Nasdaq OMX Group and Thesys Technologies, the infrastructure affiliate of Tradeworx, have announced plans to jointly launch a next-generation testing environment which will simulate trading on all major U.S. equities exchanges.

The Algo Test Facility will provide the exchange group’s electronic trading customers a safe environment to rigorously examine algorithmic strategies by replaying and interacting with real historical market data. The Algo Test Facility is expected to launch in the first quarter of 2014, and will provide customers a market-wide equities testing platform.

Nasdaq OMX’s Algo Test Facility powered by Thesys Technologies will augment operational risk management efforts for the larger financial ecosystem, help to navigate testing within complex and interconnected U.S. markets, and better serve member firms that contribute to the exchange group’s deeply liquid marketplaces.

“In an environment where operational costs can burden traders who need to focus on alpha generation, we are committed to offer our customers cost-efficient broker services for areas like risk management and performance engineering,” said Eric Noll, executive vice president of transaction services U.S. and U.K. at Nasdaq OMX. “These broker services make it easier for all market participants to achieve operational excellence.”

The Algo Test Facility will allow market participants to simulate their automated trading strategies against real-world scenarios, transactions, and competitors to manage their risk exposure and their capital expenditure.

Unlike ordinary back-testing systems, the Algo Test Facility is designed to allow traders to test all aspects of their strategy from the quality of their quote processing, all the way down to order handling and the interaction of the trading algorithm with the market microstructure.

By testing in advance, exchange customers may mitigate the risk of aberrant or potentially destabilizing behaviors like quote stuffing. In addition, the Algo Test Facility will provide traders with valuable insights about risk and performance, including the ability to evaluate the cost of adverse selection for specific trading strategies.

“The Algo Testing Facility is another way Nasdaq OMX integrates sophisticated technology solutions as a means for participants to reduce risk exposure in a constantly evolving electronic marketplace and regulatory landscape,” Noll said.

The Algo Test Facility will be accessible through the Nasdaq OMX Data Center, enabling customers to use their existing trading infrastructure, including risk systems, OMS and feed handlers.

Each simulation will recreate market microstructure and provide an accurate view of adverse selection, time priority, fills versus misses, latency and bursting. The first phase of the Algo Test Facility will include simulations for the Nasdaq Stock Market, and over time the test system plans to support all major U.S. equities exchanges along with their order types and protocols so user activity may interact with the historical orders of other market participants.

The Algo Test Facility is powered by a Thesys Technologies platform also used by major trading firms, stat-arb firms and the U.S. Securities and Exchange Commission.

“We are pleased to work with NASDAQ OMX to bring this revolutionary new capability to the market,” said Manoj Narang, CEO of Tradeworx. “Currently there is heightened realization that the all market participants need to adequately test software that interacts with the market, and given how much trading volume is generated algorithmically today, the testing of these algorithms has to be a key component to the industry’s efforts.”