Swiss Exchange Acquires Microwave Network

Shanny Basar

SIX has formed a joint venture so the Swiss exchange can own and operate a microwave-based trading network and send trade data far more quickly.

The exchange said in a statement that it has launched its new international microwave-based trading connections which connects Zurich to London, Frankfurt and Milan as well as Milan to Frankfurt. The network will be owned and operated by SIX through its new Zurich-based joint-venture, 12H, with the shareholders of the microwave solutions provider 12Horizons Pte.

Microwave technology allows trade data for all securities listed at SIX to be transmitted more than twice as fast as connections based on commonly used fiber optic technology. The statement continued that  and that SIX is the first exchange worldwide to own and operate an international microwave network in Europe.

Thomas Zeeb, head securities & exchanges at SIX, said in a statement: “Introducing microwave technology represents a significant step towards creating the Exchange Services of the future and our strong commitment to provide customers with a single source for the best low latency services from and to Zurich. We are the operator of Switzerland’s combined exchange and post-trade infrastructure and the new service demonstrates our strategy to redefine how breakthrough technology is deployed in the trade and post-trade areas.”

A SIX spokesman told Markets Media that the microwave service allows traders to execute their strategies more quickly and enhances their risk management. It also improves liquidity and tightens spreads, which results in better execution conditions, including end investors.

“The new service is available to all trading participants on an equal access basis,” he added.

This week research on algorithmic trading was published on Bank Underground, a blog for Bank of England, by Francis Breedon at the University of London, Louisa Chen at the University of Sussex, Angelo Ranaldo at the University of St. Gallen and Nicholas Vause in the Bank’s capital markets Division.

Their study examined times of market stress as previous academic studies have found that in normal markets algorithmic trading boosts market liquidity and enhances price efficiency.

“In a recent paper looking at the removal of the Swiss franc cap, we find that algorithmic trading provided less liquidity than usual, at worse prices, and that its contribution to efficient pricing dropped to near zero,” said the researchers. “Market quality benefits from a diversity of participants pursuing different trading strategies, but it seems this was undermined in this episode by commonalities in the way algorithms responded.”

The research used spot market quotes that were 100 milliseconds apart for transactions in several currency pairs on the EBS Market platform, which were provided to the Bank by NEX Markets

The data covered a period of three weeks around 15 January 2015 when the Swiss National Bank unexpectedly abolished its policy of capping the value of the Swiss franc against the euro, prompting the franc to appreciate by over 30% within minutes of the announcement at 9.30 GMT.

They concluded that it is difficult to draw general conclusions from one case study but their results suggest that market quality benefits from having a diversity of market participants, who pursue different trading strategies not only in normal times but also in times of stress.

“Hence, if the share of algorithmic trading (which was 60% of the euro/Swiss franc market in our sample period) continues to rise at the expense of manual activity, future financial market shocks could bring even greater declines in market quality,” added the researchers. “One possibility that could offset this is that further development of algorithms, including as they experience more stress events, leads to their behaviour in such events becoming less generic.”

In the UK the Financial Conduct Agency reported in February on the supervision of algorithmic trading. The regulator said automated technology brings significant benefits to investors, including increased execution speed and reduced costs, but can also amplify certain risks. The FCA added in a statement: “It is therefore essential that key oversight functions, including compliance and risk management, keep pace with technological advancements.”

The UK Prudential Regulatory Authority has also published a consultation paper on proposed expectations regarding a firm’s governance and risk management of algorithmic trading. This includes identifying senior managers responsible for pre-deployment testing of the behaviour of algorithms, including in stress scenarios, as they are created and developed.

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