High Frequency Trading Review


    An Interview with John White

    By Mike O’Hara, 30th July 2013

    The foundations of SIX Swiss Exchange were laid in 2008 when SWX Group, Telekurs Group and SIS Group joined forces to provide a range of services under the banner of SIX. With its SIX Swiss Exchange division, SIX operates one of Europe’s key regulated stock exchanges and the reference market for more than 40,000 Swiss securities.

    In this interview, we speak with John White, Head Equity Product Management at SIX Swiss Exchange.

    HFT Review: John, welcome to HFT Review. Can you provide a brief introduction to who you are and what you do?

    John White: I’m Head of Equity Product Management at SIX Swiss Exchange tasked with the development of the Equities product suite. The Exchange decided to base my role in London in order to build and maintain a strong product dialogue with our UK-based clients.

    HFTR: As an international venue, how does SIX Swiss Exchange differ from some of the other international market operators? What sets you apart?

    JW: It’s the mix of liquidity we offer and the diversity of the trading entities which form the membership of the Exchange. One striking feature of the Swiss equity market is its deep liquidity. For example, it’s not uncommon for our large cap equity stocks to have liquidity at touch prices exceeding CHF1m. So the average execution size and the size of an order that can get done without moving the market is typically that much larger than at competing venues.

    HFTR: What about asset classes other than equities?

    JW: My role is focused on equities but we are indeed a multi-asset venue. Bonds have been important to our market for a long time. ETFs have grown very rapidly in the last three to four years and represent a very important segment for us. The Scoach by SIX market is a leading market for structured products and warrants. Hence we’re definitely not just an equity trading venue and have very diverse offerings for our members.

    HFTR: Can you talk me through some of the recent developments at the Exchange? For example you’ve recently adopted new technology with NASDAQ’s X-stream INET trading system and you’re now rolling out sponsored access. What’s the rationale behind these steps?

    JW: Electronic trading is placing increasingly high technical demands on trading platforms.  We looked at the available technology and, after a detailed selection process, made the decision to partner with NASDAQ OMX selecting the X-stream INET matching engine as the platform of choice for our equities segment. This was implemented in April last year and it’s been extremely successful. The latency of the matching engine averages at 37 microseconds, which to our knowledge is the quickest equities matching platform in the world. The platform has proved to be extremely stable and has met our expectations.

    Following the introduction of X-stream INET, it was a natural evolution to offer sponsored access to our members.

    HFTR: Can we drill down a little on what exactly you’re offering through sponsored access? Because there’s often confusion around the different terms that people use like naked access, sponsored access, direct market access, direct strategy access and so on. When you talk about sponsored access, can you confirm it means where members of the Exchange allow their clients to use their (the members’) connections directly?

    JW: That’s exactly right, that a perfect way of describing it. It offers the trading firm (the client of our member) direct access to the matching engine but using a connection which is owned by the member firm. It’s important to recognise that all of the trading that happens under that model is the responsibility of our member firm i.e. the broker that they are using. In terms of the name in which they’re trading, in terms of their legal responsibility to the Exchange, in terms of the risk management and all post trade processing, the member’s responsibility remains completely unchanged.

    HFTR: In terms of pre-trade risk controls, can you give me an indication of what happens at the Exchange level versus what you would expect to happen at the member/client level? 37 microseconds doesn’t give you a huge amount of time to perform pre-trade risk checks. Or does it?

    JW: The risk management checks and controls that we apply have to execute very quickly in order not to have too much of an adverse effect on the turnaround time. The current benchmark for the execution of these checks is around one micro second. Essentially, under a sponsored access model, the risk checks that the broker requires happen within the Exchange’s infrastructure whilst still being under the control of the member firms. The member firms have access to and set all the parameters for their clients using the user interface that we provide them with.

    HFTR: In Europe, SIX Swiss Exchange is in an interesting position in that you don’t come under the MIFID and the EU regulators, you’re regulated by FINMA. How can firms take advantage of that?

    JW: I’m not sure that SIX Swiss Exchange wants to get into any sort of regulatory arbitrage. There are some situations where it’s not possible to be completely in line with the EU rules but, whilst we do not have to be, our stance is usually to be broadly consistent with their rules. Taking the example of a firm that may have its parentage in the US, to them it helps to have one harmonised set of rules and regulations when they look at Europe. So if those firms are trading DMA or sponsored access into a number of markets already, it makes it easier for them to trade on the Swiss market if they don’t have a lot of additional due diligence to undertake because of different rules. From the perspective of trying to maximise liquidity and turnover, harmonisation is a plus point.

    HFTR: By pretty much any measure, SIX Swiss Exchange can be considered an “HFT friendly” exchange in that you offer co-location, you have one of the world’s fastest matching engines, you’re offering sponsored access and so on. Are you concerned about the way regulation is moving towards trying to slow down HFT, for example with things like maximum order to trade ratios, minimum tick sizes, circuit breakers, order resting times and so on? 

    JW: HFT is just one of the client types at SIX Swiss Exchange which contributes to the rich mix of available liquidity. We do not have any client type which dominates any other. We take market surveillance and control very seriously. Market integrity is of paramount importance. We have a full-time dedicated team that is actively monitoring the markets at all times. They look at trading patterns and engage with members to verify that those trading patterns are in line with a member’s expectations and are completely legitimate. So it’s important to stress that that is a really vital part of our service offering which gives confidence to all our members regardless of their model that the market is well functioning and controlled.

    In terms of the HFT space itself, they play an important role as liquidity providers but we’re also conscious that a significant portion of the general public, including long-term investors, is deeply sceptical about the benefits of HFT and we have to take this very seriously.

    HFTR: Do you think things like order to trade ratios and tick sizes should be the responsibility of the regulators? Or should it be up to the exchanges, the market operators, to set these controls? 

     JW: We believe that decisions around order to trade ratios and tick sizes should be made with the objective of optimising market quality and balancing the different needs of the various actor in the market, for example, domestic versus international, market makers versus liquidity takers. In our view, the market operators are best placed to make these decisions. 

     HFTR: I read a comment from your CEO, Christian Katz, about market operators having a responsibility to educate both the public and the investment community on how markets actually operate and some of the benefits that high frequency trading can bring. But there is still a perception amongst some of the investment community that they’re adversely, rather than positively, impacted by HFT. Are you seeing that perception change at all? And how can this education process be made more effective?

    JW: As mentioned previously, we are concerned about this perception and the concerns which the general public has over the speed at which trading algorithms work and the level of controls which are in place.

    In some areas perceptions are starting to change and the trading of HFT firms is becoming more understood. The European Principal Traders Association, for example, has helped in terms of representing some of the HFT firms and explaining some of their business models. Industry events, such as conferences have played a big part and the sell side have also helped to educate their buy side clients about HFT.

    HFTR: Have you received push back from any subset of your members on anything you’re doing to encourage HFT type activity at SIX Swiss Exchange? Are any of your members saying, “We don’t want this, you’re going the wrong way”? Or is everyone generally singing from the same hymn sheet?

     JW: We are conscious that we have a very diverse membership and that this diversity is crucial to the attractiveness of the Exchange as a trading venue. We will continue to try as best we can to deliver to the needs of all of members. We have done a lot in the last year to improve the Exchange’s technology platform and this will continue as we roll out the platform to the other asset classes, however, this is just one of many projects being undertaken. The Exchange is, for example, committed to introducing new functionality, onto the matching engine.

    HFTR: John, thank you very much.

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