An interview with Diana Chan

In this interview for the HFT Review, Mike O’Hara talks to Diana Chan, CEO of EuroCCP (European Central Counterparty Limited), the European clearing subsidiary of DTCC that clears equities from 17 European markets, as well as ETFs, ETCs and Depositary Receipts.

HFT Review: Diana, welcome to the HFT Review. As CEO of EuroCCP, I’d like to start by asking you how important are the topics of clearing and interoperability to high frequency trading firms, given that they’re mostly flat at the end of the day and often don’t carry positions overnight?

Diana Chan: Thank you. I have a chart that might help to answer that question (figure 1).
Trading firms make money based on value traded. So if the total value of turnover in the market is down, it means that unless there has been an industry shakeout with firms exiting there’s a smaller pie shared by the same number of people and revenues are depressed.

But even though the value of turnover has gone down, the number of transactions has gone up by a compound annual growth rate of 21% from 2008 through 2011, which means the average size of transactions has gone right down. It was €19,000 average per transaction back in 2008, but by 2011 it was down to €9,000. And a lot of that is driven by algo and HFT activity.

So to answer your question of why clearing matters to HFTs even though they are mostly flat at the end of the day: clearing helps them net down their positions so that they have no securities to receive or deliver with numerous trading counterparts. Clearing requires a Central Counterparty (CCP) that novates and multilaterally nets all their trades.

HFTR: And how does interoperability help them?

DC: Let’s take an example of an HFT firm trading on Chi-X, UBS MTF and Turquoise. Across all of those venues they may be flat on a stock, but on BATS they may be long three shares, on Chi-X short one share, and on Turquoise short two shares. The HFT firm’s end-of-day net position on each venue could of course have resulted from many thousands of trades during that day.

Before interoperability existed, Chi-X was using one CCP, UBS MTF was using another and Turquoise was using yet another.  The HFT firm would have to settle with each CCP, so they would have to receive three shares, deliver one share and deliver two shares, paying three times the settlement fee. However, with interoperability among the three CCPs, the firm can choose to concentrate clearing with its CCP of choice so at the end of the day there is no securities settlement if their net position is zero. They will still need to receive (or pay) some cash because they will have made (or lost) some money, but that’s all.

Clearing is important to HFT firms because it allows them, through multilateral netting that only a CCP can do efficiently, to reduce many trades into a single obligation to settle with the CCP. But that is not good enough, which is why interoperability is also important for HFT firms. To minimize post-trade costs, HFT firms trading on multiple venues using different CCPs must be able to concentrate their clearing with the CCP of their choice, and that requires that CCP to interoperate with the others.

HFTR: But even without interoperability, can’t the HFT’s clearing broker take care of all the offsetting for them? If an HFT is not clearing its own business, to what extent is it actually impacted by interoperability?

DC: With interoperability, the clearing broker or a General Clearing Participant (GCP) can concentrate clearing with its CCP of choice, and most likely get a better volume discount on fees than if its clearing was dispersed among several CCPs.  Competition among GCPs incentivizes them to pass on cost savings to their clients, the HFTs.

 HFTR: There are obviously big differences between clearing in UK/Europe and clearing in the US, particularly when it comes to costs. Why is that? And what exactly is being measured when people talk about clearing costs? Are we comparing apples with apples or apples with oranges?

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