High Frequency Trading Review


    By Mike O’Hara

    4th March 2013

    The nature of the high frequency trading business is that HFT firms generally like to target “low hanging fruit”. They spot an opportunity and – using their models and technology – proceed to pick it, quickly and efficiently.

    This works well for a while, but what happens when – as is increasingly the case in the European and US markets – all the low-hanging fruit has been picked?

    Firms are faced with a couple of choices. Either they can build more sophisticated models and adopt ever-faster (and more expensive) technology, to climb higher up the trees in an attempt to capture increasingly smaller increments of alpha. Or they can find a new orchard.

    Is Russia the new orchard?

    Some History

    Until fairly recently, there were two main trading venues in Russia: Micex and RTS, both based in Moscow.

    Micex (Moscow Inter-Currency Exchange) was originally created by the Soviet Union in 1989 to set the USD/RUB rate. After the fall of the communist regime, it expanded to become the main venue for trading Russian stocks. RTS (Russian Trading Systems) was established by a group of Russian banks in 1996 as an alternate venue to challenge the Micex monopoly. Since then, RTS’s main focus has been derivatives, whereas Micex has commanded the majority of cash equity and FX volume.

    In December 2011, the two venues merged to form Moscow Exchange.

    Moscow Exchange & HFT

    Following its successful IPO in February this year (heavily oversubscribed and valuing the group at over $4bn), Moscow Exchange is now positioning itself as the core of a highly competitive international financial centre, covering a range of asset classes including cash equities, government and corporate bonds, FX and derivatives.

    Emmanuel Carjat, Founder and Managing Director of TMX Atrium, a low latency venue-neutral infrastructure provider, believes this is making Moscow Exchange a fairly significant magnet in that area of the world.

    “From a European perspective, HFT firms have been looking to the West for some time, but they’re now shifting their view towards Asia and the East. And the changing status of Moscow is one of the first steps on that shifting view”, he says.

    “The Moscow Exchange is out to capture HFT business and is learning from its peers that creating co-operative environments is generally more conducive to growing their electronic trading business. They’ve recently opened up a colocation facility in Moscow, they’re making their data more available globally, and we’re seeing a diverse group of clients moving into the market”, according to Carjat.

    “Winner Takes All”

    The exchange is certainly keen to attract liquidity providers and market makers, particularly those trading in larger size and has adopted a somewhat unusual approach by running a “winner takes all” monthly competition to encourage larger players.

    Roman Sulzhyk, MD & Head of Futures & Options at Moscow Exchange, explains “We’re trying to improve the quality of the order book by encouraging firms to put in larger orders,” he explains. “So starting from February, if you trade orders of 100 lots or more, all the volume from those orders gets counted towards a total, and whoever trades the most in that month gets a cash prize”.

    Why run a competition instead of taking a more traditional rebate approach?

    “The idea is to encourage a different sort of behaviour. Right now a lot of the volume is with smaller players trading one-lot orders, so we wanted to create an incentive for people to do larger trades without making it worse for the little guys. In the future we may offer discounts for larger orders”, says Sulzhyk.

    HFT Opportunities

    It is clear that the exchange is keen to attract HFT business. But where is the “low hanging fruit”?

    I ask Tim Bevan, Managing Director, Prime Service Sales at BCS Financial Group, one of the leading Russian brokerage firms, to take me through some typical strategies his clients are adopting.

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