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FIXatdl and the 2010 Flash Crash

FIXatdl and the 2010 Flash Crash. Robert Golan – DBmind Technologies Rick Labs - CL&B Capital Management, LLC (& FIXatdl Co-Chair). Please Note: This is our personal views which may not pertain to our Client’s Views or Opinions. Outline. Introductions Flash Crash – May 6 th , 2010.

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FIXatdl and the 2010 Flash Crash

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  1. FIXatdl and the 2010 Flash Crash Robert Golan – DBmind Technologies Rick Labs - CL&B Capital Management, LLC (& FIXatdl Co-Chair) Please Note: This is our personal views which may not pertain to our Client’s Views or Opinions.

  2. Outline • Introductions • Flash Crash – May 6th, 2010. • FIXatdl – What is it? • A proposed solution • Future Directions • Summary • Q & A

  3. Flash Crash References Nov 5th meeting Webcasthttp://www.capitolconnection.net/capcon/cftc/110510/CFTCwebcast-live.htm#Preliminary report:http://www.cftc.gov/ucm/groups/public/@otherif/documents/ifdocs/opa-jointreport-sec-051810.pdfFollow up reporthttp://www.cftc.gov/ucm/groups/public/@otherif/documents/ifdocs/staff-findings050610.pdfSEChttp://www.sec.gov/spotlight/sec-cftcjointcommittee.shtmlCFTChttp://www.cftc.gov/About/CFTCCommittees/CFTC-SECJointAdvisoryCommittee/index.htm

  4. Preliminary Report on May 18th • Table of Contents • I. INTRODUCTION .............................................................................................................1 • II. EXECUTIVE SUMMARY..............................................................................................2 • III. GENERAL MARKET CONTEXT ............................................................................ 11 • IV. PRELIMINARY FINDINGS....................................................................................... 17 • A. Securities Markets ..............................................................................................17 • 1. Broader Market Drop and Recovery................................................................. 17 • 2. Securities that Suffered Declines Disproportionate to the Broader Market ..... 29 • B. Futures Markets..................................................................................................59 • 1. Background....................................................................................................... 59 • 2. Role of Liquidity in Markets............................................................................. 63 • 3. Analysis of Large Traders................................................................................. 66 • 4. Preliminary Findings......................................................................................... 69 • C. Clearance and Settlement................................................................................... 69 • 1. Securities Markets............................................................................................. 69 • 2. Futures Markets ................................................................................................ 70 • V. NEXT STEPS................................................................................................................... 72 • A. Areas for Further Analysis ................................................................................ 72 • 1. Securities Markets............................................................................................. 72 • 2. Futures Markets ................................................................................................ 74 • 3. Coordinated Analysis........................................................................................ 74 • B. Potential Regulatory Responses......................................................................... 75 • 1. Securities Markets............................................................................................. 75 • 2. Futures Markets ................................................................................................ 79 • APPENDIX A OVERVIEW OF THE SECURITIES MARKET STRUCTURE...A1 • APPENDIX B OVERVIEW OF THE FUTURES MARKET STRUCTURE .........B1 • APPENDIX C CROSS-MARKET CIRCUIT BREAKERS.........................................C-1 • APPENDIX D FUTURES MARKET INFORMATION...............................................D-1

  5. The Findings: September 30th, 2010 • Turbulent Day in the Market • EU Debt Crisis • @1pm: Liquidity Replenishment Points (LRP’s) activated more then usual. • @2:30 - VIX (up 22.5% and Dow down by 2.5%). • Buy Side Liquidity for the E-mini declined 55% ($6B to 2.65B) & SPY by 20%. • @2:32 – An Algo was used to sell 75,000 E-mini contracts worth $4.1B using only the Trading Volume parameter and disregarded the price or time parameter’s. This was executed in 20mins. • Other notable events happened but we want to focus on the Algo setup and execution.

  6. FIXatdl Algo Trading Definition Language

  7. Algo Parameter Settings … <Strategy name="VWAP" uiRep="VWAP" wireValue="1" version="1" providerID=“CompanyXYZ" fixMsgType="D" > <Regions> <Region name="TheAmericas" inclusion="Include"/> </Regions> <SecurityTypes> <SecurityType name="CS" inclusion="Include"/> </SecurityTypes> <!-- input Parameters --> <Parameter name="StartTime" xsi:type="UTCTimestamp_t" fixTag="6062" use="optional" /> <Parameter name="EndTime" xsi:type="UTCTimestamp_t" fixTag="6063" use="optional" /> <Parameter name=“Price" xsi:type="Int_t" fixTag=“4063" use="optional" /> <Parameter name="MaxPctVolume" xsi:type="Int_t" fixTag="6064" use="optional" /> <Parameter name="DisplaySize" xsi:type="Int_t" fixTag="6066" use="optional" /> <Parameter name="Trigger" xsi:type="UTCTimestamp_t" fixTag="6075" use="optional"/> <Parameter name="InExcludeAuction" xsi:type="Int_t" fixTag="6077" use="optional" /> <Parameter name="Rx" xsi:type="UTCTimestamp_t" fixTag="6083" use="optional" /> <!-- Validation Section --> <val:StrategyEdit errorMessage="End Time should be later than Start Time"> <val:Edit field="EndTime" operator="GT" field2="StartTime"/> </val:StrategyEdit> </Strategy> Note: Example Only – not a real – validating set of parameters.

  8. If it’s this simple – what’s the catch • Central Governance • Compliance and Certification • Monitoring and Control • Implementation Guides & Education • Budget and $$$ • Transparencies to the right levels without compromising the Algo’s Special Sauce. • Multi-Asset and Multi-Industry Standards Cooperation. • Versioning and Maintenance

  9. Some of the Algo Players • Citadel Investment Group • Bloomberg • Credit Suisse • Deutsche Bank • Goldman Sachs • Barclays • Morgan Stanley • Susquehanna Investment Group • UBS • Etc.

  10. Prime Service Providers t Hedge Fund Prime Service Provider Algorithmic Trading System TWAP Mutual Fund VWAP Sniper Custom Hedge Fund Exchange Exchange Exchange

  11. Finally, Something New! Systemic Risk • Risks imposed by interlinkages and interdependencies in a system or market, where the failure of a single entity or cluster of entities can cause a cascading failure, which could potentially bankrupt or bring down the entire system or market. (Schwarcz, Steven 2008) • CAPM gone?

  12. Bricks for the Tower of Babel"They are one people and have one language…” • Legal or Universal Entity Identifier • Product or Instrument Identifiers

  13. LEIs are not that simple! • up to date for name, address, electronic address, legal entity type changes. • link parent, subsidiary and affiliate relationships (one LEI to all other links) • Link all persons who own or effectively control that entity • LEIs that own various interests in other entities in various cascades including interlocking • Every security ever issued by that particular LEI • Entities that are freestanding legally, but economically are virtually 100% just combinations and permutations of other legal entities, such as exchange traded funds • Derivative products (futures, options, etc.) built off large baskets of underlying securities • Mortgage pools • Mortgage pool tranche

  14. CFTC/SEC searching for a Fun, New Toy • Algos that describe OTC derivatives • That are simple like tinkertoys

  15. The Holy Grail • Calculation of Net Exposures • Real time, across entities?

  16. The train has left the station! JOINT STUDY ON THE FEASIBILITY OF MANDATING ALGORITHMIC DESCRIPTIONS FOR DERIVATIVES April 7th!

  17. Who will set the standard? FIXml FIXatdlSM

  18. Who will set the standard (2) • OWL Web Ontology Language

  19. Who will set the standard (3) • Composing contracts: an adventure in financial engineering • Simon Peyton Jones, Jean-Marc Eber, Julian Seward. ICFP 2000. • Following three slides are from that presentation

  20. Combinatorlibrary Denotational semantics Operational semantics

  21. But what does it all mean? • We need an absolutely precise specification of what the combinators mean: their semantics • And we would like to do something useful with our (now precisely described) contracts • One very useful thing is to compute a contract’s value

  22. Summary Routine for us, radical stuff for financial engineers • A small set of built-in combinators: named and tamed • A user-extensible library defines the zoo of contracts • Compositional denotational semantics, leads directly to modular valuation algorithms • Risk Magazine Software Product of the Year Prize • Jean-Marc has started a company, LexiFi, to commercialise the ideas • Beats higher order logic hands down for party conversation

  23. What about FIXatdl? • Algorithmic descriptions of derivatives are really algo trades for EVERYONE: • Equities • FI • Options • Futures • FX • Cross Asset

  24. Some other possible Solutions • Consolidated Order Book with Pre-Analytic FIXatdl enhancements. • CEP/FIXatdl Integration points for surveillance and monitoring. • Centralized Algo Compliance and Certification • Etc.

  25. Wrap-up • Flash Crash – May 6th, 2010. • FIXatdl – What is it? • A proposed solution • Future Directions • Summary • Q & A

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