High Frequency Trading Tools and Technologies

1. High Frequency Trading Tools and Technologies Presented by Larry Tabb (Founder & CEO)

2. Agenda • To the winners go the spoils • Buy-side needs multiple tools • Tools • Dark pools • Flash • Sponsored access • Technologies

3. Different trades need different tools Low Impact (size) 1) Blocks/Dark pools 2) Dark Algorithms Quiet Accumulation 1) Dark / Opportunistic Algorithms 2) Blocks/Dark pools 3) Broker Capital Size • Delegation • VWAP/Implementation Shortfall Algorithms • 2) Direct Market Access Need it, want it, got to have it 1) Direct Market Access 2) Accumulation Algorithms 3) Broker Capital Immediacy Source: TABB Group

4. Dark pools are steadily gaining market share in both the US and Europe 12.5% 11.5% 10% % Traded Volume (dark) 7.5% 7% 5% 4% 3% 2% 2% 1.5% No. of Dark Venues 1% 18 3 27 4 32 9 45 21 52 29 53 36 2005 2006 2007 2008 2009 2010 US Europe Source: TABB Group Estimate

5. National Exchange Broker 1 of 9 When trading at the exchange, you are competing against the marketplace Brokers, Buy-side, Prop, and Other Bidders for Liquidity Buy-side/ Investors/ Liquidity takers Source: TABB Group

6. National Exchange Broker 1 of 9 1 of 1 In a dark pool, you get first look, and generally better than market pricing Broker Brokers, Buy-side, Prop, and Other Bidders for Liquidity Buy-side/ Investors/ Liquidity takers Broker Dark Pool Source: TABB Group

7. HFT Tools • Co-lo • Being first is everything • Low latency connectivity • Fiber and networking • Market Data infrastructure • Direct feeds • CEP • Models • Execution engine • Risk modeling

8. Flash orders – a second chance to match orders before they are routed Not best bid Sell Sell Exchange w/oBest Price Will match or better bid? Retail Investor Retail Broker FreeExecution Market MakerLiquidity Provider 25 to 30cents/100Shares Yes / Trade Market Maker Liquidity Provider Best bid No / No Trade Exchange w/Best Price Problem is if MM/LP executes against the better price and/or changes quote • Retail Order Execution Using Flash Order • Retail order comes into broker • Broker routes order to ECN/Exchange using “Flash Order” • If ECN/Exchange does not have the best price it either needs to match the best price or send to the Exchange/ECN displaying the best price (Reg NMS) – maximum time .5 seconds • Since the ECN/ Exchange doesn’t have best price it flashes order to market markers/liquidity providers (typical time .02 to .05 seconds) • If MM/LP wants the order it either needs to match or better bid • If not – order must be routed to exchange showing best price • Typical flash order is free – typical charge to route order to another ECN/Exchange is 25 to 30 cents per 100 shares • The challenge with this order is that the market maker / liquidity provider gets to see this order up to .5 seconds before it is routed to the exchange with the best price • This is enough time for the market maker / liquidity provider to either change their quote or take out the lower price, change quote and execute the order at the higher quote – locking in a profit

9. Sponsored access provides thin gateway veneer between client and exchange • Sponsored access allows brokers & other trading firms to trade directly on an exchange using the access broker’s credentials • Mostly for liquidity providers / high frequency traders • Issues are • Risk management – order goes to the exchange before broker sees it • If they fat finger an order or the trading model goes errant then the broker is on the hook • Firms are developing technology to mange this • Equal access • Easier to co-lo / obtain sponsored access than ever before • Better understanding of liquidity in exchanges vs. dark pools • Exchanges have open access – dark pools don’t • Brokers & dark pools usually get order flow before exchanges • Dark pool order flow is more protected than exchange liquidity • Otherwise execution quality would be worse, and • Institutional investors would shun dark pools like the plague

10. Sponsored Access Matching Venue Market MakerLiquidity Provider Order Execution Broker Execution Traditional Access Order Order MatchingVenue Investor Broker Execution Execution While all orders need to be represented by a broker they don’t need to go through brokers pipes

11. Sponsored Access Benefit Speed to External Matching Venues Matching Venue Order Market MakerLiquidity Provider Execution Execution Broker Traditional Access Benefit Unique Liquidity from Other Customers Investor Exchange Orders Investor Broker Investor ECNs First Second Investor Dark Pool Sponsored access benefit is exchange execution speed which does not necessarily mean access to best orders

12. Traditional Access Benefit Unique Liquidity Comes from Customers Order Flow Traditional (Better)Liquidity hits Brokers First The majority of orders come through brokersfirst. As such they firstmatch in broker crossing networks & dealers’ dark pools – unless prop shops also co-lo or have high speed access to dealer dark pools Investor Exchange Investor Broker Investor ECNs Orders First Second Investor Dark Pool Sponsored Access Challenges Sponsored Access Challenge While access to co-loed matching engine is quick, significant volume (and better liquidity) comes through brokers (institutional and retail orders). Co-lo Facility Investor Fast Matching Venue Market MakerLiquidity Provider Broker Data Center Not as fast Broker Matching Venue Dark Pool Dark pools generally get access to best order flow – which is hard for sponsored access firms to get access to

13. The amount of data that needs to be processed is astronomical August 13, 2009 PITCH, ITC 2.1, DirectEdgeX, TotalView-ITCH 4.0,UQDF, UTDF, ArcaBook for Equities, CQS, CTS, OPRA, Canadian Venture Exchange Level 1, Toronto Level 1, NASDAQ Index Dissemination Service, NASDAQ Trade Data Dissemination Service, NYSE OpenBook --- Source: Exegy – marketdatapeaks.com

14. High Frequency Trading The Tools and Technologies Presented by Larry Tabb (Founder & CEO)