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Managing Market-wide Risk at Warp Speed Low Latency in a Fragmented World

DTCC Executive Forum. Managing Market-wide Risk at Warp Speed Low Latency in a Fragmented World. Rob Hegarty Managing Director, Market Structure DTCC November 23, 2009. Trading business models: Exchange Auction Crossing Order-book Open outcry Over-the-counter Electronic

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Managing Market-wide Risk at Warp Speed Low Latency in a Fragmented World

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  1. DTCC Executive Forum Managing Market-wide Risk at Warp SpeedLow Latency in a Fragmented World Rob Hegarty Managing Director, Market Structure DTCC November 23, 2009

  2. Trading business models: • Exchange • Auction • Crossing • Order-book • Open outcry • Over-the-counter • Electronic • Voice • Clearance & Settlement business models: • Centrally • Bi-laterally • Multi-laterally • Uncleared • Physical Settlement • Book entry Market Structure Isn’t Just for Trading Anymore! Source: DTCC

  3. A comparison of Equity Market Structures in the US and Europe draws a deep contrast between models Europe CHX NOE BTS LSE ENX DBS 60 TQS SMP NAE BSI NOX SIX SXB NEM SXE OBS WBS ISE Single CCP FEF ECP CLN LCH CCG ERX CPA XCL Single CSD GB BE FR NL PT DE IT SE FI DK CH NO AT IE $ 0.003 € 0.002 United States Trading DTCC (NSCC) Clearing Settlement DTCC (DTC) Clearing cost per side $ 0.034 € 0.023 Exchange rate € 0.67 to $ as of November 17, 2009 3 Source: DTCC

  4. In US equities, technology-based trading has completely redefined the landscape… Market Share, US Equities NYX TRF (ex BATS, DE) NDAQ Direct Edge BATS EDGX Source: BATS Exchange, Inc.

  5. …with off-exchange venues (i.e. dark pools) steadily gaining market share in the last 2 years Percent of Consolidated Volume VIX Average Close Source: Rosenblatt Securities

  6. …leading to the emergence of some big players in the equity execution business – that aren’t exchanges Breakdown of Dark Pool volume (8.6% of total volume) Source: Rosenblatt Securities, August 2009

  7. With the same effect spilling over to Europe Source: Federation of European Securities Exchanges

  8. When the geeks make the cover of Forbes, you know their time has come • High Frequency Trading has garnered headlines…and the attention of the SEC and FSA • The debate rages: Are they providers of liquidity or bandits • Not to be confused with “flash trading”, co-location, dark pools, ….

  9. Innovation Regulation Ownership Governance Transparency Opacity Competition Centralization Competing forces within the global financial markets help shape the future of market structure

  10. Post-trade or at-trade risk management for high frequency trading: Why? • More feasible for cross-market monitoring • Low-latency platforms make “at-trade” or “simul-trade” risk management more of a reality…and a necessity • Cancellation rates of 99.99% • Imagine doing pre-trade on all those orders that never get executed • Protect the HFT business from systemic failure

  11. DTCC Executive Forum Managing Market-wide Risk at Warp SpeedLow Latency in a Fragmented World Rob Hegarty Managing Director, Market Structure DTCC November 23, 2009

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