Cooperative Brokerage Integration for Transaction Capacity Sharing: A Case Study in Hong Kong

1. Cooperative Brokerage Integration for Transaction Capacity Sharing: A Case Study in Hong Kong

2. Application Background • Further automation of Hong Kong Exchange and Clearing Limited (HKEX) • Third Generation Automatic Order Matching and Execution System (AMS/3) • Open system • Many stock trading system developers integrate their flagship solutions such as the Broker Supplied System (BSS) for connection to HKEX

3. System Architecture of AMS/3

4. Open Gateway Connection Point

5. Client Placing a Request

6. More Advanced Emerging Requirements • Sharing very expensive trading capacity rights • Throttle rate control • Buying additional throttle rate is less expensive but on a monthly-fee basis • Improve trading order response • Hardware failure and outage • Business integration and extensibility • credit controllers, settlement officers, …

7. Problems Motivating this Research • Communications among partners have no common standard of message protocols • No intelligent mechanisms for integration with the trading system for capacity sharing • Hard to manage the security issues using different kinds of encryption techniques. • Web services based integration for capacity sharing of partner brokerages. • Transaction Capacity Sharing System (TCSS)

8. TCSS Overview

9. Main TCSS Mechanism • When the request queue length exceed a certain threshold, route the request to TCSS in order to forward it to partner brokerages • Via asynchronous Web services • TCSS has to handle many outstanding orders simultaneously while the time when the orders can be fulfilled is unpredictable

10. TCSS Intelligence and Heuristics • Outstanding backlog and forwarding threshold • Forwarding limit and cost of different brokerages • Number of partner brokerages Base on these, TCSS • adjust its forwarding threshold and forwarding limit dynamically according to its current queue length to achieve an effective flow control • send piggy-back with acknowledgements or broadcasted to partners if necessary • use such information for choosing an appropriate target of the next forwarded order • observe and honor this limit to maintain good relationship

11. TCSS Architecture SOAP Partner Brokerage with TCSS / BSS Internet SOAP Transaction Service Web Dispatching Services and Aggregation TCP / IP BSS Application Web Services Adaptation Manager Interface ODBC TCSS Process Manager Database

12. TCSS Protocol • Standard protocol called Financial Information eXchange (FIX) developed specifically for real-time electronic exchange of securities transactions • Adaptation Manager translates the message as FIX Markup Language (FIXML) using the FIX protocol 8=FIX.4.2;9=199;35=D;34=10;49=VENDOR;115=CUSTOMER;144=BOSTONEQ;56=BROKER; 57=DOT;143=NY;52=20000907-09:25:28;11=ORD_1;21=2;110=1000;55=EK;22=1; 48=277461109;54=1;60=20000907.09:25:56;38=5000;40=2;44=62.5; 15=HKD;47=A;10=165;

13. <FIXML> <FIXML Message> <Header>. . .</Header> <ApplicationMessage> <Order> <CIOrdID>ORD_1</CIOrdID> <HandInst Value="2" /> <MinQty>1000</MinQty> <Instrument> <Symbol>EK</Symbol> <IDSource>1</IDSource> <SecurityID>277461109</SecurityID> </Instrument> <Side Value="1" /> <TransactTime>20000907.09:25:56</TransactTime> <OrderQuantity> <OrderQty>5000</OrderQty> </OrderQuantity> <OrderType> <LimitOrder Value="2"> <Price>62.5</Price> </LimitOrder> </OrderType> <Currency Value="HKD" /> <Rule80A Value="A" /> </Order> <ApplicationMessage> </FIXMLMessage> </FIXML> <?xml version=”1.0” encoding=”UTF-8”?> <SOAP-ENV:Envelope xmlns:SOAP-ENV=”http://schemas.xmlsoap.org/soap/envelope/” xmlns:SOAP-ENC=”http://schemas.xmlsoap.org/soap/encoding/” xmlns:xsi=”http://www.w3.org/2001/XMLSchema-instance” <SOAP-ENV:Body SOAP-ENV:encodingStyle=”http://schemas.xmlsoap.org/soap/encoding/”> <sendMessage> <FIXMLMessage> <Header> <Sender> <CompID>Hopgood</CompID> </Sender> <Target> <CompID>Lloyds</CompID> </Target> </Header> <ApplicationMessage> <Indication> <IOIid>41926</IOIid> <Instrument> <Security> <Symbol>IBM</Symbol> </Security> </Instrument> <IOISide Value="1"/> <IOIShares>2000</IOIShares> <Price>30.00</Price> <Currency Value="GBP"/> <ValidUntilTime>22:50</ValidUntilTime> </Indication> </ApplicationMessage> </FIXMLMessage></sendMessage> </SOAP-ENV:Body> </SOAP-ENV:Envelope> FIXML and SOAP example

14. WS-Security • W3C security specifications • SOAP Header element to carry security-related data • XML Signature • header can contain the information defined by XML Signature that conveys how the message was signed, the key that was used, and the resulting signature value • XML Encryption • encryption information can be contained within the WS-Security header • WS-License • describes how existing digital credentials and their associated trust semantics

15. Summary • TCSS share transaction capacity => decrease order queuing time • Avoid significant costs of buying extra trading rights, which is very expensive • Group SME brokerage together against large brokerages that have much better facilities and trading capacities • Employment of Web service technologies • Phased approach • Best for SME brokerages having multiple broker licenses • Alliance of different brokerages => legal / regulatory issues

16. Future Work • Legal / regulatory issues • Inter-brokerage charging policies and schemes • How detail heuristics could be best formulated • Simulations to experiment various parameters • order processing and turnaround time • choice of parameters • Priority management in the routing • for valued customers • transactions that involve a large amount

17. Question and Answer Thank you!