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April 1, 2010

Big Firms Seek "Fast'' Money

New rules would make HFT an attractive business

By John D'Antona Jr.

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Bulge bracket firms are looking to get a foothold in the high frequency trading business as a result of proposed new regulations that will alter the playing field for sponsored access. To get into the game, brokerage firms are ramping up their technology capabilities to increase their speed--an arms race, as one broker said--to move from single-millisecond execution times to microseconds.

John Stracquadanio, Barclays

The catalyst behind the strategy is a Securities and Exchange Commission proposal that changes the game for brokers who provide access directly to markets for rapid fire traders. The rule would require sponsoring brokers to put in risk management controls and supervisory procedures.

Installing such pre-trade controls would likely slow down HFTs' market access, as orders would need to cycle through the various compliance checkpoints.

By at least one definition, HFTs are firms that send out 1,000 orders per second. They require the absolute lowest latency. For them, speed rules.

If approved, the SEC rule will make sponsored access more attractive to firms like Credit Suisse, UBS, Barclays Capital and others. According to one estimate, sponsored-access business is between $200 million and $300 million a year.

Up to now, the business has been built up by a few clearing firms who have catered to HFTs, mainly broker-dealers who use their own risk checks and not the clearing firm's. The SEC's new rule would require risk checks for all clients at the sponsoring broker--a leveling of the playing field.

If everyone must use risk checks, newcomers will be able to win more business.

Dmitri Galinov, head of liquidity strategy at Credit Suisse Advanced Execution Services, said Credit Suisse made a decision six months ago to develop a sub-millisecond hyperlow latency infrastructure product to woo new business. The SEC introduced the rule proposal on Jan. 13.

"The main focus going forward, in terms of additional flow, is to get broker-dealer clients who currently use clearing firms that provide naked access," Galinov said.

The consultancy Aite Group estimates HFT is 50 percent of the average daily trading volume. Of that, unfiltered sponsored access is 38 percent and 12 percent is filtered sponsored access, meaning that once SEC rules go into effect, three-quarters of the market is up for grabs.



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Credit Suisse's new infrastructure platform with risk-checking software, Market Access Gateway, is in beta testing with a hedge fund client. According to Galinov, the technology has produced trading execution times close to 50 microseconds one way, and he thinks that can be tweaked a little more.

Owain Self, Americas and EMEA head of algorithmic trading at UBS, said his firm's push to a sub-millisecond trading infrastructure was rooted in providing sponsored access and exchange colocation to high-volume traders who may previously have used a competitor's infrastructure rather than UBS's.