Liquidity Fragmentation & SOR
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Liquidity Fragmentation & SOR
Iosif Itkin
EXTENT February 2011
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Contents
MIFID - The Markets in Financial Instruments Directive is a European Union law that provides harmonised
regulation for investment services across the 30 member states of the European Economic Area (the 27
Member States of the European Union plus Iceland, Norway and Liechtenstein)
MTF - Multilateral Trading Facility
FFI – Fidessa Fragmentation Index
Best Execution - refers to the obligation of an investment services firm (such as a stock broker) executing
orders on behalf of customers to ensure that the prices those orders receive reflect the optimal mix of
price improvement, speed and likelihood of execution
SOR - Smart Order Router
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Technology & RegulationsNewswire and information source for the worldwide financial technology community:
http://www.finextra.com
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Technology & RegulationsFinancial Times videos: http://video.ft.com/ft-trading-room
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FTSE 250 Market Share
Source: http://www.batstrading.co.uk/market_data/market_share/index/
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FTSE 250 Market Share (MTFs)
Source: http://www.batstrading.co.uk/market_data/market_share/index/
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Fidessa Fragmentation Index
Source: http://fragmentation.fidessa.com
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Fidessa Fragmentation Index
Source: http://fragmentation.fidessa.com
N – Number of Execution Venues, Mi - Market Share of Execution Venue
FFI shows the average number of venues you should visit in order to achieve best execution when completing
an order.
a) Assuming Mi = 1/N
b) Assuming Mi = x, Mo = 1-x and N=2
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Fidessa Fragmentation Index
Source: http://fragmentation.fidessa.com
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Testing Trading Systems
Quality and stability of algorithmic trading systems become a crucial factor in the current trading landscape.
Three aspects of advanced execution systems quality:
• Functional correctness
• Technical – performance, latency, resilience
• Business efficiency
Two dimensions to their complexity:
• Technological: complex algorithms relying on historic and real-time market data and dynamically changing decisions, might include non-deterministic behavior;
• Organizational: frequent system upgrades, multiple instances of algorithms running simultaneously.
Behavior in production is key, but a robust testing procedure using simulators provides additional confidence in the results and even helps to interpret some production observations.
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Smart Order Routers Testing
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Testing Principles
• Scheduled tests vs. test markets during business hours
• Scheduled tests vs. simulation frameworks are constantly running
• Treat the test farm as a Production system
• Reflect the latest Production observations in the test suites
• Systems require careful data maintenance
• Ensure precision and correctness of latency measurements
• Due to stochastic behavior the same tests are repeated multiple times
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Complex Smart Order Router
Treat the Test Farm as a Production System
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1. Testing Principles
Scheduled Tests vs. Test Markets during Business Hours
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2. Testing Principles
Scheduled Tests vs. Simulation Frameworks are Constantly Running
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3. Testing Principles
Treat the Test Farm as a Production System
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3. Testing Principles
Treat the Test Farm as a Production System
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4. Testing Principles
Reflect the Latest Production Observation in the Test Suites
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5. Testing Principles
Systems Require Careful Data Maintenance
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6. Testing Principles
Ensure Precision and Correctness of Latency Measurements
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7. Testing Principles
Due to Stochastic Behaviour the Same Tests are Repeated Multiple Times
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Questions & Answers
Thank you.