Understanding The ECN Landscape. Technology Choices, страница 2

frequency trading operation. Unlike the equities exchanges, which stream prices, the independent FX ECNs distribute their market data in regular pulse intervals. EBS provides three levels ofdepth and Reuters Offers one. As a result, strategies that depend on a model that need information about all transactions will therefore be somewhat blind in FX as substantial data flow occurs outside the regularly distributed intervals.

Technology Choices

Once a clear understanding of the various trading venues is established, many technolow-focuscd tasks need to be addressed: coding the software for trading engines, writing to the API connections, building feed handlers, planning and securing data centers for ccAocation and arranging for high-speed circuits to connect them both to each Other and the firmk trading rooms. TO hasten time to market, many ofthese activities can and should occur concurrently.

Another technolog approach is to buy as many ofthe necessary components as possible. There is a powerhll argument for concentrating on intellectual capital and differentiators, and selecting best-of-breed components for the more commoditized aspects of the new execution framework.

Regardless Of the method chosen to build and deploy the new technolow, there will be integration issues — for which experienced, expert personnel will key. What is already a very complex investment could become catastrophically expensive With a poorly advised choices.

Back To Basics

After the nuts and bolts Of the FX trading infrastructure are in place, a substantial period of testing and re-engineering must take place. Perhaps there Will be legacy code that needs to be refactored for FX trading; or maybe it's necessary to start ccAing from scratch. Either solution (or a hybrid ofthe two) Will demand the use ofa disciplined and well-defined process developing, testing, and deploying software. Mastering the differences between liquidity pools, including the strengths and weaknesses ofeach, is essential.

Building Competitive Advantage... In FX

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Gateways and feed handlers are relatively generic aspects Of the new FX operations. For firms that do not have an experienced expert team Of FIX developers and market data specialists, a vendor-supplied solution should be considered. There are a number Ofvery high-performance products available, and utilizing one of them will save untold time, energy and Other resources that are better devoted to focusing on issues of trading strategy and algorithm development. The new FX trading engines Will encapsulate the proprietary logic that underlies a firm's unique approach to high frequency FX trading. This logic should represent a significant competitive advantage — therefore proper attention needs to be committed to it.

Be aware that trading algorithms With a history Ofpositive performance in equities may need substantial tuning and even overhaul before they are ready for FIX. The price volatility dynamics, market liquidity profile and Other FX-specific characteristics Ofyour new trading environment will test assumptions that may be built unwittingly into the new systems.

When it comes to choose which currencies to trade, G7 spot may be the logical place to Start, but there are Other areas that should also be considered. Latin American and Asian currencies, as well as non-deliverable forwards may Offer unexploited potential.

Other unique FX market dynamics include the fact that, unlike equities and commodities markets, the FX market does not have a formal open or close. FX is a true 'follow the sun' global market, which presents commensurate levels of opportunity and risk. Equities and commodities traders are also often surprised to learn that the settlement calendar varies from currency to currency.

Access to quality market data — both teal-time and historical — is also Ofparamount importance. Data needs to granular and frequency ofdelivery is key.

The critical role Oftechnology in this undertaking highlights the importance ofa robust software development and testing environment, as well as a rigorous simulated trading environment. Every bug not identified in test, whether a coding or logic issue, will result in great financial costs once in production. Therefi»re a disciplined, carefully designed approach to testing should be employed.

Risk management systems and system monitors must be established. Issues to be considered include FX-specific cash flows, calculations and Other various financial implications Oftrading billions ofdollars a day in currencies. Working With multiple prime brokers, ECNs and direct banking relationships is a complex, demanding task. A firm needs to be able to caladate and understand the importance Ofvalues that are sometimes irrelevant to trading in other asset classes.

In summary, high frequency FX trading presents substantial cost Ofentry in both financial and intellectual capital terms. Yet in spite Of the many complexities and costs involved, the space does have room for new entrants. The more a firm plans ahead to meet these challenges, the fewer frustrations it Will experience upon going live.

This learning curve written by Daniel Torrey, head ofelectronic broking new businessfor theAmericas at ICAP.