Financial market developments: a technologist’s viewpoint

14 january 2014

The TRADE Growth Market, 2013

Technology underpins the development of modern financial markets. Changes to Russia’s market microstructure over the past year, which saw the settlement cycle move from T0 to T+2, have focused attention on software development to ensure a seamless client transition to the new operating environment. Vladimir Kurlyandchik, director of business development at ARQA Technologies, explains how the company responded to the challenges.

What were the main trends in the market in terms of software development over the past year?

In the ‘Russian’ part of our business the project at the top of our agenda involved the transition of equity trading at the Moscow Exchange (MOEX) from a T0 to T+2 settlement mode. All software development was prioritized in line with it. We worked on two tasks: to provide clients with adequate risk management to comply with the new trading regime and to ensure they were able to operate uninterrupted in the new environment. The very possibility to trade T+ was embedded into our software long ago, when our first clients started to trade in international markets.

The MOEX project was completed on time and relatively hassle free – all our clients are on board to operate in the new T+ settlement environment.

Another important trend we have witnessed over the past year has been the growing interest in the FX market. An increasing number of brokers are now providing client access to FX trading at MOEX and on international FX venues such as the EBS system of ICAP and Thomson Reuters’ spot matching. Beside gateway connection projects there has also been demand for complex infrastructure solutions consolidating FX liquidity from several sources. That was the main reason to actively use smart order routing technology and an internal matching engine.

Do you think the new margin credit requirements of the Bank of Russia will put a lot of pressure on your company?

We consider this a major project for 2014. Changes in respective regulations have already come into force and everybody should be compliant with them by the end of March 2014. Having analyzed how the new regulations affect technologies and the business scenarios used by clients, we released a road map for them as to when and what software would be adapted to the regulations.

Faced with tighter regulatory scrutiny, how important is risk-management today?

There are several factors at play here. The issue of risk-management is key for many of our clients not only because of new regulations or stricter application but also because of a clear understanding that an intelligently built risk-management solution offers a serious competitive advantage in an environment where market share is subject to being eroded.

Our clients today employ more trading strategies that are effectively covered by risk-management solutions. A year ago we talked about netting local shares with ADRs. Now, any composite portfolio with multiple assettypes can be evaluated in terms of margin credit and collateral in a very efficient manner.

We see a growing number of infrastructural solutions to integrate riskmanagement into diverse trading environments. This year we witnessed a number of risk-management implementations specifically to control high frequency trading (HFT) clients at such diverse venues as the LSE and the FX market of EBS.

It seems that the services offered by exchanges and those offered by brokers are starting to overlap. What is your view on this?

Yes, it is a global trend. Quite frequently the classic role re-distribution initiative comes from both sides. There are lots of examples. NASDAQ made it clear that they are prepared to provide algorithms like TWAP and VWAP on the basis of their trading system, whereas earlier algorithmic trading was offered on broker platforms. NASDAQ believes it is time these algos became a part of the exchange functionality.

DMA is a way for the exchange to reach the end client. In this scenario, the broker’s role is effectively neutralized. Conversely, internalization is an example of how brokers are encroaching on exchange functionality by offering their clients the ability to cross internal liquidity.

The battle goes on but it is important to think of a balance of interests. From the technology point of view a solution is always available.

What are the major trends concerning the end clients trading practices?

I would name a few important trends. One of them is providing the end client with a variety of devices to utilize as a trading tool. In our world of rapid technological development that we are all familiar with in everyday life, building solutions for trading from a stand-alone computer, iPhone, iPad, Android communicators, etc. are a must.

Another trend involves extending automation functionality to the end client. For example, this could cover programming language LUA inbuilt into a QUIK terminal or allowing an external client’s trading platform to be integrated with a broker’s platform using a universal tool such as FIX protocol. And last but not the least is the increasing requirement to trade different asset classes, often in multiple currencies, using one screen.

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