The Internet was supposed to have abolished distance and made location irrelevant. One of the ironies of a fully-meshed world is that location can be even more important than it was before — especially if communication [tag]transmission times[/tag] are mission-critical. Thus investment firms compete to locate their servers actually IN Wall Street, rather than merely nearby. The Financial Times, in a long article devoted to competition between [tag]financial exchanges[/tag] and [tag]alternative trading systems[/tag], mentions a company claiming to be able to execute trades in 2 [tag]milliseconds[/tag], about one-third of the time taken by the [tag]London Stock Exchange[/tag].
“[tag]Chi-X[/tag], which offers trading in a suite of European stocks, derives its curious name from the 22nd letter of the Greek alphabet, symbolising the “crossing” or matching of the two sides of a trade. To the big exchanges that have dominated the trading landscape for decades – centuries, in the case of the London Stock Exchange – it has become all too familiar in the year since its launch. Chi-X and similar platforms represent the biggest threat to their business to have emerged since electronic dealing swept away most trading floors years ago.
The challengers differentiate themselves in three ways: speed, capacity and cost. They appeal to a new generation of traders who use automated trading programs and complex mathematical algorithms to buy and sell shares sliced into orders separated by thousandths of a second. On Chi-X’s system, a trade can be executed in two milliseconds, compared with about six on the LSE. The blink of a human eye takes about 200 milliseconds.
Few exchanges have the technological capacity to handle as effectively the sheer volume of orders fired off by such traders, often in response to the tiniest shifts in price or to fragments of news. Trading costs are low: Chi-X, like many other so-called multilateral trading facilities (MTFs), operates an incentive system that rewards those posting orders by charging the trader who matches the trade a higher amount, pocketing the difference. Exchange fee structures are more complex and generally higher.”
And, in addition to software traders using AI to decide what to quote, they are also choosing which market to quote on dynamically:
“Common in the US for about the past four years, smart order routing is taking off in Europe too – and that is providing an added boost to the alternative trading platforms.Credit Suisse is one of the leading proponents of the technology and, through its Advanced Execution Services unit, operates a smart order router called Pathfinder. AES was set up in 2001 to serve the algorithmic traders – hedge funds and others who use complex mathematical formulae to carry out specific trading strategies triggered by anything from tiny shifts in interest rate expectations to simple news headlines on a screen ticker.
AES has developed “heat maps” that identify where liquidity across a number of markets is best and is even working on a “news parsing” system that would instantly assess what a news flash across a screen might mean.”