Algorithmic Trading across different exchanges and countries
This webinar is based on the lines of discussions which were a part of 4th Annual Conference on ‘Behavioural Models and Sentiment Analysis Applied to Finance’, in London, on 16-20 June 2014.
In this session, the speaker Mr. Rajib Ranjan Borah, co-Founder QuantInsti & iRageCapital Advisory, compares algorithmic trading in different geographic across the globe. He shares his insights and experience of algorithmic trading across the major exchanges in Asia Pacific (APAC), Europe & Middle East (EMEA) and the Americas. The presentation has data of volumes of equity and options traded in more than 30 exchanges monthly and annually. The regulations required in different countries across the world are also listed in an easy to understand and implement manner. They key aspects of lucrative markets are mentioned for traders to make a quick first impression of the global markets. Basic terms such as ETFs and dark pools which are important to understand to appreciate the practical differences between exchanges are also explained. To help audience appreciate the technology that goes behind the entire algorithmic trading set up, Rajib also explains the complex System Architecture of Algorithmic Trading System in a simplified manner.
In this post, we will provide a short summary of what has been discussed in this webinar.
As a trading manager, how do you decide which geographies to trade?
The benefit of algorithmic trading is when you are able to multiply your profitable trades. There are two ways of doing the same; either you add more instruments or volumes in the existing market or you can expand your operations in different geographies all across the globe. Most of the big and medium sized hedge funds trade in as many markets as feasible for them. How do they make a decision to start trading in a new geography? The key deciding factors are of four types as listed below.
Regulations – How easy is it to start trading in that geography?
A few questions which need to be answered before you start trading in a new geography are:
- Does it allow algorithmic trading to outsiders?
- Which instruments are allowed to trade algorithmically?
- What kind of regulations are there on algorithmic traders in the new geography?
- What kind of Financial Transaction Tax does that country apply on algorithmic traders?
In this session, all the questions are looked at for different countries in different areas. In Asia, Singapore, HongKong, Japan, Malaysia are relatively easier markets in terms of regulations. But, one also needs to look at other factors before deciding to trade in a country.
Technology – Is technologically connecting to that market feasible?
Before taking a call about expanding your business in a new geography, it is important to dwell upon the technologically protocols relevant in that market. The session discusses about the aspects of technology one should look at while studying an exchange for connectivity.
One of the aspects is technology protocol family does the exchange, in which you want to trade, belongs to. The most popular and widespread protocol is FIX protocol (Financial Information eXchange). However, there are most a dozen different types of protocols being used by different exchanges to encrypt market data. For instance, London Stock Exchanges uses Millennium Native Trading. National Stock Exchange of India uses NEAT. It is important to know how feasible it is for you to connect to a new exchange. Does it follow the same protocol which is being followed by your current exchange? If so, then it should not be too complex for you to switch into the new exchange.
Volumes – Is it worthwhile?
High Frequency Trading or Algorithmic Trading usually makes money on volume trading. The technology takes benefit of very low spreads and uses a lot of volume to make profits. If there are no substantial trades happening in an exchange, then there is not much benefit of entering that market.
In this session, the speaker compares data of the following for across 40 exchanges all around the world:
- Equity volumes
- Index FO
- Equity FO
- Interest Rate
It is crucial for trades to have such data at hand before deciding on which instruments they would like to trade in which markets. Japan is a very good market in Asia with lots of volumes being traded in every category except commodity. However, for the same reason, it is also a very competition market. That brings us to our next very crucial deciding factor.
Competition – Will you be able to make money?
If a lot of big players already exist in the market, it would be difficult to compete with them. Hence, it is required to know what the level of competition in the new geography is. Rajib compares different geographies in terms of existing competition there.
The Road Ahead
Over the last decade, technological innovations in trading have been widely accepted and became quite popular. Various exchanges across the globe have shifted to standardized technology protocols.
The technology innovation in trading is probably reaching its limits with the cost of technology coming down and accessible to most of the market participants. It is expected that in the next phase, trading alpha will again shift towards statistical excellence rather than technological upper hand.
If you’re a retail trader or a tech professional looking to start your own automated trading desk, start learning algo trading today! Begin with basic concepts like automated trading architecture, market microstructure, strategy backtesting system and order management system. You can also enrol in EPAT, one of the most extensive algorithmic trading certification programme available in the industry.