Forex Brokers Guide

India may still be in the early adoption phase as far as algorithmic trading goes, but its stock exchanges are making large investments to facilitate its progress. Some of the investments are directed at reducing latency, which is the time delay in data being transmitted from the exchange server to that of the member broker as well as the time taken for a member’s order to reach the exchange’s system. Low latency is critical for algorithmic trading, and exchanges, brokers and traders worldwide are investing millions of dollars to enhance trading efficiency.

The National Stock Exchange (NSE) has offered co-location facilities to its members, who can set up automated trading systems in the same building as the exchange. The idea is that the time taken for market data going out from the exchange and for order messages to come in from members will be reduced. By how much? With most of its members connected on leased lines, data is already moving at a fraction of a second. Using co-location services can help traders reduce latency by a few milliseconds (one millisecond is one thousandth of a second).

Graphics: Sandeep Bhatnagar / Mint

In advanced markets, every millisecond counts for algorithmic traders— especially in a market such as the US equities, where two-thirds of all volumes come from high-frequency trading firms. In the Indian context, high-frequency trading is at a nascent stage. Many algorithms used in the Indian markets are to facilitate better order execution. Here, shaving a few milliseconds off the time taken to send an order may not be a high priority. Still, there are categories of traders who are involved in statistical arbitrage and the like, who would want to reduce latency.

Besides, algorithmic trading is slated to grow manifold in the Indian markets, and it’s good that Indian exchanges are making such investments. NSE sent out a circular on 25 November saying members could avail of a faster broadcast of market data, up from 100 messages per second to 200 messages per second. A day later, the Bombay Stock Exchange sent out a circular saying that it has implemented FCAST, which enables a faster broadcast of market data compared with its predecessor DCAST. Besides, it has recommended that all its members should upgrade to 2 Mbps lines and this transition should be completed in the first half of 2010.

NSE has since gone a step ahead and has said in a circular sent earlier this month that it would make tick-by-tick data available to its members. In essence, data on every order entry, modification, cancellation and trades will be made available to members on a real-time basis. Currently, only the bids and offers at the top five prices are disseminated to members. Those who avail of this facility will be able to see the entire order book for a security, except of course, full details of orders where only a specified “disclosed quantity” is revealed.

Again, only a small sub-set of the Indian market participants may benefit from such large volumes of data and decide to invest in such infrastructure, which require dedicated leased lines for each market segment. But the good thing is that the service is available for whoever is ready. Of course, much of this is also happening because of the increase in competition among exchanges.

Nomura, the Japanese bank, plans to launch what would be the first bank-owned ”dark pool” in Europe to reveal publicly what trades have been done in a bid to ”remove the mystery” from such increasingly controversial trading facilities.

Dark pools, which allow the anonymous matching of trades with prices posted only after deals are finalised, have come under scrutiny by US and European regulators amid questions over their transparency.
In Europe, there is added concern that a lack of an industry-wide standard on how dark pool prices should be reported post-trade is hampering investors’ ability to judge where the best prices for trades are likely to be.

Dark pools fall into three categories: those operated by exchanges; independent companies; and by banks such as Nomura and larger rivals like Credit Suisse, Goldman Sachs and Morgan Stanley. Bank dark pools are also known as ”crossing networks”.

Nomura said it would convert its existing NX crossing network into a multilateral trading facility (MTF), a legal structure created by the Markets in Financial Instruments Directive that is used by trading platforms like Chi-X Europe and Turquoise. It is also used by some independent broker dark pools.

Such a status will require NX to reveal the trades done on NX and the price. Currently non-MTF dark pools and crossing networks report – or ”print” – prices after trades are done to specialist reporting services, mainly Markit Boat. However they are not required to identify where the trades were done and appear mixed in with other types of over-the-counter trades.

Andrew Bowley, head of electronic trading product management for Europe at Nomura, told the Financial Times: ”We’re trying to remove the mystery around the dark pool space. This will give some clarity as to what happens in our dark pool.”

In addition, NX would not allow trades to proceed if the size of the bid and of the offer in the “lit” reference market were ”materially imbalanced” – that is, if one was significantly larger than the other. It would also allow customers to set a minimum size at which an order could be done.

NX, which will be launched next month, will include stocks listed on London’s Alternative Investment Market and will be regulated by the Financial Services Authority. It will offer trading in 7,000 shares across 14 market indices in Europe.

Nomura’s move comes as bank crossing networks have become a flashpoint between banks and exchanges. The Federation of European Securities Exchanges argues that they have an unfair advantage over exchanges because they do not face the same regulatory obligations as exchanges. FESE has called for crossing networks to be registered as MTFs, arguing that they have become a ”significant part” of the off-exchange equities markets.

The banks reject FESE’s claims, saying their dark pools are fully regulated and that they account for around 3 per cent of Europe-wide equity markets.

The Committee of European Securities Regulators is studying the issue and has asked both sides for numbers to back up their claims. Eddy Wymeersch, CESR chairman, said last week “we have very contradictory figures with regard to dark pools”. He added: ”The question of what a dark pool is, is very confusing.”

The Securities & Exchange Commission wants to know what YOU think about high-frequency trading and so-called dark pools or dark liquidity, in which securities trading happens without public listing of price quotations.

Mary Schapiro, head of the SEC has said in a letter to Senator Ted Kaufman, Democrat of Delaware, that the Commission will seek public comment about such obscure trades “early next year,” according to a piece in the Financial Times. Kaufman is a critic of dark liquidity and other irregularities of trading. “Next month we hope to seek public comment,” FT quotes Schapiro, “through a concept release or similar document, on a range of issues relating to dark liquidity in all of its forms, as well as the impact of high frequency trading in our markets.”

So, make your voice heard!

High frequency trading is gaining popularity in the fund management world, and one Jersey City, New Jersey firm is aiming to help managers get into the game faster.

Trading Cross Connects US LLC (TXC), an incubator of high frequency trading teams, announced today that its first team—a London, England-based firm—has begun trading. The newly-created firm was founded by former high frequency proprietary traders who worked at a major European bank.

“The speed and efficiency involving the on-boarding of TXC’s first customer is a testament to the scalability of our technology infrastructure, broad connectivity offering and experienced professionals,” says Alan Schwarz, president and COO of TXC. “TXC helped establish the new high frequency firm and connected them with Bay Head’s pre-existing prime brokerage relationship, which contributed to the overall ease of starting the business. Individuals in the high frequency trading community looking to set up their own operation will find our turn-key solution extremely valuable – both on the infrastructure and capital side.”

TXC provides ultra low latency connectivity to all major exchanges/ECNs for FX, fixed income and U.S. futures.

“We have native connectivity to all major marketplaces and provide co-location to ensure minimal latency. Our asset agnostic software and optimized exchange adapters ensure that we can meet the demands of our clients,” says Gray Lorig, TXC’s chief information officer.

TXC plans to incubate five teams in 2010 and is in active discussions with several high frequency traders seeking to establish their own high frequency firm.

Currently I am trading with only two Forex brokers — Marketiva and Interactive Brokers. Both brokers are very different and have their advantages and disadvantages. I am quite sure that the same can be said about 90% of all other Forex brokers. They aren’t perfect but I must say that they do their job well and I rarely had any problems with them. Marketiva is fine for me because I often need small fractional trades (the similar position sizing flexibility is also offered by Oanda), deposits and withdrawals have always gone fast and smooth and their security is admirable (they always double check my identity when I login to my account from different PCs or IP address). Interactive Brokers offers interbank rates and is awesome for the long-term trades. Also, I am not afraid to keep a big account with them, knowing that they are very stable and regulated company with a top-notch security of funds. So yes, I am satisfied with my Forex brokers. And what about you?

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