With the new rule going into effect for July 14th, there has been a race by many high frequency firms, clearing firms and Broker Dealers to come up with solutions that satisfies the rule requirement without compromise on latency. Prior to the formal announcement of the SEC in November 2010 of the adoption of the Market Access rule, I have kept a close watch on the proposed solutions offered by various firms who claimed to have the one “fix-for-all-solution.”
By Midmonth December 2010, one of the founders and a top executive at LIME (recently acquired by WEDBUSH) and I had a chat at a market function. He claimed that their pre-trade validator was 8 microseconds (µs), which is eight millionths (10−6) of a second. I was astounded to learn that LIME already built the solution and was quoting the latency figures under 10 microseconds (µs), when FTEN one of the leading firms on low latency gateway were putting out white papers saying that it would require an investment upgrade cost over 5 million dollars and would not be ready for months if not years. What really was surprising to me was that they could achieve those numbers based on what I understood was required to be checked. Granted with a lack of much needed guidelines from the powers that be as to what exactly should be the risk parameters, I was somewhat doubtful because I felt the ambiguity of the rule left it open to interpretation. In addition, I had my doubts on the vocally noisy selected few who declared that their systems are compliant since it is in line with the “spirit” of the rule. I could only guess whether these systems are truly doing proper checks.
What should a Pre-Trade system check for?
- Buying Power exposure
- Reg SHO on easy to barrow and hard to barrow securities
- Proper locate for short sales
- Prevent Wash sales
- Displays real-time order execution
- Provides visual alert of violation of threshold checks
What controls should it have for Risk Management?
- Kill Switch for halting all trading in MPID or per symbol blocks.
- Capital controls should be configurable by percent of fill ratio.
- Single Order Quantity should be configurable based on maximum size limit on order.
- Single Order Value should be configurable based on values of securities trading.
- Odd-lot Order restrains.
- Configurable recent order based on a time restrains.
- Configurable repetitive orders restrains.
As the time to the rule implementation date drew closer, various companies have announced the completion of their pre-trade risk monitor and we have noted the acquisition of a few companies who have announced to have the technology. Not to be left out of the game, we have also built a new Risk Management Administrative control (RMAc) which successfully completed all required pre-trade risk checks on an order acknowledgement at 8µs. Essentially the Broker dealers or clearing firms’ clients can connect either to our Risk Control Terminal (RCT) session either in a Windows Operating or Linux based system. We have also built an ultra-low-latency application which is in a purely Linux based environment that delivers validation at 0.23µs. In each scenario the owner of the mnemonic maintains the full control of trading limits and is alerted when a pre-trade threshold is violated via email and internal messaging. Within our infrastructure we also have a new constructed fiber powered FIX engine (DMAr), which sends orders at less than 1ms to NASDAQ and under 2ms to ARCA. This is the actual time it takes for an order to leave our network, hit the exchange matching engine and return an order acknowledgement.
So did the rule really change the game for the High Frequency Trader? Only time will tell….