The Voice of The Machine – 5 Minutes with the CTO of Chi-X
Florian Miciu is the CTO at Chi-X Europe, putting him right on the cutting edge of the world of trading technology, particularly when it comes to making sure that the all-important ‘back-end’ is serving the needs of those on the trading floor – and the regulators.
We caught up with Florian in the run up to TradeTech Architecture to take a look at the technological challenges behind increasing data volumes, cross-asset trading, HFT and low latency, regulations, strategy and best practice…
Q: Do you think technologies are at a risk of not keeping up with the accelerating data volume requirements?
Yes, systems and business processes are at risk, but as problems will appear, solutions will be sought (some better than others), and vendors will step in to address the gap. Whoever will be first to identify the effects and address them properly will have an advantage.
Q: Cross-asset trading is a major industry talking point. With some classes and exchanges more developed than others, speed cannot be the only factor. What strategies should traders be looking into to best exploit this trading style?
Entering the cross-asset arena is quite tricky. For an investor it really depends on your strategies – e.g. if you do not have a market-wide exposure, it makes no sense to hedge with an index. It also depends on the capacity in which you operate: for an agency broker it makes sense to be market neutral, for a proprietary trader this may spell doom. Each asset class has its characteristic and unless you understand them very well you should not invest in these assets. For an exchange, it is similar: you need to understand both the attributes which are characteristic to each asset class, the way investments in these assets are carried through and what your clients expect from you. If you do not, it is probably wiser to continue to play the game you know.
Q: What major changes do you expect to see in the next 12 months in the key asset classes and are the current technology solutions you are aware of prepared to deal with these predictions?
The highest probability of success stays with natural growth: e.g. if you are a successful equities exchange, than the most natural expansion would be in the realm of equity derivatives – if you have the client base to cater to. The technology challenges are to provide solutions which are addressing the issues related to cross-asset trading: strategy handling, risk management, regulatory issues specific to each asset, customer service, etc.
Q: What strategies should technology providers take when trying to attract new business?
Make sure you do not offer solutions in search for problems, but that you are addressing existing issues. As an example, latency measurement between an exchange and its clients is best done from the client side – selling such a product to a tech savvy exchange or client is unlikely to be successful.
We hear from the banks that HFT is an essential lifeblood of the industry, yet we regularly hear from commentators that it’s one of the major contributing factors to the global economic crisis. Is either side right?
HFT has absolutely no contributions to the global economic crisis – the cause of the crisis is a combination of fundamental failures and human nature: in search for immediate profits, CEOs of corporations have become short-sighted and have ignored the basic rules of financing, thus creating un-manageable risks which they have kept hidden. The South Sea Company crash happened in the 18th century – we had no computers then. HFT is the natural evolution: many years ago, one would walk to the broker to discuss an investment, then telegraph happened, then phone, then computers. Each of these technology innovations means that there is a shorter time between deciding to invest and carrying the trade through, thus reducing uncertainty. Reducing uncertainty means narrower spreads, which benefits the investor, eliminating frictional costs.
Q: With trading on the nanosecond there is an argument from the smaller banks that the latency race has become such an expensive game that it is creating unfair market conditions where strategy is virtually irrelevant as they simply do not have fast enough connections to compete. In your experience, is this the case?
Currently we have the ‘trading on the microsecond’, and it primarily plays a role for strategies which try to capture the spread. This type of technology is referred to as ‘ultra-low latency’. Trading within the realm of nanoseconds will probably be tagged ‘extreme low latency’ or similar. The race to reduce latency is primarily driven by the need to keep risk innovation on the investor side, and to reduce the unnecessary uncertainties. The trend of reducing the atomic risk size by reducing order size has to be compensated by higher processing capability and faster communication in order to properly mitigate against adverse trend and opportunity costs (one cannot always increase exposure). Being tech savvy is not a measure of size of the bank or investment house, but a measure of what investment strategies one wants to employ – many successful ‘techie’ investment houses have been started on a shoestring budget.
Q: From what you have seen coming out of the consultation on MiFID II, what steps do you think technology providers are likely to have to take to prepare for the changes?
Ascertain your systems are flexible and can easily be adapted to a variety of requirements. Regulatory changes are not always easy to predict, and the devil is in the implementation details.
Q: How can technologies help support and best utilise the introduction of a consolidated tape for Europe?
I think that we first need to address the concept of ‘composite price’ or ‘dominant price’. A consolidated tape carrying individual prices will only partially address the investors’ needs, due to the geographic dispersion of the price formation venues, and due to the undefined concepts related to a price. Once these aspects have been addressed, then technologies have to provide the necessary infrastructure which is able to calculate these prices and distribute them with minimal delays. Thus, the focus will be on low-latency / high throughput
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