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Algorithmic Trading
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Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
By: Surya Gurung and Cheng-Fang Lin
NYU-Poly: FRE 7251 Algorithmic Trading & High Frequency Finance
Dec, 16th 2013
Source: www.engadget.com
NASDAQ Connectivity &
Algorithmic Trading
Brief History of NASDAQ.
NASDAQ Connectivity.
Algorithmic Trading.
2
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Nasdaqtrader.com Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Nasdaq & Its History:
Nasdaq was developed by the National
Association of Securities Dealers (NASD) and
began trading in 1971.(Freedman, 23)
When Nasdaq began trading in Feb 8th 1971, it
was the first electronic stock market in the
world. (3)
It connects hundreds of dealers who are
allowed to make markets in a particular stock.
(Freedman, 23)
3 Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Source:
Nasdaqtrader.com
Nasdaq & Its History:
Nasdaq OMX group owns and operate 26 markets, 3 clearing houses, and 5 central securities depositories over. (2)
In 2000, Nasdaq began to separate from NASD to become a public company. (3)
In 2007, Nasdaq purchased Scandinavian exchange group called OMX to become The NASDAQ OMX Group. (2)
4 Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin Source:
Nasdaqtrader.com
Fig 1. Source:Nasdaqomx.com
5
Nasdaq Connectivity:
Trading Access
Equity Protocols
Algo Testing Facilities
6 Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin Source:
Nasdaqtrader.com
Trading Access: Any firms who needs the lowest latency data feed,
NASDAQ OMX offers direct access to its U.S. equity and derivatives data feed products from its U.S. data centers.
They can connect to Nasdaq U.S. data centers via
1. Co-Location
2. Wireless Connectivity
3. Extranets
4. Direct Connectivity
Investors and Traders can also access to Nasdaq data feeds through more than 100 authorized market data redistributors. (7)
7 Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Source:
Nasdaqtrader.com
Trading Access:
Co-Location?
It is opportunity provided by an exchange to high frequency firms to place their trading computers directly next to the exchanges computers in their data centers for some fee.
Speed?
10G, 10G Ultra, and 40G Ethernet available for all Nasdaq OMX order entry protocols and data feeds. (8)
Reduces round-trip latency by an average of 2-3 microseconds.(9)
8 Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin Source:
Nasdaqtrader.com
Trading Access:
Wireless Connectivity:
1. Metro Millimeter Wave (MMW) network
connects customers in Nasdaq data centers to traders in New York Metro trading hubs in 40% faster than any fiber based network.(10)
2. NASDAQ OMX, in conjunction with CME Group, recently started providing a new wireless connectivity offering providing a direct, low-latency microwave route between Carteret, NJ, and Aurora, IL, for delivery of select NASDAQ and CME data up to 36% faster. (9)
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Nasdaqtrader.com
Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Trading Access:
Wireless Connectivity:
MMW network.
10
Source:
Nasdaqtrader.com
Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Source: www.nasdaqtraser.com
Latency; 201 microseconds
Latency; 197 microseconds
11 Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Source:
Nasdaqtrader.com Source: www.floatingpath.com
Trading Access:
Extranets & Direct Connects:
Firms outside the Nasdaq OMX data
centers can connect to Nasdaq OMX data
centers through approved third party
Extranets or Direct Connect networks
providers.
The monthly co-location fees for the
Nasdaqs data center in Carteret, NJ
(where all the trading actually happens)
run up to $14,000 per month. (6)
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Source:
Nasdaqtrader.com
Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Equity Protocals:
Financial Information eXchange (FIX)
FIX Lite
OUCH
Routing and Special Handling (RASHport)
Nasdaq Information exchange protocol (QIX)
Computer-to-Computer Interface (CTCI)
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Nasdaqtrader.com
Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Equity Protocals:
FIX
1. Created by Fidelity and Salomon Brothers in
1992 to communicate electronically between
buy and sell sides. (Freedman, 247)
2. It is a vendor-neutral standard message
protocol that defines an electronic message
exchange for communicating securities
transactions between two parties. It is free and
open standard format used today by most of
U.S. firms in the options securities business.(14)
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Source:
Nasdaqtrader.com
Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Equity Protocals:
FIX supports message for order entry, cancel,
and modify for
1. US Equity trading
2. Option trading
3. Order routing system ACES
4. Trading reports
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Nasdaqtrader.com
Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Equity Protocals:
OUCH
1. This protocol allows customers to quickly enter orders into and receive executions. OUCH subscribers and their software developers can integrate NASDAQ into their proprietary trading systems or build custom front-ends to NASDAQ systems.
2. OUCH accepts limit orders from system subscribers, and if there is a matching order, they will execute. Non-matching orders are added to the Limit Order Book, a database of available limit orders, where they are matched in price-time priority. OUCH only provides a method for subscribers to send orders and receive status updates on those orders. (18)
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Nasdaqtrader.com
Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Equity Protocals:
RASHport
1. RASHport allows subscribers to enter orders,
cancel existing orders and receive executions while
providing smart order routing and special handling
features. RASHport also provides advanced
functionality and the ability to process sophisticated
order types including discretion, random reserve,
pegging and routing. (15)
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Nasdaqtrader.com
Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Equity Protocals:
CTCI
It is a method by which NASDAQ subscribers can enter transactions, such as NASDAQ Market Center
orders and trade reports, from their computer systems
to NASDAQ's computer systems without using a
NASDAQ Workstation. CTCI interface is based on the
Common Message Switch protocol. (16)
QIX
It is an efficient protocol that allows automated, real-
time trading. QIX offers reliability in placing orders and
quotes in the NASDAQ system, while providing
improved throughput and reduced latency. (17)
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Nasdaqtrader.com
Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Algorithmic Trading:
It is a computarized trading using proprietary
algorithms.
Speed (fastest boat), reliability and data quality
are essential in algorithmic trading.
That is why, Nasdaq Connectivity is very
important.
Remember, it is the Nasdaqs connectivity issues
which lead to creation of Datek and eventually
Algorithmic Trading.
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Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Nasdaq Shutdown 3 hours:
Aug 22, 2013
20
Source:
Nasdaqtrader.com
Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Source: CNN Money
Algo Testing Facility:
NASDAQ provide next-generation Algo testing
environment offering a market-wide equities
testing platform that provides a comprehensive
testing universe well beyond just the NASDAQ
market systems.
The Algo Test Facility will provide High
Frequency traders with a safe environment to
rigorously test and calibrate their algorithmic
strategies by replaying and interacting with real
historical market data. (19)
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Nasdaqtrader.com
Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Conclusion:
Nasdaq changed the stock trading world by inventing the first electronic trading system. Even though, Nasdaq has made the electronic trading market more robust and advanced by continued technological innovation, I think lots of challenges still remains unsolved. Periodic news of flash crashes because of various algorithmic glitches such as one in Aug 22nd, 2013 could cause investor to loose their confidence in electronic trading markets.
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Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
References: 1. Freedman, Roy S. Introduction to Financial Technology. Academic
Press/Elsevier, 2006. Print.
2. What is Nasdaq? Nasdaq OMX. Retrieved from http://www.nasdaqomx.com/aboutus/company-information/whatisnasdaq on 12/14/2013
3. Nasdaq. Wikipedia. Retrieved from http://en.wikipedia.org/wiki/NASDAQ on 12/14/2013
4. Traders. Nasdaq OMX. Retrieved from www://www.nasdaqtrader.com
5. Nasdaq OMX Timeline. Nasdaq OMX. Retrieved from http://www.nasdaqomx.com/aboutus/company-information/timeline on 12/15/13
6. Mid-Week HFT Primer: Co-Location. Retrieved from http://www.floatingpath.com/2013/07/03/mid-week-hft-primer-co-location/ on 12/14/13
7. Market Data Vendors. Retrieved from http://www.nasdaqtrader.com/Trader.aspx?id=MarketDataVendors 12/13/13
8. Low Latency Connectivity. Nasdaq OMX. Retrieved from http://www.nasdaqtrader.com/content/Productsservices/trading/CoLo/LowLatencyFS.pdf 12/14/13
23 Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Source:
Nasdaqtrader.com
9. Nasdaq OMX Co-Location. Nsdaq OMX. Retrieved from http://www.nasdaqtrader.com/Trader.aspx?id=colo on 12/14/13
10. Wireless Connectivity: Metromillimeter Wave Offering. Nasdaq OMX. Retrieved from http://www.nasdaqtrader.com/content/Productsservices/trading/CoLo/millimeter.pdf on 12/14/13
11. Margaret Rouse. RASHport. Retrieved from http://searchfinancialsecurity.techtarget.com/definition/RASHport on 12/14/13
12. Margaret Rouse. QIX. Retrieved from http://searchfinancialsecurity.techtarget.com/definition/QIX on 12/14/13
13. Margaret Rouse. CTCI. Retrieved from http://searchfinancialsecurity.techtarget.com/definition/CTCI
14. FIX. Nasdaq OMX. http://www.nasdaqtrader.com/Trader.aspx?id=FIX on 12/14/13
15. RASHport. NasdaqOMX. Retrieved from https://www.nasdaqtrader.com/Trader.aspx?id=RASH on 12/14/13
24 Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin
Source:
Nasdaqtrader.com
16. CTCI. Nasdaq OMX. Retrieved from
https://www.nasdaqtrader.com/Trader.aspx?id=CTCI on 12/14/13
17. QIX. Nasdaq OMX. Retrieved from
https://www.nasdaqtrader.com/Trader.aspx?id=QIX on 12/14/13
18. OUCH. Nasdaq OMX. Retrieved from
https://www.nasdaqtrader.com/Trader.aspx?id=OUCH on 12/14/13
Nasdaq Testing Facilities. Nasdaq OMX. Retrieved from
https://www.nasdaqtrader.com/Trader.aspx?id=TestingFacility on
12/14/13
19. Chuck and Campos. Nasdaq market paralyzed by three hour
shutdown . Retrieved form
http://www.reuters.com/article/2013/08/22/us-nasdaq-halt-tapec-
idUSBRE97L0V420130822 on 12/14/13
25 Nasdaq Connectivity & Algorithmic Trading, 2013. S. Gurung and C. Lin Source:
Nasdaqtrader.com