Parallel trading venues in a  single market mean one thing to  a big portion of the global broking  and funds management industry:  arbitrage opportunities. Now, in  Australia, Chi-X is preparing to  launch a high-frequency trading venue  and the Australian Stock Exchange  (ASX) is developing new platforms  aiming to direct high-speed traffic our  way. The arms race is on. SIMON  MUMME reports.

Chi-X has clearly announced its  intentions for Australia. It aims to  repeat what it has done in the US  and Europe: provide faster trading  and lower fees than traditional  exchanges. This makes quantitative,  high-frequency traders its natural  clientele.  Peter Fowler, Chi-X Australia’s  chief operating officer, expects the  new trading venue to be executing  orders by October, once it has  adjusted to the market regulator’s  new integrity rules. The company’s  operations in Canada and Europe  “showed the importance of  attracting liquidity through high  frequency players coming out of  the US and continental Europe,”  Fowler says.  “We hope to attract them into  Australia.”  This means providing lowlatency  trades, which cuts the  time lapse between submitting an  order taken and acknowledgement,  and co-location, which offers  asset managers and brokers the  ability to run trading algorithms  through computer servers within  the trading venue.

These services  were first brought to market by  Nasdaq in 2005, and since then,  high-frequency trading in global  markets has evolved into a game of  milliseconds.  Between 30 per cent and 50 per  cent of global trading turnover is  driven by quantitative, or ‘blackbox’,  trading, says Brian Brown, a  former head of pan-Asia systematic  trading with Morgan Stanley in  Hong Kong. He is also the author  of Chasing the Same Signals, a book  describing the influence of cybertrading  on global markets.  He says the new trading  technologies run by managers  and venues “allows quant funds  to compete against banks and the  traditional businesses of market  making, which you couldn’t do five  years ago”.  The development of parallel  trading venues in Australia should  lure US and European quantitative  managers to extend their operations  and compete against domestic  banks as liquidity providers.

“They won’t compete in all the  liquid names with the banks, but  further down the food chain where  it’s less covered.”  The ASX is also preparing  for the arrival of high-frequency  traders in Australia by developing  parallel execution platforms. Firstly,  it is phasing out its integrated  equity and derivatives trading  system (ITS) and developing a  new platform, TradeMatch, that  Richard Murphy, general manager  of equity markets at the bourse,  says will provide more capacity for  higher trading volumes – and, of  course, lower latency.  It is the ASX’s adaptation to  global trading practice, in which  “order to trade ratios have blown  out dramatically, the capacity  needs of exchanges have blown  out dramatically and timeframes  have come down from seconds  to milliseconds to microseconds,”  Murphy says.  Today, the ITS offers latency of  between two and five milliseconds.  Its successor will provide latency of  between two and five microseconds,  accelerating the speed of execution  by a multiple of 10.  It will also boost execution  capacity five-fold to exceed 5  million trades, and 500 million  order book changes each day.

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