Viewpoint | Darren Toulson


the SOR order. Each rectangle represents a piece of resting liquidity on a lit venue. The background colour depicts the venue.


The volume text colour shows what happened to the available liquidity over the next 58ms as the SOR slice executed:   the liquidity; for instance, the SOR algorithm successfully hit all of the London MTF liquidity at 174.1.


  before the aggressive orders sent by the SOR slice reached the venue. So, at the first price level of 174.1, 7 out of 11 of the resting orders on Stockholm were cancelled just before the SOR orders could execute.


  aggressive order that executed ahead of the SOR slice. In other words, it was ‘stolen’ by a faster participant.


What’s striking about this picture is the amount of red / orange activity. There is nothing special about the timing of this order; market activity on this stock in the seconds preceding the order was negligible.


So to tell the story of what happened with this SOR slice:   MTFs successfully hit their targets.


  immediately cancelled most of the orders resting on XSTO. This implies that the HFTs were able to react to the executions on London and send messages to cancel orders in XSTO faster than time taken for the SOR orders to reach Stockholm.


  the same firms) aggressively traded ‘in front’ of the SOR slice.


  executes further down the book.


The analysis


What does this example tell us? Firstly, it illustrates the degree to which liquidity and trading really do react at millisecond timescales. Buyside orders


Best Execution | Spring 2013 KEY - Status


Cancelled Stolen Missed Our hits


KEY - Trading venues


= BURG = XSTO = BATE = CHIX = TRQX = XHFT


174.2 24,264


180 979 500 400 300 600 600 1,374 833 604 400 159 500 1,000 2,865 400 731 200 300 500 590 609 99


500


914 400 2,180 62 600 200 400 597 750 200 700 691 387 126 198 500 400 398 200 300


600 491 500 1,036 500 250


500 1,000


1,000 726 300 600 600 500


71 500


400 300 600 400 234 207 500 600 180 605 1,099 714 790 600 300 500 597 750 600 390 200 700 300


81


653 600 200 400 390 600


174.1 16,984 300


600 411 600 500 600 500 500 1,046 1,000 250 1,000 500 300 763 570 500 600 400 300 246 497 750 700 600 400 551 200 600 400 250 250 600


Diagram: Orderbook across all venues showing orders available at the beginning of the SOR trade


attempting to access such liquidity must be precise in their timing and sequencing otherwise they may be ‘gamed’. However, it also demonstrates that much of


the resting liquidity on lit venues is currently being provided by HFT players. The improvements in average spreads and liquidity seen when MTFs appeared in Europe may well be in part due to such HFT liquidity providers feeling able to offer tight prices as long as they can “dodge the falling knife” when they see large incoming buyside orders. Finally, what of current proposals for minimum


500ms resting times? This rule would primarily target the ‘orange’ HFT liquidity providers, i.e. those trying to avoid adverse selection but who do add liquidity. It would do nothing to prevent, and in fact would encourage, aggressive (red) HFT activity using lower latency to trade ahead of slower participants. Perhaps not the regulators’ intended target? ■


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