The term ‘Trading technologies’ collectively refers to the various tools, platforms, software, and systems used by financial professionals to execute and manage trades in the financial markets.
Over the years these technologies evolved significantly and have become very sophisticated and play a crucial role in modern financial markets.
Some of the key components and aspects of trading technologies are:
Electronic Trading Platform: Highly customizable software applications that allows traders to place and execute trade, check P&L, balance and manage risk. These platforms can be configured per client requirements and are available in desktop, web-based and in mobile versions. Examples include TradeStation, TD Ameritrade, and Robinhood for retail traders, and Bloomberg Terminal, Reuters Eikon for professionals.
Algorithmic Trading: Algorithmic Trading or algo trading refers to the use of software code to create algorithms which in turn automate the trading strategy. These algorithms can analyze market data and execute orders at high speeds depending on configurable conditions and other factors like price movement, trends, volume etc. These are often used by institutional investors and hedge funds to optimize trading. Some of the examples of algorithmic trading includes:
- Trend Following Algorithms: Primary aim is to check price trends and buy and sell assets based on it. RSI and MA crossovers follow this pattern.
- Predictive Models: They try to predict future price movements based on historical data, market sentiment, news, and others.
- Volatility Trading: These algorithms aim to profit from changes in market volatility.
High Frequency Trading: Specialized trading setup that relies on software and hardware acceleration to execute large number of orders in milliseconds or microseconds. Hardware acceleration is a solution where compute-intensive workloads are being offloaded to GPU’s or FPGAs.
What are FPGAs: Stands for Field Programmable Gate Arrays. In short, it’s a chip that contains a million or more logic blocks being repeated throughout the silicon. Each of these logic blocks called lookup tables (LUTs) includes basic logical operation such as Boolean AND, OR, NAND or XOR. The advantage of using FPGA is that it offers hardware accelerated solution for co-located Direct Market Access and pre-trade risk management.
Order Management Systems (OMS): Is a set of software applications or tools used by financial institutions and other trading organizations to streamline and automate the entire order processing lifecycle in terms of Order Entry, Order Routing, Execution, Portfolio Management, Risk Management and Compliance Reporting.
Types of Trading Venues
Trading Venues are locations that allow transactions of financial instruments. Based on the financial instruments being handled and their structure, venue can be broadly categorized into Stock Exchange, Commodity Exchange, Bond/Derivative Market.
In the context of trading venues and particularly in the realm of equities (stock) two terms are very important – Lit Market and Dark Market.
- Lit Market/Venue: In general, all the publicly trading exchanges like JPX, NYSE, LSE etc. come under this category. These exchanges share the same characteristics as:
- Transparency: All orders and trade information are visible to market participants in real time.
- Price Discovery: This is the central function of a marketplace and strikes to find the spot price or the proper price of an asset, security, commodity, or currency. In simpler terms it is where a buyer and a seller agree on a price and a transaction occurs.
- Highly Regulated: Public exchanges are subjected to rigorous regulatory processes to ensure fair and transparent trading practices among all the participants.
- Dark Market/Venue: Also known as ‘Dark Pool’ and are financial exchange/ hubs which are privately organized and facilitate trading of financial securities. Dark pools are in stark contrast to public financial exchange / lit market, where there is a high degree of regulation. Some of the well-known dark pools are CBOE Kai-X, Instinet BlackCross and Liquidnet. Below are some of the characteristics of dark pools:
- Private Trading: Dark pools allow for trading execution away from the spotlight of public markets. Order information along with participant information is not displayed to the public and hence reduced transparency.
- Avoidance of Price Devaluation: Being private in nature attracts institutional investors to use dark venues to execute large orders with reduced market impact. If the similar had been executed in public exchange, then there would have been high price fluctuation.
- Price Improvement: Dark pools offer price improvement opportunities where trades can be executed at Mid (mid-price of BBO), Near (Best Bid Price for Buy and Best Ask Price for Sell) and Far (Best Bid Price for Sell and Best Ask Price for Buy).
Types of Financial Protocols
To facilitate trading, communication and data exchange the widely used protocols are FIX, OUCH and ITCH.
FIX (Financial Information Exchange)
FIX 4.2 is the well-known version of the protocol used by traders, brokers and institutions enabling exchange of information related to trading of securities like stock, bond, FX. FIX message format is a tagged, delimited ASCII format and each message is composed of a delimited series of unordered tag/value pairs.
General message format is composed of the standard header followed by the body followed by the standard trailer.
Below is an example of a FIX message for Buy 100 quantity of Monex at limit price.
8=FIX.4.2: Indicates the FIX protocol version.
35=D: New Order - Single (D) message.
34=1: Unique message sequence number.
49=SenderCompID: Sending firm's identifier.
56=Broker: The broker's identifier.
55=8698: The symbol for Monex
54=1: Buy order.
38=100: Quantity of shares to buy.
44=570.00: Limit price.
40=1: Order type (Limit Order).
10=007: Checksum for message integrity.
Some of the features of FIX 4.2 are:
- Message Based: Uses a specific structure to interchange trade messages between participants. These messages included order execution, trade confirmations, market data etc.
- Customizable: FIX is highly customizable and allows us to define custom messages to meet certain trading needs. For example, Tags from 5000 are used for custom messages.
- Acceptability: Used globally across financial institutions allowing seamless communication. Further details of FIX can be found here - https://www.fixtrading.org/standards/
ITCH (Incremental Trading Consolidated Feed)
The ITCH Protocol is widely used today, on both Nasdaq owned liquidity pools/exchanges, and other non-Nasdaq venues that use the Nasdaq OMX Genium INET and Nasdaq Financial Framework (NFF) exchange technology platforms. ITCH is binary protocol and used for disseminating detailed full-depth, order-level market data messages with ultra-low latency.
ITCH Protocol usually defines the business-level message formats only and does not include a transport-level protocol. Messages are delivered using a lower-level transport protocol that takes care of sequencing, re-transmission, and delivery guarantees (e.g., SoupBinTCP or MoldUDP64).
ITCH covers the following areas:
- Order lifecycle events (added, executed, canceled, deleted, replaced)
- Trades (provide execution details for match events involving non-displayable order types)
- Security definitions and statuses
- Market events and data feed events
Below is an example of ITCH Binary message (in hexadecimal format)
|Message Type||0||1||Alphanumeric||0x41||A||Add Order message|
|Order Reference Number||9||4||Numeric||0x000003EA||1002|
|Order book ID||17||4||Numeric||0x000500CD||327885|
|Side||21||1||Alphanumeric||0x42||B||“B” = Buy order
“S” = Sell order
Another example of ITCH market data message:
T: Indicates a trade message.
8698: The symbol for the stock.
100: Quantity of shares traded.
570.00: Trade price.
20230918093015000: Timestamp (in microseconds) of the trade.
This protocol is used for order entry and execution. It is designed to offer the maximum possible performance at the cost of flexibility and ease of use. The messages are binary encoded in OUCH Protocol, which means that all numeric values are represented as binary values.
OUCH offers the following advantages:
- Efficiency and low latency
- High level of performance
- Delivery of real-time execution information (DROP)
Below is the example of an OUCH message for Buy order, AAPL, quantity 5,000 at $151
Enter Order Message – Inbound message sent by user
|Message Type||1||Alpha||“O” (Enter Order Message)|
|Order Book ID||4||Numeric||AAPL (translated value)|
Collectively, these protocols, along with sophisticated technologies and trading strategies, have revolutionized financial markets. They have enabled automation, algorithmic trading, and complex strategies that were once unimaginable. Moreover, these protocols have made markets more accessible and interconnected, fostering global participation and liquidity.
Anish Basu - Senior Engineer