A new pre-trade risk management tool for listed derivatives trading will shift risk checking to the exchange level and reduce latency for market participants, according to Nasdaq OMX Nordic.
The pre-trade risk management tool is currently being tested by participating members on Nasdaq OMX Nordic’s derivatives markets and will go live early in June. It lets member firms monitor their own order flow and that of their clients to avoid erroneous trades.
“The main benefit of these tools will be the reduced latency our members and their clients can achieve by concentrating pre-trade checks at exchange level,” Lauri Rosendahl, president of NASDAQ OMX Helsinki, and head of equities and derivatives, transaction services Nordic, at Nasdaq OMX told theTRADEnews.com.
“Having too many layers of risk checks can obviously lead to latency issues, but initial testing of these tools has shown members are keen to use them at the exchange level, rather than their internal systems,” he adds.
The new service includes different price and order size checks and daily accumulated quantity checks as well as per second limits and price order limits.
It has adapted from a system on Nasdaq OMX Nordic’s equities markets using technology from FTEN - a risk management software provider acquired by Nasdaq OMX in 2010 - and is compliant with pre-trade risk guidelines established by the European Securities and Markets Authority.
Rosendahl said the tool would be particularly beneficial to members offering direct market access (DMA).
“Listed derivatives trading needs more advanced risk checks compared with cash equities markets. Functions like mass cancellation of open orders and emergency action tools, such as kill switches, for members handling DMA flow are vital to reduce the impact of volatile trading scenarios,” Rosendahl said.
Increasing levels of trading automation require exchanges to take a greater role in dealing with erroneous trades, he added.
“We’ve co-developed the pre-trade risk management tools closely with our members to meet their needs and we think this is part of what a primary exchange should offer to facilitate fair and orderly trading.”
Richard Henderson +44 (0) 20 7397 3820 firstname.lastname@example.org
Two key factors have led Nasdaq OMX Nordic to take a different path from other European exchanges in defending equity market share since MiFID opened up trading venue competition in Europe, says Lauri Rosendahl, president of NASDAQ OMX Helsinki, and head of equities and derivatives, transaction services Nordic, at Nasdaq OMX.
First, the openness of the export-led Nordic economy and the high proportion of listed stock owned by overseas investors meant that Nasdaq OMX Nordic - operator of the domestic stock exchanges of Denmark, Finland, Iceland and Sweden - knew it had to respond positively and quickly to the threat of competition as the directive came into force in 2007.
Almost half (46%) of stock in Finnish listed companies is owned by overseas investors. “But when you buy a large Finnish stock you are not necessarily buying Finnish exposure,” notes Rosendahl, a career investment banker and equity analyst until he joined Nasdaq OMX Nordic four years ago. He points out that Finnish listed companies have the largest exposure to the BRIC countries of any European country’s stocks, with Sweden second. “Domestic demand accounts for only a few per cent of the revenues of some firms listed in Helsinki, such as elevator manufacturer Kone. BRIC demand for capital goods tends to be a much bigger driver of our listed companies than domestic or European demand,” he observes.
Strong demand for Nordic stocks from UK-based institutional investors in particular gave London-based pan-regional multilateral trading facilities (MTSs) an incentive to look north for growth. In the immediate aftermath of MiFID, BATS, Chi-X Europe and Turquoise offered London-based brokers the opportunity to tap Nordic stocks via cheap, fast matching platforms. Then, in May 2009, a local competitor emerged in the form of Burgundy, a Nordic-only MTF, initially backed by a number of Swedish brokers and now owned by Norway’s Oslo Børs (indeed Oslo Børs and Nasdaq OMX Nordic are still the only incumbent European exchange groups that compete head-on for secondary trading in each other’s listed stocks).
“We were exposed to competition at an early stage but had the benefit of being part of an organisation, NASDAQ OMX, which has a good deal of experience in competing for market share,” says Rosendahl. “If you start with 100% of the market, you can only go down in a competitive environment. But that doesn’t mean you should only be defensive in your strategy.”
These two factors - few barriers to entry for competitors and a competitive spirit that channelled the parent company’s domestic experience - have shaped a markedly different strategy for Nasdaq OMX Nordic’s compared with other incumbents such as Deutsche Börse and NYSE Euronext.
More than speed
In the first instance, the northern European exchange took a very obvious step to blunt the competitive edge of their new rivals: it implemented the ultra-fast INET matching engine provided by its new American owners. But it went further in 2010 by launching routing services for local brokers and a dark MTF, which allows orders to forego pre-trade price transparency through a system of waivers. Nordic@Mid matches orders at the mid-point price of the primary exchange using MiFID’s reference price waiver but since a revamp last year has removed the previous 500,000 Swedish kroner minimum order size obligation and matches trades on a price-size, rather than a price-time, priority basis.
“The other exchanges might think we’re a little odd because we’ve done different things like offering routing to clients and launched a dark pool, but there are good fundamental reasons for the growth of dark pools and we are able to offer minimal slippage with our mid-point matching compared with other dark pools.”
The pro-active strategy seems to be paying off. Nasdaq OMX Helsinki offers best price for the stocks it lists for 92-93% of the time and typically offers twice the liquidity available on the next best trading venue.
According to the Liquidmetrix Guide to European Dark Pools for March 2013, Nordic@Mid matched 99.83% of orders inside the European volume-weighted best bid and offer. An average trade size of €10,939 - second only to Liquidnet and ITG’s POSIT among dark MTFs - suggest last year’s repositioning to discourage high-frequency trading has been successful.
In Sweden, Nasdaq OMX Nordic captured 61.14% with €19.9 billion traded of Swedish equities on the lit market in March with BATS Chi-X Europe following with 30.25% and €9.8 billion traded. Burgundy held 3.18% with €1.03 billion traded, according to data from Thomson Reuters Equity Market Share Reporter.
For Danish stocks, Nasdaq OMX Nordic traded 65.63% of all lit equities with €4.8 billion traded, followed by BATS Chi-X Europe on 25.54% and €1.9 billion traded. Burgundy attracted 0.88% with €64.4 million traded.
And in Finland, Nasdaq OMX Nordic held 64.05% of market share of Finish lit equities with €6.4 billion traded, compared to BATS Chi-X Europe with 25.28% and €2.5 billion traded. Burgundy attracted 1.17% of market share, with €118.2 million traded.
But Rosendahl suggests there is no time for resting on laurels. In terms of future developments, one project in the pipeline is to offer a wider product range to local brokers. “We will continue to develop services that help those brokers handle the European competitive dynamic,” he says.
Steering a middle course
Nor has it all been plain sailing. The Nasdaq OMX Europe MTF closed in 2010 after it failed to pick up sufficient market share to justify further investment in the pan-European venue. And the creation of Burgundy by Swedish brokers reflects a sometimes tense relationship between exchange clients and owners since Nasdaq merged with OMX Group in 2007. On offering clearing interoperability in its cash markets, Nasdaq OMX Nordic has steered a middle course between MTFs and continental Europe’s incumbent bourses.
The firm moved quickly to introduce central clearing for Nordic cash markets with an external partner - EMCF, the Dutch-based clearer initially established to service Chi-X Europe in which Nasdaq OMX later took a minority stake - rather than taking the vertical silo approach of some other European exchanges. But unlike MTFs Chi-X Europe, BATS, and Turquoise, Nasdaq OMX Nordic stopped short of offering full interoperability via Europe’s four pan-European cash equity clearers on grounds that Deutsche Börse and NYSE Euronext, among others, were not willing to do the same. EMCF has subsequently announced its merger with EuroCCP - legacy stakeholders Depository Trust and Clearing Corporation, ABN AMRO, Nasdaq OMX and BATS Chi-X Europe will hold equal shares - but Rosendahl says the combination does not alter the interoperability situation significantly.
“I think the merger of EMCF and EuroCCP shows we were on the right side of the argument, but I’m disappointed that clearing competition has not since spread further,” he says. “Combined, EMCF and EuroCCP account for more than 90% of cash equity clearing on Nasdaq OMX Nordic. With the merger, we’re ready to go the extra mile on clearing interoperability, but it has to be a two-way street. If we open our doors to competition, others should do the same.”
He also insists that the consolidation should not give rise to fears of complacency on the part of the new central counterparty. “The governance structure of the merged EuroCCP-EMCF will ensure that the firm continues to deliver the best possible value to our members.”
Article written by:
Chris Hall +44 (0)20 7397 3819 email@example.com
Original source and full article can be found here:
In an article in the Danish news publication Finanswatch, you can today read about the increase in Danish derivatives trading.
A stable, growing index coupled with a new capped index and lower trading fees is now resulting in an increase in Danish index futures contract trading. In just one year, the number of trades has more than doubled.
Link to Finanswatch (på Dansk): http://finanswatch.dk/Finansnyt/article5364650.ece
Exchanges have an integral role in the chain of investment, job creation and economic growth in societies. In light of this important task NASDAQ OMX will sponsor the „Startup Iceland“ conference startupiceland.com. Startup Iceland is an international 4-day conference which will be held in June in Iceland. The concept was created in 2012 and due to the great success it will be an annual event that brings the startup world to Iceland. Startup Iceland‘s task this year is to answer the question How do we build antifragile entrepreneurial ecosystems? Many prominent speakers from Iceland and abroad will give their account. Entrepreneurs are builders and creators of valuable resources for their communities. Small entrepreneurial companies create more new jobs proportionately than large companies and are the economic engine of every society. We are very proud to be a part of this great project.