SETTING THE SCENE
Until the end of the first quarter of this year Russia’s revitalised Moscow Exchange (backed by a burgeoning post trade infrastructure provided by the National Securities Depositary) was gaining significant traction among global investment banks and hedge funds. All eyes were on DMA.
Current woes resulting from the land-grab crisis in the Ukraine, have deflected both opinion and attention from the very real market reforms underway in the Russian market. Nonetheless, there is a steady stream of business (although at levels much lower than they were at the end of 2013) which necessitates discussion of the salient market trends.
Direct market access clearly offers advantages, such as a reduction in latency and immediate access to an exchange’s block trading function or simply to trade options. It also negates the need to maintain dedicated hardware and software. A DMA service can unlock trading features that may not previously have been available to many international investors in particular markets such as Russia. The Moscow Exchange was created in 2011 from the merger of the RTS and Micex exchanges, which previously operated separately, settled in different currencies (ruble and dollar) and specialised in different asset classes. The combined exchange is a central plank in the Russian government’s drive to turn Moscow into a major global financial centre and claim back some of its lost IPO business from London, which has emerged as a rival Russian IPO centre.
Those plans are perforce on the back foot right now, though the exchange and the NSD have been polling and networking hard both in the CIS states and Asia, where there is expected to be a substantial uptick in business going forward. Deutsche Bank’s client briefings anticipate a flurry of initiatives around tax and settlement to follow in the next few weeks. The year has not been a total write off for the Russians in terms of dealing with the West. A recent seminar held by the Moscow Exchange in London attracted over 450 attendees. Moreover, over the last 18 months, connectivity providers have raced to roll out low-latency connections to the Russian market.
In September, TMX Atrium released a set of options for trading Russia through its connection to Frankfurt’s Equinix FR2 IBX data centre and the Moscow Exchange. Meanwhile, BSO Network Solutions has its own link from London to Moscow, which it upgraded in March to achieve a roundtrip latency of 39.15 milliseconds. Through the first half of 2014, Russian brokerages in London steadily decreased the ultra-low latency data lines between London and Moscow and now must be the fastest trading connection yet built between the two cities, well below 39 milliseconds.
Elsewhere, Horizon’s software focuses on providing DMA to the Russian market. Its DMA gateway provides support for order routing as well as pre-trade risk management, which has become an important feature of the Russian market ever since Moscow moved from its original T+0 settlement cycle to T+2 settlement in the second half of last year. It also provides an ‘exchange-native’ data feed, which Horizon says is important because otherwise the data would be more complex to obtain and may suffer from higher latency.
One of most important developments over the past year, irrespective of, but clearly linked to, sanctions has been the expansion of the client universe of the Moscow trading infrastructure. Sanctions have encouraged the Russians to look eastwards and south for new strategic partnerships, new business and trading flow. In the following roundtable, we look at the nuts and bolts of trading with the Russian market infrastructure and the changes and efficiencies now placed in chain.
CONNECTIVITY & COLOCATION: THE TRENDS
VLADIMIR KURLYANDCHIK, BUSINESS DEVELOPMENT DIRECTOR, ARQA TECHNOLOGIES: There are now many ways to gain connectivity. The primary data centre of Moscow Exchange is located in an international data centre in the south of Moscow. All major Russian local telecoms providers can now avail themselves of network access to trading engines of Moscow Exchange. Big international players like BT Radianz also offer connectivity to the exchange. Co-location is a separate area in the M1 data centre. A client can rent a rack or several units on Moscow Exchange and the typical connectivity for colocation is 10GB. There are several options to achieve colocation from outside. You can rent an internet link, as part of the colocation services that Moscow Exchange provides or utilise dedicated lines from one of other data centres. An optimal solution to harness this infrastructure is to arrange a rack and then to connect on to Moscow Exchange colocation or other data centres. Most Russian prime brokers provide services based on links between the M1 data centre and London data centres. Moreover, both telecom and service companies can organise links easily. Specifically for the London based community LD4 is also an option for connectivity to the Moscow Exchange.
TOM O’BRIEN, HEAD OF INTERNATIONAL SALES, MOSCOW EXCHANGE: We moved into M1 more than a year ago now. It’s not an ideal data centre, mainly due to its size, but it’s actually pretty good in some parts. From a power supply point of view its actually very well set-up. It is not a long term solution, though I believe when we moved in we committed to it for a period of time. Separately, London and the LD4 link has, I can say, been really successful. We have a host of customers in LD4. They are not going to be the true low latency customers, mainly because our latency from London to Moscow is never going to be the fastest. Actually though, and especially these days, that’s not really the game we are in. As a pillar of the market infrastructure our focus is always on making connectivity to Moscow easier, from whichever part of the world you are based. We’re not particularly looking to make it faster. Clearly now we are looking to open up data centres or points of presence (POP) in other locations. LD4 will carry on being the primary data centre overseas but I think of LD4 as an FX data centre in the way that it is actually set up. That really works from the FX side. Interxion is closer to LSE, so if we’re going to have people doing some sort of arbitrage between the two, that’s somewhere we should be. Again we are not going to be the fastest and we aren’t going to pick all those customers up but there will definitely be customers in there who are in Interxion which aren’t in LD4. The same applies for Frankfurt, where we’re seeing derivatives contracts traded in Frankfurt which are interesting to us back in Moscow. Some people are sitting in Frankfurt doing index arbitrage type trading from Frankfurt back to Moscow. Then you also have the Scandinavian countries, where most of the trading goes through Stockholm. Should we break it up in some way and offer some sort of POP in one of three Stockholm based data centres that are available? I think the answer is yes. Overall, I would posit that low latency from an exchange perspective is too costly, it moves too fast. Our focus now is to extend our reach, either through connectivity, POP, and or relationships with other exchanges and parties.
FRANCESCA CARNEVALE, EDITOR, FTSE GLOBAL MARKETS: The data centre market in Moscow is different from that in the UK or the US, in the sense that it’s still quite a new market. What are its main features?
IRINA GLAZKOVA, DMA SALES DIRECTOR, ASIA, RUSSIA AND CIS, OTKRITIE SECURITIES: Whatever our clients would like to have in terms of proximity, connectivity and colocation, we will always strive to offer them. Just a couple of years ago there was a trend where each client began to believe they were extremely big HFT players. This notion was created by M1 providing them with an opportunity to be installed in a colocation centre rather than in proximity hosting. It was a big buzz and everybody immediately wanted to be collocated rather than proximity hosted. These days, naturally, it is very different. Smaller, even mid-tier clients realise they are not GETCO’s or Kite Groups and trading is more considered. The bigger players, real HFTs, with quite a big market share on MOEX now require not so much colocation as a much broader service set that also includes other markets. Colocation is something of a game changer because if you are collocated somewhere you lose something of a competitive edge, irrespective of whether you are trading in Russia or not. For example if you want to trade US markets CME against LSE, once you are collocated somewhere there is nothing close to quick post-trade, pre-trade risk management that a broker can offer. With all these other players the bigger players started to be less focused on being collocated. This continues to happen across the board.
TREND SHIFTS: LOOKING EAST AS SERVICES DEEPEN & SANCTIONS BITE
FRANCESCA CARNEVALE, EDITOR, FTSE GLOBAL MARKETS: I guess there are broadly two types of requirements. You have people who are really keen on speed directly into a local market, they will go for the colocation facility and not for anything else. What we hear about is that many of our clients who already trade other markets are keen to use other points of presence. In that sense, Stockholm is interesting because it’s sort of halfway between Moscow and London. So you get that GDR arbitrage opportunity. With Frankfurt, we are beginning to see, some of our clients beginning to treat it as a kind of hub. Part of that is because Deutsche Börse trades so many markets in central and Eastern Europe. As Irina says, people who care about the speed don’t necessarily want to go to Russia. On that last point, clearly some investors remain afraid, or nervous, about actually putting their software in Russia. Do you accept that? Equally, speaking to the Russians, they are increasingly looking eastwards. What are the implications of that?
IRINA GLAZKOVA: Actually, some of our Asian clients clearly articulate the concerns over their trading equipment being too far away and say ‘we are not there, we don’t know what is happening there.’
TOM O’BRIEN: It is true, we have recently signed a range of memoranda of understandings (MoUs) with Asian exchanges and clearly we’re investigating whether we can do something with them. We’ve looked at how we penetrate into the US and what we do on that side. US is a no go for equities. That’s mainly our business side, CFTC approval for index and contracts. The asset class that actually interests us is currency. What do we do on the FX side? China Japan, Korea, Singapore. It’s just a case of finding out what to do in those spaces. Moscow is actually not in a bad place to offer some sort of currency exchange. Our biggest contract on the futures side, apart from the index is USD/Ruble, though in the short term we have had to face some issues with the decline in the value of the currency post sanctions. Even so, that contract is as big as all the equity market combined, the cash market on just cash and swap is 25 times greater than the equity market. We tend to be overly focused all the time, especially in the UK, around equities but it’s a small part of what we are doing. My interest is really shifting away from equities and looking at what we do around currency. I’m considering what the rouble going through CLS would mean for us and looking at how you do offer settlement and clearing for currencies such as the Renminbi, which is becoming increasingly important. Now we’ve got very good technology, which is pushing us much more to the East really. Our relationships from Russia are with China, and again with Japan. Huge amount of flows on the currency side. Most of that actually comes back through London. But why? A lot of it is pushed into London for a variety of reasons, but one is really around settlement. Technology is just an enable you have to be understanding of what you want to do from a business point of view. Regulation is also a big driver globally. What we do with MiFID II, EMIR, Basel III and so on. What do we do with clearing, settlement, reporting? That really drives our relationship with other exchanges. Is Moscow ideally situated now with the change to move to the east? Don’t know how quickly the shift away from the US, a shift away from the UK, into China, Japan, South Korea, and Singapore will be, but clearly sanctions have accelerated that process. Frankly, Moscow sits in a very good geographical space for that shift. London has had a thousand years of history of working with financial markets. Russia, effectively, with the reengagement has only really had three years! It’s not a long time! We just have to look at what we want to do. Our main focus from a Moscow Exchange perspective is how we repatriate trading around rouble denominated assets. That’s FX, futures, equities, repo, corporate bonds, and government debt. Rather than looking at us being global, I think that actually, from a Russia/Moscow exchange point of view, it’s about making sure we are the venue that people recognised for ruble trading.
VLADIMIR KURLYANDCHIK: How do you propose to build a financial ecosystem with Asia?
IRINA GLAZKOVA: It is a universal issue. Earlier this year I spoke with the Singapore Exchange and this element was key for them too. They really want to have connectivity to as many data centres as possible. They are even thinking about investing in themselves as an exchange into channels and to keep up the fastest channels, upgrading systems and being in the centre of the trading activity. They actually see themselves as London is nowadays because this is somehow, in terms of territory and history, London is the centre point for going West (to the US) and to going East. Singapore now considers itself more as a regional centre and have made a lot of significant steps as a technical centre point for connectivity from the ASEAN area. It is also very well connected with Korea, with Japan, and with Australia. Whoever is collocated in their data centres enjoys one of the lowest latency in the region. So they are constantly thinking of ways to upgrade their technology.
VLADIMIR KURLYANDCHIK: We now have live microwave links in London and Frankfurt and New York and Chicago. Longer term, what sort of demand would you expect to see from microwave links between for example Moscow/Stockholm, Frankfurt? Is that what clients are currently asking for, or do you see it farther down the line?
TOM O’BRIEN: Frankly, that’s a question about liquidity and you need enough liquidity to make it worthwhile and big markets to make it work. Chicago and New York came first, next it was Frankfurt and London. Is there enough business in Moscow and arbitrage deals going back to London? I’m not so sure. I think the obvious route is to build the network into Frankfurt better and then use the microwave back from Frankfurt to London. So you have 4.1 on Microwave London into FR2, you’re currently probably 36 – 37 and a half from Moscow into FR2. So you’re above where you would be in London. All of these things keep moving every single week. That’s really the problem that Singapore actually finds. Being in the telecoms game is a very hard game. All the evergreen stuff that you have to do to guarantee that stuff means you move away from being an exchange to being a telecoms provider. I don’t really want Moscow Exchange to get too much involved in that. I think it can be a distraction for an exchange.
VLADIMIR KURLYANDCHIK: Next point, what protocols can be used to access the trading engines of Moscow Exchange? Moscow Exchange has two major trading platforms, one is ASTS for stock and currency markets, and SPECTRA for derivatives. Each platform has its own native API, both these APIs provide full functionality in a trading sense and in the sense of receiving market data, special data like market making obligations and so on. At the same time both of the platforms support FIX or order routing for market data dissemination. At the moment there is talk on currency markets using the same unified FIX and the same product will be in production for derivatives by the end of this year. All markets use separate entry points for FIX order routing and separate channels for fast market data dissemination. One important remark is that FIX now provides access only to trading functionality not for clearing, or other specialities. I think we will cover latency a little bit later and my last remark about protocols is that most brokers provide fix connectivity to their clients using different vendor solutions. Usually a client can get the same FIX protocol version for any markets of Moscow Exchange from their broker. Irina, is their client demand for native or FIX connectivity? Which connection do they prefer for market data?
IRINA GLAZKOVA: If FIX connectivity could provide this same low latency as native protocols our clients would be happy to stay with FIX. In the majority of cases they don’t want to really have the headache of having too many protocols to operate. The point is some of them, and here we talking about the most experienced clients, and the really qualified ones (with a good HFT history), for them Russia is just one more market to add to their trading strategy. For many of them operating via native protocol is having another competitive edge. As long as it’s there, native protocols will be really in demand. We have clients who go through the hassle of being certified in Moscow Exchange, being certified in LSE. Interestingly quite experienced clients, very experienced in Moscow, tell me how difficult it is to be certified in LSE with their native protocols, sometimes it takes a few months for them to go through the certification process, sometimes its vice versa, suddenly they get a very fast result and they are all very positive. Generally though, if it could be unified, it would be convenient for clients as long as this unification doesn’t kill the competitive edge. If the competitive edge is there, they will go through all the hassles of native protocols. It’s up to client readiness. If they want to be certified everywhere, have native protocols for market data, we are there, it is okay. If the FIX protocol is enough, that’s okay too. TOM O’BRIEN: I think everyone knows that on equities that FIX is faster when it comes to equities. It’s just the design. Most of the reason why FIX is always slower tends to be an add-on to a native protocol that sits under it, so there’s a translation there. That’s not how the equity platform was built. So effectively, both fix and what you term the native, go through a translation exercise back into the platform. It’s not that fix is always going to be slower.
FRANCESCA CARNEVALE: Which does raise the question: is there a plan? I ask because basically ATS is just another protocol. Is your plan to open up a real native protocol?
IRINA GLAZKOVA: It’s not only Moscow where it is changing. At the LSE I think that just five or six years ago, FIX was not considered the native protocol, but now they are moving closer to FIX.
VLADIMIR KURLYANDCHIK: For market data dissemination players can use FAST channels. The time between receiving confirmation on order and receiving order in market data flow is the following. For equity FIX the average time is 90 micros. FIX is the fastest way for order routing for equity and FX markets. The average latency is 340 micros. For derivatives, the situation is the opposite. As regards SPECTRA, the native protocol is faster, the number is around 600 micros, for transaction latency on colocation. For FIX there are no exact numbers because, as I mentioned a little bit earlier, Moscow Exchange is now in the process of implementing the same FIX version for derivatives they use for fixed and equity market. The expectation is that the protocol will be slower than 100 micros for native for derivatives.
FRANCESCA CARNEVALE: Those clients that really care are the same sort of people who say: ‘I won’t do proximity I must have colocation, even if it costs more. They will want the native connection surely?
TOM O’BRIEN: I think you shouldn’t call it native. I think they’ll always go for the faster one if it doesn’t matter if it’s native. I think the issue that the exchanges have got into is all around choice. Everyone puts FIX in because it’s just an easier protocol to actually build. I think you’ll probably go through a process over the next few years where this will change. It’s not about fix or native it’s about building a connection to the faster one.
FRANCESCA CARNEVALE: How does this compare with other exchanges?
TOM O’BRIEN: If you go to the fastest you’re probably looking at Toronto’s system in a few micros, we’re up around 330. It’s not comparable. LSE is around 120. On our side we do all the risk checks. So it’s not all about speed, some of it is about functionality and how it all actually works. People don’t care that much about it.
VLADIMIR KURLYANDCHIK: Another important thing about latency and what people care about is deviation, deviation of latency. From this point of view, FIX for example, is looking like 90% of transactions are under 400micros. It’s a really good result from my point of view and 99% are under 600 micros, so this 10% which is what people care about on Moscow Exchange. Generally, this jitter is not so bad and the numbers appear quite good.
RISK MANAGEMENT: NEW CONSIDERATIONS
VLADIMIR KURLYANDCHIK: When it comes to Russian financial markets, we have different levels of risk management implementation. As Tom already mentioned, at an exchange level, all markets support the opening of separate accounts for end clients, the typical situation is that the broker has an account and CCP for collateral and settlement for all his clients. Equally, though a broker can offer separate accounts for particular clients. In this case, the broker maintains a collateral pool for this account and conducts separate settlement for this account. The exchange has two different risk management systems on board. These risk management systems are encapsulated into trading platforms. One risk management system is SPECTRA proprietary methodology. Another one is used for stock and currency markets and based on haircuts for different instruments. At the moment all three major markets of the Moscow Exchange have separate collateral pools, and one of the main projects for the exchange is to provide a service to optimise collateral. The second level of risk management is at the broker level, usually the broker’s motivation in this process is to provide for the end client a possibility to increase their positions in different markets without increasing market risk. Typically a client can receive collateral management as two opposite flags on Moscow Exchange and LSE in the same instrument. Also, all major prime brokers provide portfolio margining for complex portfolios with stocks, GDRs, futures and options. Usually in this service the client has the possibility to trade using USD on stock market, and use USD for collateral and settlement currency. So all three major markets, equities, derivatives and FX are mixed in brokers’ risk managers systems. Of course, what people in London usually think of as risk management is fat fingers checks, frequency, like the number of allowed securities and so on and so forth. This is also in place in brokerage platforms.
TOM O’BRIEN: We’ve gone through a T+0 model which was all pre funded to T+2 model, partial refunded, but you’re always going to err on the side of safety. I think it’s just how that actually moves forward. I can see that changing over time. I think our real focus as a group has really moved a bit away from the trading side, into clearing and settlement and about tidying up, reducing costs of settlement, reducing costs of clearing. There are things actually going on around real time gross settlement, moving the accounts, how we actually structure the accounts with the NSD with the corresponding banks that will make all of this movement much simpler. You go back, and coming to this forum I thought it has been a couple of years of ongoing work from Moscow about changing. In reality it is actually less than that, when I look at the completion of the NSD, the merger to the exchange, the coming together of the central counterparty, the change that’s actually going on around settlement. It’s all happened in less than a year. You just have to work through all the changes really. I can see the issues mentioned probably disappearing over the next couple of years. I do come back to the fact that actually a pre funded model is actually a very good model, and I see that it’s something Russia should be proud of. I can see other exchanges globally coming to adopt that model. We’ve had some good conversations with our clients. They know the GDRs, but don’t know the real stocks that well. And actually when you explain how the funding model works, added costs etc, but when we say ‘here’s why’ they say they feel fairly safe, the exchanges are going to look after them.
IRINA GLAZKOVA: I’d like to interject with a couple of remarks around risk management. Tom didn’t go into too much into detail about the project with Eurex, our experience was that we have quite number of clients who are really big market makers in Russian trading venues, and they were, really avidly waiting for something to launch, something Russia-related to be launched on Eurex, but the problem was, after they started checking the conditions, the problem was that the risk management does not properly exist on the Eurex side, as they used to on the risk management on the Moscow Exchange. They understood that there is always an additional layer of risk management checks which will be minimum by the clearing member which does now exist as a recognised institution in the Moscow exchange, and there is inevitably the expectation that ‘we will always be slower than somebody, than a clearing member itself for example, if they would like to take over the market making functions, we will lose anyway.’ The other thing is that we were talking pre-trade risk management and having collateral prefunded before the trading, I fully understand all exchanges who are thinking about changing their business model into a former Moscow Exchange model. I even understand why brokers would love to keep the same model, the bad news is that however, the clients who were trading US markets, at least via us, LSE, and I used to T+3, expected that this will be T+2 will be like fully T+3, even in terms of settlement, so you are definitely not going to pre deposit anything even less liquid stocks which are still the requirement of the Moscow exchange side.
VLADIMIR KURLYANDCHIK: There are very different variants on different exchanges as to what kind of orders usually exchange trading engine supports. In the Moscow Exchange the situation is quite clear, SPECTRA only supports limit orders and it is very important to know because there are no ways to send a market order directly to a trading engine, but most platforms can emulate market orders for end clients by sending limit with low or high possible price on the derivatives market. The good news is that FIX drop copy service is on the way for the ASTS platform, and for SPECTRA it will be completed by the end of this year. Market participants also may use the native API connection to receive all drop copy from exchange trading platforms. There has also been significant success in resolving related legal questions and the working mechanisms for different platforms on the exchange. Another important element is that there is no kill switch functionality on Moscow Exchange and there are not any plans about introduction of this functionality this year. I think that pressure from market participants about this particular functionality will grow and next year will be the year of implementing this feature.
FRANCESCA CARNEVALE: As an outsider looking in, the level of change, reform and upgrades implemented in the Russian market have been impressive. I think the exchange has done what most other exchanges have done over a ten to fifteen year period in about two years. There’s still lots to do and there is no escaping the political questions that surround trading and which have undermined some investor sentiment. That is not our lot to debate, however. Over the long term do you still believe we will see Russia as a major market?
IRINA GLAZKOVA: We will be trying to complement anything that Moscow Exchange is doing and other exchanges are doing. We cannot only be focused on Moscow Exchange, we do anything that is Russia related worldwide, plus global instruments as well, but our top focus that we see from all our groups of clients from all types is efficiency of their collateral, use of their collateral, whatever can be netted, should be netted. Whatever should be matched, must be matched. All these things that Moscow Exchange will undertake in the Russian market there is still a lot to do on Russian instruments worldwide. Irrespective of the political situation, we believe this will be the bigger demand within a year and a half for our big international clients, much more important than the low latency alone. Although low latency players are still our biggest source of revenue, this focus is shifting, even for HFTs.
VLADIMIR KURLYANDCHIK: My last remark will be about another unique feature of Moscow Exchange - each September over the last eight years, Moscow Exchange, has organised a stress test in a production environment, for all market participants, it’s a very good chance to check all market infrastructure, (trading platforms, brokerage platforms and so on and so forth). I believe the last one was quite successful and so that means that the exchange can still keep building on its achievements to date.