Liquidity Fragmentation & SOR Iosif Itkin EXTENT February 2011

Contents MIFID - The Markets in Financial Instruments Directive is a European Union law that provides harmonised regulation for investment services across the 30 member states of the European Economic Area (the 27 Member States of the European Union plus Iceland, Norway and Liechtenstein) MTF - Multilateral Trading Facility FFI – Fidessa Fragmentation Index Best Execution - refers to the obligation of an investment services firm (such as a stock broker) executing orders on behalf of customers to ensure that the prices those orders receive reflect the optimal mix of price improvement, speed and likelihood of execution SOR - Smart Order Router

Technology & Regulations Newswire and information source for the worldwide financial technology community: http://www.finextra.com

Technology & Regulations Financial Times videos: http://video.ft.com/ft-trading-room

FTSE 250 Market Share Source: http://www.batstrading.co.uk/market_data/market_share/index/

FTSE 250 Market Share (MTFs) Source: http://www.batstrading.co.uk/market_data/market_share/index/

Fidessa Fragmentation Index Source: http://fragmentation.fidessa.com

Fidessa Fragmentation Index Source: http://fragmentation.fidessa.com N – Number of Execution Venues, Mi - Market Share of Execution Venue FFI shows the average number of venues you should visit in order to achieve best execution when completing an order. a) Assuming Mi = 1/N b) Assuming Mi = x, Mo = 1-x and N=2

Fidessa Fragmentation Index Source: http://fragmentation.fidessa.com

Testing Trading Systems Quality and stability of algorithmic trading systems become a crucial factor in the current trading landscape. Three aspects of advanced execution systems quality: • Functional correctness • Technical – performance, latency, resilience • Business efficiency Two dimensions to their complexity: • Technological: complex algorithms relying on historic and real-time market data and dynamically changing decisions, might include non-deterministic behavior; • Organizational: frequent system upgrades, multiple instances of algorithms running simultaneously. Behavior in production is key, but a robust testing procedure using simulators provides additional confidence in the results and even helps to interpret some production observations.

Smart Order Routers Testing

Testing Principles • Scheduled tests vs. test markets during business hours • Scheduled tests vs. simulation frameworks are constantly running • Treat the test farm as a Production system • Reflect the latest Production observations in the test suites • Systems require careful data maintenance • Ensure precision and correctness of latency measurements • Due to stochastic behavior the same tests are repeated multiple times

Complex Smart Order Router Treat the Test Farm as a Production System

1. Testing Principles Scheduled Tests vs. Test Markets during Business Hours

2. Testing Principles Scheduled Tests vs. Simulation Frameworks are Constantly Running

3. Testing Principles Treat the Test Farm as a Production System

3. Testing Principles Treat the Test Farm as a Production System

4. Testing Principles Reflect the Latest Production Observation in the Test Suites

5. Testing Principles Systems Require Careful Data Maintenance

6. Testing Principles Ensure Precision and Correctness of Latency Measurements

7. Testing Principles Due to Stochastic Behaviour the Same Tests are Repeated Multiple Times

Questions & Answers Thank you.