The latest multilateral trading facility (MTF) to enter the UK stock trading sector claims to be able to process trades in under a millisecond. This compares to the London Stock Exchanges three millisecond capability.
The firm's core trading platform is capable of processing trades in 200 microseconds. About 80% of its current trades, in the US, are processed in 400 microseconds. The time taken to process trades, or latency as it is known,involves the time take to accept, process and acknowledge a particular order," said a Bats spokesman.Faster trading speeds are advantageous when dealing with the large investment banks that use computer generated algorithms to instigate high volumes of trades.
Chris Skinner, CEO at financial services think-tank Balatro, said Bats has an opportunity to win business in the UK. "It has been very successful in the US and there is no reason why it shouldn't in the UK."
John Bates, general manager at complex event processing software supplier Progress Apama, said the entrance of Bats into the European market is further signal that incumbent trading exchanges cannot rest on their laurels.
"If its US experience is an example, we can expect them to be a force to be reckoned with. No doubt, the current incumbents will redouble their efforts to withstand the inroads that BATS will make. Exchanges can choose to compete on price, compete on services, or compete on a mixture of both.
Due to the competition in the sector as well as the advancement in technology the speed of trade execution has diminishing importance.
Bates said in the current market climate and because of Mifid has forced exchanges to compete on more than speed alone. "Exchanges must look to incorporate a broad range of services that can attract and sustain liquidity. Otherwise they risk competing solely on increasingly minute distinctions of latency or transaction costs.
The London Stock Exchange recently announced that for the first time it would offer trade clearing services in the UK. It also introduced a service where investment banks can put their algorithm generating servers in its datacentre next to its trading platform. This reduces trading times further.
|MTFs, which compete with traditional stock exchanges, are already in the UK in the form of Chi-X, Nasdaq OMX and Turquoise.|
|The markets in financial instruments directive (MiFID) which came into effect in November last year, has liberalised the stock trading sector through the removal of the concentration rule. This rule stated that trades should go through local exchanges and led to the creation of MTFs.|
|All stock trading venues use complex core trading software to complete trades and rely on massive IT infrastructures to process and store the information.|
|Speed is of the essence|
|With stock prices fluctuating rapidly a millisecond here and there can make a big difference.|
|Skinner at Balatro said if an exchange has the fastest trading time it has more chance of winning the business from investment firms that use algorithmic trading systems.|
|"These systems send messages automatically to see where they can trade and if a trading system is fast enough to complete the order they require it will automatically use it." He said algorithmic trading systems initiate trading when a stock reaches a certain price but this may only be for one second a day so systems must be fast to achieve the trade in this window.|