An Introduction to

Trading Technology
Trading in The Financial Markets - Systems, Data and
Networks
 Agenda
• Introduction

• Trading Systems

• Trading Data

• Trading Networks

• Trading Process

• FIX Protocol

• Q&A
Copyright Damian Kozak, presentation for Qredo
Agenda
 Who am I

• Damian Kozak

• Over 20 years in the IT

• AIB, LloydsTSB, Morgan Stanley, Deutsche Bank,

Standard Chartered, HSBC

Copyright Damian Kozak, presentation for Qredo

Agenda
 Buy-side and Sell-side
• Buy-side (aka Customer Side): • Sell-side (aka Street Side):

• Institutional Investors • Brokers/Dealers

• Buy-Side Banks • Sell-Side Banks

• Individual Investors • Day-Trading Firms

• Depository • Clearing Corporations

• Non-financial firms • Retail Broker /Dealer

• Regulators

• Vendors
Copyright Damian Kozak, presentation for Qredo
Part 1 Introduction
 Buy-side and Sell-side Trading Venue
Match buy and sell
orders
Vendor
Supplies services and
technology
Clearing Corporation
Guarantees Settlement

Sell-Side Bank
Regulator
Depository Provides payments,
Warehouse instruments Buy-Side Bank Institutional safekeeping and
Ensures market fairness
and efficiency
Provides custody and financing
payments

Broker / Dealer Day-Trading Firm

Non-financial Firm Servers as Servers as
Institutional Investor
Consumes investment intermediately for intermediately for high-
Manage funds for others
banking products individuals and frequency retail and
institutions institutions

The Street
Buy-Side aka Customer Side Sell-Side aka Street Side

Retail Broker / Dealer

Individual Investor Servers as
Manage funds for self intermediately for
individuals

Retail
Copyright Damian Kozak, presentation for Qredo
Part 1 Introduction
Offices, Systems, Data and
Network

Front Office

Middle Office

Backoffice

Systems

Data

Network
 Office Functions
• Front Office • Middle Office

• Portfolio management • Compliance

• Research • Customer Accounting

• Trading • Backoffice

• Market activities • Front office activities support

(settlement)
• Sale / Buy
• Reporting and aggregated
position

• Compliance
Copyright Damian Kozak, presentation for Qredo
Part 1 Introduction
Part 2 Trading Systems,
Data and Network
Trading Systems - functions
• Display and presentation

• Analyse and Decision Making

• Measure and Comparison

• Workflow Management

• Database Management

• Inventory Control

• Accounting

• Reporting
Copyright Damian Kozak, presentation for Qredo
Part 2 Trading Systems
 Trading Data - allocation
Trading
Sell-side dealers,
market makers and
Other Sell-side Competitive trading
prop traders
quantitive traders venues
Using sell-side order
management systems

Buy-side traders Other Buy-side High frequency prop

Using sell-side order quantitive traders traders
management systems
Investment Bankers
Pricing an issue for Systematic High frequency hedge-
market internalisers fund traders

Viewing
Value
Investment Bankers Sell-side firms
Derivatives
Enhanced data used to
Processing
and research analysts (executions) generate large revenues
such as index used in
derivatives contracts
Buy-side firms
Portfolio Managers (execution)

Enhanced data
Risk Management
Subject t to reveres
Buy-side middle and back office Buy and Sell sides
engineering

Sell-side middle and back office

NonTrading

Value
Copyright Damian Kozak, presentation for Qredo
Part 2 Trading Systems
 Trading Networks
• Latency • Hub-and-spoke

• Communication • Hierarchical

• Computer Processing • Ladder

• Design Complexity • Distribution Techniques

• Queuing • Full broadcast

• Architecture • Multicast

• Point-to-point • Publish/Subscribe
Copyright Damian Kozak, presentation for Qredo
Part 2 Trading Systems
 Trading Network
Standards
Focus Standard Governing Organisation Access Description

Message standards aimed primarily at pre-trade

FIX FIX Protocol Ltd Open
activities
ISO 15022
Society for Worldwide
Message standards aimed primarily at post trade
SWIFT Interbank Financial Closed
activities
Telecommunication
Business-
Level International Press
Standards A standard designed to be a media independent
NEWSml Telecommunications Council Open
message standard for news and related information
(IPTC)
A markup language for XML-based presentation of
RIXML RIXML.org Open
investment materials
An XML-based standard for electronic transmission
XBRL XBRL International Open
of business and financial information
Wire-level protocol for interoperable message
AMQP AMQP Working Group Open
exchange
Middleware agnostic Messaging API developed by
MAMA NYSE Closed
Wombat and later acquired by NYSE Euronext
Message bus technology primarily used for market
RV Tibco Closed
Technical data redistribution and front office integration
Standards Latency Buster Messaging API(s) developed by
LBM Informatica / 29West Closed
29West

LLM IBM Closed Low latency messaging API(s) offered by IBM

Messaging queuing software that has been used

MQ IBM Closed
primarily for back office integration

Copyright Damian Kozak, presentation for Qredo

Part 2 Trading Systems
 Trading Process
• step1: pre-trade decisions

• step2: buy-side trading

• step3: order routing

• step4: execution

• step5: trade confirmation

• step6: trade allocation

• step7: clearing

• step8: settlement
Copyright Damian Kozak, presentation for Qredo
Part 2 Trading Systems
 Pre-Trade Decisions

• Goals

• Optimise the returns on the portfolio

• Satisfy needs of the beneficial owners

• Conform to firm’s policies, owner’s wishes and

regulatory mandates

Copyright Damian Kozak, presentation for Qredo

Part 2 Trading Systems
 Pre-Trade Decisions

Inputs Evaluation Decisions Outputs

Order(s) with
Customer requests: instructions:
- Policy - Instruments
Alternative investments Changes (if any)
- Contributions - Quantity
- Withdrawals - Urgency
- Price range

Research and ideas IOIs

Copyright Damian Kozak, presentation for Qredo

Part 2 Trading Systems
 Buy-side Trading
• Goals

• Make best net use of execution alternatives

• Optimise desired balance between best prices and fast

execution

• Minimise market impact

• Achieve goals of portfolio manager

Copyright Damian Kozak, presentation for Qredo

Part 2 Trading Systems
 Buy-side Trading
Inputs Evaluation Management Decisions Outputs

Total order(s) with

instructions:
Specific orders to
- Instruments Alternative trading Role (use DMA,
Open orders trading venue(s)
- Quantity venues use agent, or mix)
and/or agents
- Urgency
- Price range

IOIs Market prices Orders in market Quantity

Commentary Timing

Copyright Damian Kozak, presentation for Qredo

Part 2 Trading Systems
 Order Routing
• Goals

• Make the best use of execution alternatives

• Optimise desired balance between best price and

fastest execution

• Achieve goals of customer

• Generate profit for firm

Copyright Damian Kozak, presentation for Qredo

Part 2 Trading Systems
 Order Routing
Inputs Evaluation Management Decisions Outputs

Total order(s) with

instructions:
Use of capital (if Specific orders to
- Instruments Alternative trading
Open orders user permits trading venue(s)
- Quantity venues
needed) and/or agents
- Urgency
- Price range

IOIs Market prices Orders in market Quantity

Customer
Expose to other
Commentary satisfaction vs Timing
customers
profit impact

Use internal
Does customer
markets (if
have more?
customer permits)

Copyright Damian Kozak, presentation for Qredo

Part 2 Trading Systems
 Execution

• Goals

• Execute orders according to rules

• Satisfy regulatory obligations

• Satisfy customers/members

• Generate profit for form or minimise cost for members

Copyright Damian Kozak, presentation for Qredo

Part 2 Trading Systems
 Execution
Inputs Pricing Execution Decisions Outputs

Orders by type:
- Price
Application of
- Quantity (Size) Execution costs Open orders Execution reports
rules
- Time in force
- Held/not held

Canceled orders
Cancel/Replace Data pricing Orders in market Quantity
confirmations

Expose to other
Cancellations Data rebates Timing Market data
customers

Use internal
Administrative
Incentives markets (if
messages
customer permits)
Copyright Damian Kozak, presentation for Qredo
Part 2 Trading Systems
 Trade Confirmation
• Goals

• Sell-side

• Record details of execution

• Evaluate alternatives for balance of order (if any)

• Cash problems and/or any other errors

• Buy-side

• Update customers on progress

• Find problems

• Receive approval from customer

Copyright Damian Kozak, presentation for Qredo
Part 2 Trading Systems
 Trade Confirmation

Sell-side Buy-side Sell-side Buy-side Sell-side

Inputs Inputs Tasks Tasks Outputs

Market trade Forward market Market trade

Market trade report or report trade report or Update order report or report
report from internal send report from status from internal
market internal market market

Copyright Damian Kozak, presentation for Qredo

Part 2 Trading Systems
 Trade Allocation

• Goals

• Find average price

• Allocate execution to customer account

• Satisfy customer wishes (custody)

Copyright Damian Kozak, presentation for Qredo

Part 2 Trading Systems
 Trade Allocation

Inputs Calculations Outputs

Trade reports Average price Allocation report

Customer instructions and Apportionment to each

details participating portfolio

Copyright Damian Kozak, presentation for Qredo

Part 2 Trading Systems
 Clearing

• Goals

• Guarantee settlement

• Verify trade details

• Find errors if any (corrections)

• Agree on trade details

Copyright Damian Kozak, presentation for Qredo

Part 2 Trading Systems
 Clearing
Inputs Tasks Outputs

Market trade report Correct errors Contract list

Contract list Collect margin (if needed) Margin calls (if needed)

Margin calls Accept “good” trades Trades ready for settlement

Pay margin (if needed) Error corrections

Margin payments (if needed)

Copyright Damian Kozak, presentation for Qredo

Part 2 Trading Systems
 Settlement
• Goals

• Exchange funds for value

• Satisfy innocent party if trade fails

• Mitigate damage if trade fails

• Pay for instruments or instruct bank to make payments

• Receive interments or notice of transfers

Copyright Damian Kozak, presentation for Qredo

Part 2 Trading Systems
 Settlement
Inputs Tasks Outputs

Payment instructions for

Settlement date Correct errors
purchase

Payment instruction from buyer Pay margin (if needed) Delivery instructions to buyer

Verify payment delivery

Delivery instructions from seller Payment instructions to seller
instructions

Approve transfer Delivery instructions for sale

Approve payment

Copyright Damian Kozak, presentation for Qredo

Part 2 Trading Systems
 Trading-process vs
Business-process Flow
pre-trade Buy-side trade trade
order routing execution clearing settlement
decisions trade confirmation allocation

Buy-side INVOLVED INVOLVED INVOLVED INVOLVED

Sell-side INVOLVED INVOLVED INVOLVED INVOLVED INVOLVED

Trading Venue INVOLVED

Clearing Corp. INVOLVED INVOLVED

Bank INVOLVED INVOLVED

Depositor INVOLVED

Vendor INVOLVED

Copyright Damian Kozak, presentation for Qredo

Part 2 Trading Systems
 Part 3
FIX Protocol
 FIX Protocol
Introduction
• Financial Information eXchange

• FIX was created to facilitate a trading activity between Fidelity Investment and Salomon Brothers
in 1992 to replace verbally communicated information

• Governed by FIX Trading Community

• Works for virtually every asset class

• Classic FIX - tag value encoding

• FIXML - back office version encoded in XML

• Sessions Protocol variations:

• FIXP - low latency binary encoding

• FIXT - session abd delivery guarantee, point to point

• Others: JSON, GPB, FAST, ASN.1 (Abstract Syntax Notification)

Copyright Damian Kozak, presentation for Qredo

FIX Protocol
 FIX Protocol
Message Encoding

• Example Message:

8=FIX.4.2 | 9=176 | 35=8 | 49=PHLX | 56=PERS | 52=20071123-05:30:00.000 |

11=ATOMNOCCC9990900 | 20=3 | 150=E | 39=E | 55=MSFT | 167=CS | 54=1 | 38=15 |
40=2 | 44=15 | 58=PHLX EQUITY TESTING | 59=0 | 47=C | 32=0 | 31=0 | 151=15 |
14=0 | 6=0 | 10=128 |

Copyright Damian Kozak, presentation for Qredo

FIX Protocol
 FIX Protocol
Message Encoding
• Decoded:

Copyright Damian Kozak, presentation for Qredo

FIX Protocol
 FIX - questions that people
shouldn’t be asking
• What message types are to be used. Can I use AI (Allocation
Extraction) or should it be FX specific message type?

• Currency/Counter Currency pairs are properly coded.

• Which fields are to be used for quantities and/or for

exchange rate.

• What CFI Codes or Security Types should be used.

• What value for Security Exchange (if any) needs to be

provided.
Copyright Damian Kozak, presentation for Qredo
FIX Protocol
FIX has some problems
• FIX is a very fudgy protocol

• If you are designing a commercial interface, you should

check with your intended counterparty

• If you are designing a server system such that multiple

parties are connecting to you, then you will have some
choices to make.

• Look out for new fields and messages. Be vigilant in case

of FIX 4.4 and up.

Copyright Damian Kozak, presentation for Qredo

FIX Protocol
 FIX Gateway - things to
consider
• Normalises various FIX versions, such
as FIX 4.2, FIX 4.3, FIX 4.4, and FIX
• Utilised as a client facing gateway, an 5.0
Execution venues facing gateway, or
as a market data proxy service
• Offers market data quotes
management window
• Supports Spots, Forwards, and
Swaps
• Provides quote markup algorithm for
targeted client quotes
• Supports various tradable currency
pairs, while normalises currency pairs
formats
• Pre and Post trade Risk Validations

• Aggregates various execution drop

• Sanity validations
copies formats, such as FIX, MQ, and
XML • Trade restrictions

• Capital limits
Copyright Damian Kozak, presentation for Qredo
FIX Protocol
 FIX Resources
• Community driven standards organisation:

• https://www.fixtrading.org/

• http://fiximate.fixtrading.org/latestEP/

• Open source engines

• http://fix8.org/ (c++)

• http://www.quickfixengine.org/ (c++)

• https://quickfixj.org/ (Java)
Copyright Damian Kozak, presentation for Qredo
FIX Protocol
 Q&A

Copyright Damian Kozak, presentation for Qredo

Thank You!