Star-Spangled Exchanges: IT Projects in 2016

The year 2016 is one of new development for US exchanges. The markets were choppy in 2015, with investors grappling with the volatility coming out of China, and, of course, there are ever-increasing regulatory demands being placed on every financial institution—exchanges, banks and asset managers, alike.

As the US capital markets become more congested and the 12th stock exchange—the National Stock Exchange—enters the arena, with others, namely IEX, waiting in the wings, technology will go some way to determining the winners and the losers. 

For this feature, Waters looked at a cross-section of US-based exchanges to view the projects they are currently working on, and what those projects might mean for investors as we head deeper into the New Year—and beyond. As trading continues to fire at once-unfathomable speeds, and as market complexity increases, exchange operators have to overhaul their legacy platforms in order to attract liquidity and order flow. 

International Securities Exchange (ISE): Automation 

A major player in the options exchange market, the International Securities Exchange was the first fully electronic US options exchange. The biggest near-term initiative for ISE is the launch of its third market, Mercury, in the first quarter of this year, scheduled to launch on February 16, pending final Securities and Exchange Commission approval. 

Mercury will work alongside the ISE and ISE Gemini markets, and reuse most of the same technologies on Gemini, but provide a different fee structure. The alternative pricing will enable the exchange to serve different segments of the options market not currently active on the exchange’s two other markets. ISE officials tell Waters that the exchange operator is considering the launch of two additional markets in different asset classes, though that is still under consideration.

“Any time you can reduce complexity in a technology system—or the markets in general—is better for the customer and better for the system. So as soon as you can take out additional or unnecessary complexity, the results will be better.” Stacey Cunningham, New York Stock Exchange

Automation will be the focal point for ISE during 2016. T7, the ISE trading platform launched in the spring of 2011, is capable of trading any product in any currency, says Daniel Friel, ISE’s CIO. Still, a key design goal for the platform will be “quicker time-to-market for new software releases in order to be able to bring new functionalities to market more frequently,” he says.

Part of the initial focus in the design of the T7 trading platform was to take advantage of new technologies to automate the system, Friel says. “That gave us the opportunity to then change the operational paradigm of our technology organization, and it was a conscious decision of ours to move toward a DevOps model,” he says.

ISE began the automation transition in 2012. Because of the success of the DevOps model, it was able to take advantage of other initiatives like software deployment automation (SDA) and a build-deploy-test (BDT) model to automate the full system development lifecycle, says Robert Cornish, ISE’s CTO. 

“As an example, the regular daily cycle of our trading platform is fully automated,” he says. “This means that the system starts up, processes trades while the market is open, shuts down at the close, performs necessary post-trade reporting, and gets ready for the market to open again the next day—all on its own. That level of automation takes a great deal of manual process cycles off of our operations team, so they can focus on more automation and really enhancing the way we operate.”

Increasing Automation

ISE has driven this design goal to the point where all software deployment using BDT happens automatically in collaboration with automation software provider Puppet Enterprise, Cornish explains. “This helps to distribute code very quickly into our environments,” he says. “It keeps a known ‘good state’ of our production environment, from the system all the way up to the application. Should there be any issues at any point in any of those aspects, we can quickly fall back to a known stable state,” he says. 

BDT also allows the system to create “test systems,” deploy new software, and run tests at night on its own, Cornish says.

In the face of all this automation, ISE officials are quick to point out that they have a help desk where a team of people sit and interact with members all day long, should there be any trading or technology issues. The human element, they say, is still integral to running their business day in and day out. 

And, like everyone else, they have regulatory requirements to adhere to. For example, the Regulation Systems Compliance and Integrity (Reg SCI) mandate from the SEC, a new regulatory regime that came into effect November 3, 2015, raises the bar in the industry for what is considered best practice for financial IT. The regulation requires the exchange to report to the SEC every “incident” that occurs throughout the trading day—even the smallest of disruptions—whereas before, only significant outages and bugs were reported. Friel says because they were operating according to those standards previously, it was a fairly easy transition. 

The New York Stock Exchange (NYSE): Single System

The New York Stock Exchange is arguably the most recognizable stock exchange in the world. But even it wasn’t immune to consolidation, as the Intercontinental Exchange (ICE) bought the operator back in 2012. Since the purchase, ICE has been pushing for an update to NYSE’s infrastructure. In 2014, ICE purchased Algo Technologies to help speed up the senior exchange’s trading software. NYSE will also be upgrading its six markets to new platforms this year and into 2017. NYSE Arca Equities will be the first to migrate to the new system in the third quarter of this year, while upgrades for NYSE, NYSE MKT, NYSE Arca Options, NYSE Amex Options, and NYSE Bonds will follow. 

“The three separate equity exchanges and two options exchanges run similar technology and are based on the same architecture, but do not have identical implementations of technology,” says Stacey Cunningham, COO for NYSE. That’s why the new technology updates are exciting, she says, because the operator will have ostensibly the same technology across all five platforms. Because the markets aren’t identical, however, it will take a significant period of time for customers to move to each of those respective markets. 

With the exception where components of the market structure are different, it will be exactly the same experience for customers, Cunningham says. “We’ve taken a much simpler approach to how we’re implementing the technology across each of the venues,” she says. “It’s going to be much more deterministic, so the experience they have on the platform will be much more consistent, which also leads to more reliable and resilient platforms.”

The rollout for Arca Equities will be in phases. In the second half of 2015, the group rolled out the production environment available for testing, and customers have been interacting with the system for a number of months now. “It’s something that we’ve been focused on for a while and our customers are excited about it,” Cunningham says. “The early feedback that we’ve gotten from testing is very positive and we think it makes us much more competitive from a technology standpoint.” 

Going Live

NYSE hasn’t traded live production symbols yet, but the first symbol was scheduled to go live on February 1, 2016. The rollout for equity platforms will come first, while the options platforms will follow. The new system comes with added benefits, according to Cunningham. “It’s easier to enhance the system and if there are issues, it’s easy to address them without having significant impact,” she says. “Any time you can reduce complexity in a technology system—or the markets in general—is better for the customer and better for the system. So as soon as you can take out additional or unnecessary complexity, the results will be better.” 

NYSE looked at the features within the old system and streamlined those, while eliminating a number of different order types that existed, and simplified it to a “base” functionality. The single system will also allow customers to reduce the number of different protocols they use to interact with the exchange. 

While staying true to its Buttonwood roots, the exchange has taken on a technology focused outlook. “When we look at our approach to the market, ICE and NYSE are technology focused companies, and we generally use technology to solve our customers’ problems,” Cunningham says. “We’re looking into technology all the time” 

Chicago Board Options Exchange (CBOE): Build Over Buy

The Chicago Board Options Exchange is one of the largest options exchanges in the US. In the past year, it has been working on many new developments. The CBOE teamed up with the London Stock Exchange Group (LSEG) and major dealer banks to form CurveGlobal, a new interest-rate derivatives platform, scheduled for launch in the second quarter of this year. The exchange also completed the acquisition of the market data services and trading analytics platforms of Livevol. Its trade analysis and volatility modeling technologies were a natural fit for the exchange’s trade support services, according to Edward Tilly, CEO of the CBOE. In addition, the exchange also teamed up with Environmental Financial Products (EFP) to launch the American Financial Exchange (AFX), an interbank lending exchange with an electronic marketplace. 

The exchange hopes to release Vector, its next-generation, in-house-built trading engine in the third quarter of this year for CBOE Futures Exchange (CFE). The Vector release for CBOE Stock Exchange (CBSX) and CBOE Options Exchange (C2) will follow. The new platform will be faster, with roundtrip orders expected to take less than 25 microseconds, and improved connectivity that lowers variability in response time. 

The exchange struggled with whether to buy a new platform, or build its own, Tilly says. Ultimately, the build option was chosen because management felt it could better tailor the user experience to its clients. “It’s still primarily a broker experience. We have supplemented our experienced systems team with top developers to ensure that we are on the cutting edge with every aspect of Vector,” he says.

The drive to develop a new trading platform for the CBOE was motivated by multiple factors. “The trading volumes on exchanges have grown; industry message traffic continues to build; and the growing nature of sub-second trading demands of the higher-frequency trader requires us to keep up,” Tilly says. The new platform allows the exchange to control its delivery speed and allows room for customization. 

In Development 

Vector has been in development for a number of years. “Once Vector is fully rolled out, the old system, CBOE Command, will be closed off entirely,” Tilly says, adding that it’s difficult to keep a system that was designed with customer needs in mind from 15 years ago to meet their needs for today and tomorrow; he doesn’t foresee this new system lasting for as long as its predecessor.

The old platform was designed to be a state-of-the-art platform, capable of trading options, stocks and futures, according to Gerry O’Connell, CIO of the CBOE. “Our old in-house-developed platform has served us well, but now we feel that it’s time to start from scratch and redo that platform,” he says.

One of the primary features of Vector is its low latency, which was an important feature 15 years ago, but is even more important in today’s world, O’Connell says. “Vector will power trading on all three of our exchanges and provide greatly increased transaction speeds, while also handling constantly increasing message traffic and industry demand for additional functionality, such as risk controls.”

In the development of Vector, the CBOE team interviewed 20 firms, scrutinizing their application programming interfaces (APIs) and making modifications based on the feedback they received. “We think the new platform is going to be well received by the firms and we’re looking forward to launching Vector this year,” O’Connell says. 

IEX and the Future 

As traditional exchanges move toward automation, centralized systems and rolling out new trading engines, alternative exchanges are similarly moving into the space. The most recent entrant was the aforementioned National Stock Exchange. The NSX, previously owned by CBOE Holdings and bought by a consortium of investors, is doing away with the traditional maker-taker pricing system, in favor of charging nothing to post liquidity and $0.0003 to remove liquidity. In 2014, the old exchange shuttered after accounting for only 0.2 percent of stock market trading on its final day of trading. 

The NSX brought to 12 the number of stock exchanges in the US, and that number is likely to grow in 2016 with the pending launch of IEX. As chronicled in Michael Lewis’ Flash Boys, IEX entered the fray as a dark pool, although it is currently in the filing process to become an official exchange and is seeking regulatory approval. 

To combat high-frequency trading, IEX has created what it calls its “magic shoebox,” which slows down orders by 350 microseconds by way of a 38-mile coil of optical fiber placed in front of its trading engine. It’s an artificial delay built into its market data distribution mechanism designed to discourage speed-driven structural arbitrage strategies by putting all trading participants—both HFT and institutional investors—on the same footing.

Technology innovation isn’t going to slow down in the capital markets space. And even as major players combine forces and merge, there will always be upstarts entering the space looking to play the role of disrupter. It’s a game of evolution or extinction. 

Salient Points

• NYSE has scheduled the third quarter for the release of its Arca Equities platform.
• ISE plans to launch its third options exchange, Mercury, in the first quarter of this year.
• The CBOE plans to release its new platform, Vector, in the third quarter of this year.