FIXatdl
and the
2010 Flash Crash
Robert Golan – DBmind Technologies
Rick Labs - CL&B Capital Management, LLC
(& FIXatdl Co-Chair)
Please Note: This is our personal views which may not
pertain to our Client’s Views or Opinions.
Outline
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Introductions
Flash Crash – May 6th, 2010.
FIXatdl – What is it?
A proposed solution
Future Directions
Summary
Q&A
Flash Crash References
Nov 5th meeting Webcast
http://www.capitolconnection.net/capcon/cftc/110510/CFT
Cwebcast-live.htm#
Preliminary report:
http://www.cftc.gov/ucm/groups/public/@otherif/documen
ts/ifdocs/opa-jointreport-sec-051810.pdf
Follow up report
http://www.cftc.gov/ucm/groups/public/@otherif/documen
ts/ifdocs/staff-findings050610.pdf
SEC
http://www.sec.gov/spotlight/sec-cftcjointcommittee.shtml
CFTC
http://www.cftc.gov/About/CFTCCommittees/CFTCSECJointAdvisoryCommittee/index.htm
Preliminary Report on May 18th
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Table of Contents
I. INTRODUCTION .............................................................................................................1
II. EXECUTIVE SUMMARY..............................................................................................2
III. GENERAL MARKET CONTEXT ............................................................................ 11
IV. PRELIMINARY FINDINGS....................................................................................... 17
A. Securities Markets ..............................................................................................17
1. Broader Market Drop and Recovery................................................................. 17
2. Securities that Suffered Declines Disproportionate to the Broader Market ..... 29
B. Futures Markets..................................................................................................59
1. Background....................................................................................................... 59
2. Role of Liquidity in Markets............................................................................. 63
3. Analysis of Large Traders................................................................................. 66
4. Preliminary Findings......................................................................................... 69
C. Clearance and Settlement................................................................................... 69
1. Securities Markets............................................................................................. 69
2. Futures Markets ................................................................................................ 70
V. NEXT STEPS................................................................................................................... 72
A. Areas for Further Analysis ................................................................................ 72
1. Securities Markets............................................................................................. 72
2. Futures Markets ................................................................................................ 74
3. Coordinated Analysis........................................................................................ 74
B. Potential Regulatory Responses......................................................................... 75
1. Securities Markets............................................................................................. 75
2. Futures Markets ................................................................................................ 79
APPENDIX A OVERVIEW OF THE SECURITIES MARKET STRUCTURE...A1
APPENDIX B OVERVIEW OF THE FUTURES MARKET STRUCTURE .........B1
APPENDIX C CROSS-MARKET CIRCUIT BREAKERS.........................................C-1
APPENDIX D FUTURES MARKET INFORMATION...............................................D-1
The Findings: September 30th, 2010
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Turbulent Day in the Market
EU Debt Crisis
@1pm: Liquidity Replenishment Points (LRP’s)
activated more then usual.
@2:30 - VIX (up 22.5% and Dow down by 2.5%).
Buy Side Liquidity for the E-mini declined 55%
($6B to 2.65B) & SPY by 20%.
@2:32 – An Algo was used to sell 75,000 E-mini
contracts worth $4.1B using only the Trading
Volume parameter and disregarded the price or
time parameter’s. This was executed in 20mins.
Other notable events happened but we want to
focus on the Algo setup and execution.
FIXatdl
Algo Trading Definition Language
Algo Parameter Settings
…
<Strategy name="VWAP" uiRep="VWAP" wireValue="1" version="1" providerID=“CompanyXYZ" fixMsgType="D" >
<Regions>
<Region name="TheAmericas" inclusion="Include"/>
</Regions>
<SecurityTypes>
<SecurityType name="CS" inclusion="Include"/>
</SecurityTypes>
<!-- input Parameters -->
<Parameter
<Parameter
<Parameter
<Parameter
name="StartTime" xsi:type="UTCTimestamp_t" fixTag="6062" use="optional" />
name="EndTime" xsi:type="UTCTimestamp_t" fixTag="6063" use="optional" />
name=“Price" xsi:type="Int_t" fixTag=“4063" use="optional" />
name="MaxPctVolume" xsi:type="Int_t" fixTag="6064" use="optional" />
<Parameter
<Parameter
<Parameter
<Parameter
name="DisplaySize" xsi:type="Int_t" fixTag="6066" use="optional" />
name="Trigger" xsi:type="UTCTimestamp_t" fixTag="6075" use="optional"/>
name="InExcludeAuction" xsi:type="Int_t" fixTag="6077" use="optional" />
name="Rx" xsi:type="UTCTimestamp_t" fixTag="6083" use="optional" />
<!-- Validation Section -->
<val:StrategyEdit errorMessage="End Time should be later than Start Time">
<val:Edit field="EndTime" operator="GT" field2="StartTime"/>
</val:StrategyEdit>
</Strategy>
Note: Example Only – not a real – validating set of parameters.
If it’s this simple – what’s the catch
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Central Governance
Compliance and Certification
Monitoring and Control
Implementation Guides & Education
Budget and $$$
Transparencies to the right levels without
compromising the Algo’s Special Sauce.
Multi-Asset and Multi-Industry Standards
Cooperation.
Versioning and Maintenance
Some of the Algo Players
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Citadel Investment Group
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Bloomberg
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Credit Suisse
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Deutsche Bank
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Goldman Sachs
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Barclays
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Morgan Stanley
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Susquehanna Investment Group
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UBS
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Etc.
Prime Service Providers
t
Prime Service Provider
Hedge Fund
TWAP
Mutual Fund
Algorithmic
VWAP
Trading
Sniper
System
Custom
Hedge Fund
Exchange
Exchange
Exchange
Finally, Something New! Systemic Risk
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Risks imposed by interlinkages
and interdependencies in a
system or market, where the failure
of a single entity or cluster of
entities can cause a cascading
failure, which could potentially
bankrupt or bring down the entire
system or market. (Schwarcz, Steven 2008)
CAPM gone?
Bricks for the Tower of Babel
"They are one people and have one language…”
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Legal or Universal Entity Identifier
Product or Instrument Identifiers
LEIs are not that simple!
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up to date for name, address, electronic address, legal
entity type changes.
link parent, subsidiary and affiliate relationships (one LEI
to all other links)
Link all persons who own or effectively control that entity
LEIs that own various interests in other entities in various
cascades including interlocking
Every security ever issued by that particular LEI
Entities that are freestanding legally, but economically are
virtually 100% just combinations and permutations of
other legal entities, such as exchange traded funds
Derivative products (futures, options, etc.) built off large
baskets of underlying securities
Mortgage pools
Mortgage pool tranche
CFTC/SEC searching for a Fun,
New Toy
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Algos that describe OTC derivatives
That are simple like tinkertoys
The Holy Grail
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Calculation of Net Exposures
Real time, across entities?
The train has left the station!
JOINT STUDY ON THE
FEASIBILITY OF MANDATING
ALGORITHMIC DESCRIPTIONS
FOR DERIVATIVES
April 7th!
Who will set the standard?
FIXml
FIXatdl
SM
Who will set the standard (2)
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OWL Web Ontology Language
Who will set the standard (3)
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Composing contracts: an
adventure in financial
engineering
Simon Peyton Jones, Jean-Marc
Eber, Julian Seward. ICFP 2000.
Following three slides are from that
presentation
Combinator
library
Denotational
semantics
Operational
semantics
But what does it all mean?
 We need an absolutely
precise specification of what
the combinators mean: their
semantics
 And we would like to do
something useful with our
(now precisely described)
contracts
 One very useful thing is to
compute a contract’s value
Summary
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Routine for us, radical stuff
for financial engineers
A small set of built-in combinators: named
and tamed
A user-extensible library defines the zoo of
contracts
Compositional denotational semantics, leads
directly to modular valuation algorithms
Risk Magazine Software Product of the Year
Prize
Jean-Marc has started a company, LexiFi, to
commercialise the ideas
Beats higher order logic hands down for
party conversation
What about FIXatdl?
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Algorithmic descriptions of
derivatives are really algo trades for
EVERYONE:
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Equities
FI
Options
Futures
FX
Cross Asset
Some other possible Solutions
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Consolidated Order Book with PreAnalytic FIXatdl enhancements.
CEP/FIXatdl Integration points for
surveillance and monitoring.
Centralized Algo Compliance and
Certification
Etc.
Wrap-up
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Flash Crash – May 6th, 2010.
FIXatdl – What is it?
A proposed solution
Future Directions
Summary
Q&A