INDUSTRY PERSPECTIVE
ZERO LATENCY:
MAKING TRADING RISK CHECKS COMPLIANT
AND HIGH-SPEED
BANKING & CAPITAL MARKETS
FEBRUARY 2016
Nobody likes choosing between two unsatisfactory alternatives. For example,
which would you prefer: being fired from your job or taking a 50 percent pay
cut? Not much to like there. Yet that’s precisely the kind of choice many
trading companies have been forced to make while trading electronically
— until now.
What if you could get a promotion and a raise? That’s precisely the kind of “best-ofboth-worlds” solution that Fixnetix, a CSC company, has recently delivered.
First, a little background. In 2008, U.S. regulators passed rules that added controls to
“naked access,” or trades that occurred when a firm placed orders through an investment bank’s infrastructure and exchange membership. In these trades, investment
banks were liable for client losses, but they had virtually no control over a client’s
trading activity. In response, the U.S. Securities and Exchange Commission (SEC) gave
investment banks additional control over their clients’ flows to the exchanges.
To accommodate this change, IT solution providers developed systems that helped
investment banks gain control over clients’ trades. The systems offer a choice between
two kinds of solutions — passive and active — and both have trade-offs in performance
and risk-checking capabilities.
Passive systems let banks either catch order elements for risk decisions or swap a
symbol to change the semantics of an order. Active systems, in contrast, perform a risk
check by actually intercepting trade flows and control risks on behalf of the bank in a
pretrade fashion.
Both approaches add some latency, and neither meets the needs of every use case.
While passive systems are the faster of the two, they may also violate some regulatory
recommendations. Active systems address that concern, but until now have been
comparatively slow. While the added latency time for a passive system can be as little
as 250 nanoseconds, the added latency time for an active approach can reach about
1.5 microseconds, or six times as much. In today’s high-frequency trading marketplace,
those fractions add up fast — and they can cause traders to suffer losses or miss
important deals.
iX-eCute Zero Latency (ZL) - Positioning
2 | ZERO LATENCY: MAKING TRADING RISK CHECKS COMPLIANT AND HIGH-SPEED
iX-eCute ZL
Faster, Safer Trades
To create a third, better option, Fixnetix developed iX-eCute Zero Latency (ZL). It’s a
risk-management and trading gateway that supports electronic trading for investment
banks, prime brokers, hedge funds and proprietary trading firms. The product fundamentally alters the flow of an order through the pretrade risk process, providing the
client and exchange alike with additional protection against market manipulation,
without a latency penalty. ZL conducts more than 40 different risk checks according to
SEC, Investment Industry Regulatory Organization of Canada ( IIROC), Canadian
Securities Administrators (CSA) and Australian Securities and Investments Commission
(ASIC) requirements. For the first time, an active trading product independently offers
both robust risk checks and high-speed order submissions, effectively removing the
need or use case for passive inline systems ZL is built on the existing technology of
iX-eCute, which essentially rips apart a trade order and holds the pieces up to a light. If
the elements meet an investment bank’s regulatory demands, the order is reformatted
and submitted to the exchange. If the order doesn’t meet demands, it doesn’t reach the
exchange at all. In other words, exchanges never see orders that would fail a risk check.
What’s more, active systems such as iX-eCute keep a firm’s trading history in memory.
That way, if a trader sends an amendment to an earlier trade, the system can compare
the two orders and check them against daily-limit and other restrictions. That’s in
keeping with the spirit of guidance from the SEC and other regulatory bodies, but as
you can imagine, all that work takes time. That’s why active approaches such as
iX-eCute have, until now, imposed a larger latency penalty than passive systems.
Passive systems, by contrast, have addressed the need for extremely high trading
speeds without requiring additional programming. Most do so by offering one of two
approaches. In the first, the system spots the elements needed to infer a risk decision as
the order flies past — a bit like trying to spy a person wearing a red shirt in a speeding
train while you’re standing on the platform! If an order fails the test, it still goes to the
exchange, but in a malformed, scrambled state. It’s as if you had somehow pushed over
the last car of that metaphorical train; it’s still moving, but now partially capsized.
3 | ZERO LATENCY: MAKING TRADING RISK CHECKS COMPLIANT AND HIGH-SPEED
In the second approach, passive systems change the semantics of an order, allowing
the exchange to trade the order, but in a way that avoids any material impact. For
example, if an exchange offers a “test” symbol, a passive system could swap out the
“trade” symbol on an order for a “test,” send the order on its way and then have it run
as a mere test order. The problem here is that the system actually changes the client’s
message. That’s a questionable approach in the view of some regulatory bodies. Also,
clients could easily miss the fact that their order has been changed, not knowing that
an order sent as a buy was actually fulfilled as a test.
Best of Both Worlds
Enter the Fixnetix ZL approach. It delivers the best of both worlds: the high speed of
naked access combined with the rigorous and compliant risk-checking of active
approaches. It’s a trading gateway, a system investment banks can use to better
manage the risk of trades conducted by clients using the bank’s identification.
Built on Fixnetix’s existing iX-eCute solution, the ZL gateway is nonetheless an independent system. It can be used on its own or in tandem with iX-eCute, depending on
which setup works best for a bank.
ZL offers a unique solution to the challenge of reducing the latency penalty while
maintaining robust risk-checking. While more conventional solutions have essentially
reached the limits of physics — they really can’t get much faster — with Fixnetix, we
asked, “How can we move a bank’s risk checks closer to the client?”
The answer, as embodied in ZL, is to actually put the risk checks in the client’s server.
This way, the client’s system becomes self-governing. Orders that would fail a risk
check in a more conventional solution are not even generated with ZL.
More specifically, the client’s intention of placing an order, rather than the message itself,
is passed along to ZL. In parallel with the client algorithm generating the order, ZL uses
the client’s spare latency to perform the actual risk check. In fact, the risk check is done
at the same time the client generates the order; hence the “zero latency” approach.
The ZL approach delivers two major benefits. One is that a bank can be fully compliant
in its risk checks without any latency impact. The second benefit is speed: Because ZL’s
architecture bypasses all standard x86 transfers — including Peripheral Component
Interconnect Express (PCIe) — orders can be placed on the wire faster than clients
could ever do it themselves. As a bonus, ZL operates at a “raw” (rather than market)
level, so trading on different markets requires little or no additional programming. This
means ZL can be deployed on either an asset-class or region basis.
With investment banks under increasing regulatory scrutiny, many in the industry have
wondered where we go from here. Passive systems are clearly not the long-term
answer; the SEC recently provided guidance requesting an explanation of message
scrambling and the use of the test system. The answer, we believe, is in solutions such
as ZL, which deliver secure risk checks with almost immediate feedback.
ììMarcus Perrett is chief technology officer at Fixnetix, a CSC company that provides
outsourced managed services to investment banks, hedge funds and trading groups.
4 | ZERO LATENCY: MAKING TRADING RISK CHECKS COMPLIANT AND HIGH-SPEED
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About CSC
CSC leads clients on their digital transformation journeys. The
company provides innovative next-generation technology
services and solutions that leverage deep industry expertise,
global scale, technology independence and an extensive partner
community. CSC serves leading commercial and international
public sector organizations throughout the world. CSC is a
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About CSC Fixnetix
Fixnetix, a CSC company is a leading managed service provider
for the global financial community. Since 2005, Fixnetix has
built a reputation as an award winning international technology
vendor, supplying outsourced services for ultra-low latency
trading, market data, hosting, infrastructure connectivity and
risk management to prominent investment banks, hedge funds,
proprietary trading groups and exchanges worldwide. In 2015,
Fixnetix became a wholly owned subsidiary of CSC.