The Quest for Additional Liquidity

Algo trading has grown continuously over the past years, especially in the equity segment. Is there still room for improvement?

André Buck: Looking back in trading history, the quest for the fastest connection is nothing new. In the early days of trading, brokers that had fast runners to carry orders from the office to the trading ring had an advantage, having said offices close to the exchange building even more so. Nowadays, our trading participants may use co-location to get their computers as close as possible to our matching engine and/or use our Microwave network for the fastest transmission of trading data.. The constant change of technology paired with client demand motivates us to invest and cater for the needs of this growing client segment. What’s key is that we allow for a level playing field by providing equal access to our services to those participants wishing to do Algo trading.

And what feedback did you get from your Trader Survey?

Additional liquidity sources is where traders see the most room for improvement, based on 42 of 114 feedbacks, i.e. 37%. It was closely followed by the AI of the algorithm, with 34%. For our traders, the quality of the API and the low-latency infrastructure present further – albeit smaller – potential for improvement for Algo Trading, with 14% and 11%, respectively. The location of the data center was only cited by 4%.

The rise of Algos seems coupled with the development of Artificial Intelligence. Do traders perceive AI as a personal threat?

At first glance, the results from our survey might indicate that: for example, just over 1% stated that this rise will lead to more traders being hired, while almost a fifth believes there will be less traders. However, the clear majority of respondents – 59% of them – agrees that Algos and AI are on the rise but does not expect it to have a significant impact on staffing. Another fifth believes things will stay the way they are.

How do you interpret these results?

Once again, let’s look at it from a historical perspective. The electronification and digitalization of trading and all associated processes has allowed standardization and scale, leading to lower transaction costs. The ensuing spectacular growth of trading volumes and transaction numbers was witnessed first-hand at the Swiss stock exchange, having been the trailblazer of this development. Simply put: more efficient trading is better trading, for participants, asset managers and end investors alike.

It’s the same story with Algo trading so far: it hasn’t replaced previous forms of trading, because they continue to reflect specific needs of certain market participants. For example, to some trading members certainty of execution is more important than pure speed of execution. Algo trading is therefore complementary to “traditional” trading, for lack of a better word. It makes the overall trading cake bigger, which provides more opportunities to everybody.

Speaking of growth: auction trading volumes have increased over the last 5 years. How will demand develop in the future?

According to our traders, less than 5% of respondents believe it will decline. The clear majority – 57% percent to be exact – expects auction volumes to increase, leaving 38% with a neutral view. This growth expectation matches the findings of various pieces of research we published since 2020 which highlighted that the closing auction has become a very significant liquidity event. It establishes an essential industry performance and valuation benchmark – the official closing price – and trading residual liquidity at a fixed price is clearly a client need.

How is SIX Swiss Exchange responding to this client need?

Back in June 2020, we introduced a service called TAL, short for Trading-At-Last, a 10 minute extension of on book trading in the Central Limit Order Book after the closing auction. It gives our participants a second chance to find additional liquidity at the official closing price.

With SMR11, the next SWXess maintenance release scheduled for Spring 2023, we will introduce a new order type called Auction Volume Discovery, or AVD. It will allow entry and execution of hidden volume during the Opening and Closing Auctions without impact to the theoretical auction price. Expect to read and hear more from us about AVD in the upcoming months.

• Trading InfoSnack: Last Orders
• Trading InfoSnack: Closing Auctions – What’s Hanging in the Balance?
• Examining Closing Auction Liquidity
• Keeping It Together
• All Eyes on Auctions!