THE VIEW FROM THE EXCHANGE October 6, 2015

MARKET STRUCTURE AND A HEALTHY TRADING ECOSYSTEM

WHY HFT? High speed algo trading: confluence of technological progress and regulatory

changes in MiFID I

3

4

Terms like robot

trading, computer

trading, Algo and HFT

are used at random.

The term olgo trading can

be segmented into

traditional automated

trading and High Frequency

Trading

WHAT ARE WE TALKING ABOUT?

HFT

Algo trading

Total trading

Source: 2009 McCann quantitative and qualitative study with over 200 CFOs and senior executives.

COMMON FEATURES OF HFT

Arbitrage

trading – HFT is the electronic

equivalent to day trading

No

overnight

positions

Proprietary

trading

Computerized high-speed

micro seconds trades

AUTD- accounts with Order-to-trade

over 10 Based on Nordic list

share trading

HFT is conducted both by

specialist firms and by the

traditional

members, including large banks

5

No standardized

international definition

Still, there are a few common

characteristics

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Small Cap

Increased activity Efficient pricing = lower cost for investor

Efficient pricing

NASDAQ OMX 7

Smaller orders

Smaller trades

More orders

More trades

More delete messages

Orders/trade ratio up

More information to disseminate

• Less liquidity in the order book

• Harder to execute large orders

Need to use algorithms

Dark liquidity pools

Hybrid order books

New order types

Latency & capacity in focus

More revenues & more cost

EFFECTS OF HIGH FREQUENCY TRADING

Fragmented liquidity

Better price discovery?

High Frequency Trading

NASDAQ OMX 8

RIGHT AMOUNT

OF HFT?

Avoid HFT by rules,

regulations and fees

Allow HFT with restrictions:

• Order throughput

• Order trade ratios

• Cancellation restrictions

• Penalties / fees if broken

Possibly liquidity provider schemes focusing on HFT flows

Fees not focus to get maximum HFT flows

• All-in to get as

much HFT flow as

possible

• No or very limited

restrictions

• Fees focused to get

HFT flows

• Special liquidity

provider schemes

for HFT

NASDAQ NORDIC’S MEASURES

9

• World class electronic

surveillance SMARTS

• Order book Discipline OTR Limit

• Prevent un-intended price

movement

Volatility Guard

Nasdaq Nordic ahead of the curve • Tools and standard procedures apply to all market participants on Nasdaq Copenhagen

EU regulation: • Common rules and guidelines in all markets • HFT is pan-European – measures should be pan-European

MEASURES

Limit on order to trade ratio to discipline the order book: • Introduced 1:250 in July

2011 • Adjusted to 1:100 in

December 2013 • Weight factor: Fee calculation

dependent of order proximity

to BBO.

Volatility Guard (Kursvagt) Electronic circuit breaker pauses trading in shares that drop or increase suddenly and greatly. For C20 shares deviation limit is 3 pct from last sale price and 10 per cent from opening price. Provides time-out for the market to reconsider price direction in single stocks

Document Title 10

SMARTS SURVEILLANCE SYSTEM MONITORING AND REPLAY CAPABILITIES

SMARTS SURVEILLANCE SYSTEM MONITORING AND REPLAY CAPABILITIES