As the Russian economy matures and Moscow continues its quest to become an international financial center, new opportunities are appearing in Russia's financial services sector. Companies specializing in high frequency trading (HFT), which uses powerful computers to conduct high speed transactions of a large number of orders, are starting to see opportunities in Russia. As the first of a two-part series on HFT in Russia, Modern Russia spoke with Chris Ivey, an HFT entrepreneur and co-founder of financial technology company EquaMetrics Inc. following his recent visit to Russia.
You recently visited St. Petersburg, could tell us about your experience? What was the purpose of your trip?
I visited St. Petersburg with my CTO to meet with ETNA Software, a custom software development company that specializes in finance. We were looking to outsource some of the development of our new Rizm trading platform and decided ETNA was a prime candidate for this role. Additionally, we were also exploring opportunities in Russia's quantitative trading sector by meeting with a few insiders on the subject.
ETNA has a New York City-based sales office, but the majority of its 200 person staff is located in St. Petersburg. After conducting our due diligence, my CTO and I visited their offices to conduct an in-person assessment of their facilities and programming capabilities. We were so impressed by the industriousness and programming skills of the developers that we secured a contract with them a week after we returned to the U.S.
Can you tell us about HFT in Russia, what is the demand outlook?
The demand outlook for HFT in Russia's future looks very bright. As with all of the emerging markets, there is still a vast amount of opportunity for arbitrage that high frequency traders will eventually capitalize on. While American quantitative trading shops are evolving from high to medium or low frequency operations, Russian stock exchanges are just starting to develop the technology to support HFT, making it a new and promising frontier for international HFT players.
What are the geographical centers of HFT development in Russia? Does much trading occur outside of Moscow?
Moscow is definitely the center of HFT in Russia. This is primarily because HFT companies need to host their servers near major exchanges, all of which are in Moscow. Furthermore, most broker-dealers are headquartered in Moscow. As the MICEX-RTS updates its accessibility for high frequency traders, Moscow will likely become known as a hub for activity between London and Hong Kong. Aside from Moscow, HFT shops are also found in scientific and academic areas such as St. Petersburg, Nizhny Novgorod and Novosibirsk.
What are some of the challenges associated with HFT development in Russia?
Even in the most advanced markets, HFT is often misunderstood and seen as a threat to the existing financial system. Russian authorities have scrutinized the practice in the past and will continue to do so in the future.
Russian markets are also still underdeveloped and consequently suffer from low levels of liquidity, which leads to slippage when trading the significant volumes involved in HFT operations. To address this issue, markets will have to update their infrastructure to facilitate and encourage high-volume trades on Russian exchanges. The financial system as a whole will have to make an extensive effort to update existing systems. However, consumer products eventually meet the desires of consumer demand, which bodes well for high frequency trading in Russia because demand is consistently increasing.
Also, FFMS limitations imposed on individual instruments and order types have caused algorithms to sometimes malfunction. Broker Dealers have even been known to interfere with trading processes in the name of regulation, which results in lower liquidity because of higher market barriers.
Has the MICEX-RTS merger affected the trading environment in Russia?
While it is still too early to observe a significant impact, the merger has eliminated competition between the exchanges, which could potentially slow technological development. On the other hand the creation of this super exchange plays an essential role in Moscow's development as a global financial center. The move also highlights Russia's commitment to making its market more accessible to international investors, which will in turn be a positive catalyst for HFT development.
We expect to see continued improvement in MICEX-RTS infrastructure and reduced transaction costs since the merger. We also expect to see improved market liquidity and HFT infrastructure evolve to match that of major western exchanges over the next few years. An example of MICEX's commitment to connectivity enhancement is its adoption of the FIX protocol in 2010.
Has access to the Russian trading community increased in the past several years?
Access has increased in the past several years, with the number of traders on the Russian markets growing at approximately 13 percent since 2006.
Are Western HFT companies interested in this market?
While Western HFT participation in the Russian market is still at an early stage, companies are becoming increasingly interested, which is a trend that will likely continue in the future.
What are your impressions of the product range in Russia's financial markets?
In general, the market is still maturing and more derivatives will be used but the challenge is to increase openness on all levels for these markets to flourish. There is also limited financial services industry development, with much room for improvement in terms of quality of service and technological solutions.
Who would you say are the rising stars of HFT development in Russia? Are there any promising startups we should be watching?
The HFT start-up environment is interesting in Russia because large brokerage houses usually acquire successful startups when they mature. We believe ETNA is a company to watch both in the Russian and international HFT space.