Toronto Stock Exchange revamps trading engine

The automation of stock trading is one of the driving forces behind the Toronto Stock Exchange’s plan to set up a next-generation engine for handling the millions of order messages it is receiving every day.

Called LeapFrog, the TSX’s trading engine has been built but not yet deployed, the company said in a conference call on Tuesday. The rollout plans have not been completely determined, but executives said LeapFrog should be up and running by the fourth quarter of this year. The system was developed internally by the TSX’s own IT staff, which numbers about 200 people.

TSX Markets president Rik Parkhill said work on LeapFrog began about two years ago to start preparing for the growth of “algorithmic trading,” whereby a computer programmed with mathematical instructions determines how a stock is traded. The trading system is designed to make the TSX more competitive on a North American wide basis, he said, including the NASDAQ where it competes on inter-listed securities. The current capacity requirements for the TSX’s existing platform has doubled every six to nine months over the last several years.

“When you offer customers better performance, they tend to increase their business with you,” Parkhill said. “If we can compete effectively with those marketplaces (in the U.S.), it won’t be much of a problem competing with startups domestically.”

TSX CIO John Cieslak said initial tests of LeapFrog showed it can process more than 320 million order messages an hour, or two billion in one day. Right now, the TSX processes about 10 million to 12 million order messages a day, he said. 

“The response times are down to a millisecond, which brings us more in line with other software in the exchange space,” he said.

LeapFrog represents a couple of technology changes for the TSX, including a move from HP NonStop Unix to the Linux operating system for the first time. The system will be run on blade servers, potentially enhancing the performance, he said. LeapFrog was also tested so that it can run either AMD Opteron or Intel Xeon chips.

The TSX suffered a number of high-profile system crashes in the 1990s but has since taken a number of measures to improve its image. In April 2003 the exchange celebrated two failure-free years following a system overhaul. It has also formed a division called TSX Technologies that seeks to assist other problem-ridden exchanges.

According to Sang Lee, managing partner at research firm the Aite Group in Boston, stock exchanges of all kinds are starting to take a closer look at the exponential growth of messaging they are starting to see. Algorithmic trading is not limited to equities, he pointed out, but to the options market as well. 

“In the U.S. market right now, there are a lot of conversations around capacity issues, driven by algorithmic trading,” he said.  “Sometimes to figure out what’s happening, you’ll have people sending out orders to see where the market is at. When they see what’s going on, they cancel their orders. That leads to massive capacity issues.”

David Easthope, an analyst with Boston-based financial research and technology firm Celent, said exchanges such as the New York Stock Exchange (NYSE) and NASDAQ are not necessarily creating new platforms but integrating electronic communication network (ECN) products into their existing trading engines. 

“To some extent they do have to change and adapt,” he said, “but it may not be a huge change. The trades in an algorithmic trading scenario may be coming rapid fire, but as long as they can keep up with capacity and speed, then that’s really all the exchanges need to worry about.”

Easthope said it was more important for stock exchanges to invest in smart order routers that can be used for multi-asset trades including derivatives. The TSX has already announced plans to set up a smart order router.

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