RISK MANAGEMENT | 04 December 2023

Driving the Electronic
Trading Evolution


Merlin Rajah

Head of Equities Electronic
Product, Absa CIB


How Absa’s in-house development team creates tailor-made, sub-nanosecond latency FPGA solutions for South African Electronic Trading clients

Twenty-seven years ago, traders would stand in the Johannesburg Stock Exchange calling out trades from the physical floor of the exchange. “Trading has come a long way since then,” says Merlin Rajah, Head of Equities Electronic Product at Absa Corporate and Investment Banking. “We have evolved from floor traders using hand signals to electronic traders using mathematical indicators; from only traders within broker firms able to trade on the exchange to a broker’s clients executing trades via direct market access in the central order book. We’ve seen this move from manual execution on one exchange to autonomous computerised trading models across multiple exchanges and asset classes simultaneously, with complex and expensive infrastructure based in various colocation facilities around the world.”

Field-programmable gate arrays (FPGAs) were the natural next step in that evolution, giving traders unparalleled speed and flexibility in execution globally and South Africa was no exception.

“Now, a large part of an electronic trader’s role within the sell-side program trading desk is to place and/or monitor the quantitative parameters that are enforced on an order, and to complement the algorithms, knowing when and how to tweak based on liquidity and market events during the day,” Rajah adds.

Further to this, he says, to be a superior electronic trader/electronic sales trader one needs to have a deep understanding of exchange and broker systems, system processes, exchange pricing, and overall in-country exchange(s) market structure and regulatory changes. “A passion for mathematics and programming is also important to understand the sell-side algorithms,” he says, “as well as a basic network understanding to piece together solutions for clients – and lastly, a collaborative personality to be able to work with highly demanding clients.”

Trading solutions can become highly complex when overlayed across multiple exchanges, time zones, each with its own trade and order types. “There are also trading sessions and time-in-force orders that one has to be cognisant of,” says Rajah. “Building and maintaining adequate controls of our clients’ orders gives us, the regulators and our clients have comfort that sufficient measures are in place to ensure minimal errors or problems.”

For high-frequency trading (HFT) clients, however, onerous risk controls cause delays in executions, even though fractions of a microsecond. Many large global clients would either prefer not to have a broker do this, if rules permit, or work with the broker that has the fastest access.

Ultra-fast risk monitoring

“Over the years, broker risk filters evolved from optimisation of code in software platforms to integrated circuits like Field Programmable Gate Array (FPGA) solutions, where code is written directly on the hardware,” Rajah says.

When it comes to electronic trading, sophisticated clients have bespoke requirements for their executing broker/partner to set up a structure that will give them a competitive edge.

“For HFT firms, while robustness of the platform, pricing, financing and location of stocks all play a role, it’s primarily about the speed in terms of receiving market data and executing onto the central order book,” Rajah says.

As firms become more sophisticated in their trading practices, regulation always needs to be refreshed to sustain market integrity. Rules around direct market access (DMA) and risk monitoring are expected to become tighter in South Africa, following on from global norms, and having the knowledge and expertise will become even more important within the country.

“Most HFT firms, trading on swap, preferred and pushed that their risk checks were done with only post-trade checks by their executing broker,” Rajah explains. “But that’s like asking a student to mark their own test.” Internationally this was stopped almost a decade ago. The Regulator is finally making progress on clamping down on this practice as it currently introduces systemic market risk in South Africa. HFT Firms that have been trading on the JSE with what is refer to as ‘naked access’, will now need to ensure their broker(s) has the fastest compliance layer, find another a new one that does or live with the reduction in latency, which will change on-screen market dynamics and bring about fiercer, fairer but most importantly safer competition in this space.”

Bespoke solutions for JSE traders

Absa’s Electronic Trading business is built and supported by teams of experienced Absa developers, based both locally and offshore. “We build our FPGA solutions in-house,” says Rajah. “It’s a point of differentiation for Absa as a South African bank. Our market access and FPGA solutions are tailor-made for the South African market.”

Apart from the fastest access into both the JSE and A2X in South Africa, those solutions provide clients with the ability to leverage Absa’s smart order router (SOR), which selects when and where to execute based on various factors, ensuring our clients receive the best execution.

“We also continuously develop our sell-side algorithms, such as VWAP (volume-weighted average price), participate, pairs and so on, to ensure our clients have the best tools in the South African market at their disposal,” he says. “We have to live ahead of the curve, providing unique and innovative propositions, across multiple asset classes and exchanges.”

Rajah adds that the Electronic Trading team has often needed to cross over into the vendor space to offer their clients a holistic service. “Our ultra-low latency solution, Smart Order Router (SOR) and algorithmic solutions are just some of our popular offerings to our more sophisticated clients,” Rajah says.

“We have tier 1 global banks asking us if they can leverage our technology in other financial markets, which is a testament to Absa’s capabilities,” says Rajah. Local hedge funds have also enjoyed the seamless access Absa provides into offshore equity and derivative markets.

“And as we continue to evolve, the complexity will certainly increase,” he concludes. “But we’re invested and committed to be the best in this space, ensuring we can support the liquidity into Africa and from Africa into the rest of the world. That is where our solutions and customisation become so important, to be able to cater to clients’ evolving needs.”

Merlin Rajah

Head of Equities Electronic Product, Absa CIB

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