Pan-European multilateral trading facility (MTF) Chi-X Europe has launched Chi-Velocity, a solution that aims to combine the speed of sponsored access with the additional functionality and risk control of direct market access (DMA).
Traditional DMA allows buy-side traders to access execution venues electronically through their brokers’ trading infrastructures. Sponsored access allows clients, typically hedge funds and high-frequency traders, to connect their own trading engines directly to the venue, circumventing broker systems and reducing latency.
Chi-Velocity, which Chi-X describes as ‘sponsored DMA access’, deploys a layer of risk management software that is co-located with the Chi-X Europe’s primary matching engine. Clients of the MTF’s trading participants will be able to connect to the layer to trade on the platform, similar to sponsored access.
Unlike Chi-X Europe’s standard sponsored access solution, where the risk management layer is built into the matching engine, brokers licence the Chi-Velocity risk management software as a vendor-provided solution to allow them to monitor their clients’ behaviour on the MTF.
The system offers a suite of configurable pre-trade controls, open exposure risk management controls, alerting functionality and a FIX order and trade feed that can be integrated with brokers’ in-house risk management systems.
Because the broker, rather than the venue, directly controls Chi-Velocity’s risk management mechanism, the greater level of client-broker interaction preserves a DMA-like relationship while achieving lower latency.
Chi-X suggests the new hybrid service could be attractive to statistical arbitrageurs that trade equity swaps or contracts for difference with their prime brokers rather than the underlying equities to benefit from stock lending, margining and tax management. In this instance, the broker would match the trade internally and then offset its position by trading the underlying equity on the exchange via DMA.
Such an arrangement would not be possible with standard sponsored access because of the lack of interaction with the broker systems, but Chi-Velocity enables and speeds the process up because it provides a single system to handle the client order submission and the broker’s subsequent equity trades.
Chi-Velocity is initially being installed at six prime brokers for use by 18 underlying clients.
Hirander Misra, chief operating officer of Chi-X Europe, told theTRADEnews.com. that Chi-Velocity will reduce the cost of DMA-style trading arrangements because the broker will not have to develop the risk management software itself, which he estimates can cost hundreds of thousands of pounds. Chi-X charges sponsoring brokers £1,500 a month per underlying customer for Chi-Velocity. “It can also achieve a much lower latency overhead than the brokers could with their own systems,” he said.
While the typical users of Chi-Velocity will be hedge funds, Misra said, “the solution is very adaptable and not limited to hedge funds. If a more traditional buy-side client wanted direct access to the Chi-Delta dark pool or our matching engine, for example, they could take this route.”