FIXatdl and the
2010 Flash Crash
Robert Golan – DBmind Technologies
Rick Labs - CL&B Capital Management, LLC
(& FIXatdl Co-Chair)
Please Note: This is our personal views which may not pertain to our Client’s Views or Opinions.

Outline







Introductions
Flash Crash – May 6 th , 2010.
FIXatdl – What is it?
A proposed solution
Future Directions
Summary
Q & A

Flash Crash References
Nov 5th meeting Webcast http://www.capitolconnection.net/capcon/cftc/110510/CFT
Cwebcast-live.htm#
Preliminary report: http://www.cftc.gov/ucm/groups/public/@otherif/documen ts/ifdocs/opa-jointreport-sec-051810.pdf
Follow up report http://www.cftc.gov/ucm/groups/public/@otherif/documen ts/ifdocs/staff-findings050610.pdf
SEC http://www.sec.gov/spotlight/sec-cftcjointcommittee.shtml
CFTC http://www.cftc.gov/About/CFTCCommittees/CFTC-
SECJointAdvisoryCommittee/index.htm

Preliminary Report on May 18th




























Table of Contents
I. INTRODUCTION .............................................................................................................1
II. EXECUTIVE SUMMARY..............................................................................................2
III. GENERAL MARKET CONTEXT ............................................................................ 11
IV. PRELIMINARY FINDINGS....................................................................................... 17
A. Securities Markets ..............................................................................................17
1. Broader Market Drop and Recovery................................................................. 17
2. Securities that Suffered Declines Disproportionate to the Broader Market ..... 29
B. Futures Markets..................................................................................................59
1. Background....................................................................................................... 59
2. Role of Liquidity in Markets............................................................................. 63
3. Analysis of Large Traders................................................................................. 66
4. Preliminary Findings......................................................................................... 69
C. Clearance and Settlement................................................................................... 69
1. Securities Markets............................................................................................. 69
2. Futures Markets ................................................................................................ 70
V. NEXT STEPS................................................................................................................... 72
A. Areas for Further Analysis ................................................................................ 72
1. Securities Markets............................................................................................. 72
2. Futures Markets ................................................................................................ 74
3. Coordinated Analysis........................................................................................ 74
B. Potential Regulatory Responses......................................................................... 75
1. Securities Markets............................................................................................. 75
2. Futures Markets ................................................................................................ 79
APPENDIX A OVERVIEW OF THE SECURITIES MARKET STRUCTURE...A1
APPENDIX B OVERVIEW OF THE FUTURES MARKET STRUCTURE .........B1
APPENDIX C CROSS-MARKET CIRCUIT BREAKERS.........................................C-1
APPENDIX D FUTURES MARKET INFORMATION...............................................D-1

The Findings: September 30 th , 2010







Turbulent Day in the Market
EU Debt Crisis
@1pm: Liquidity Replenishment Points (LRP’s) activated more then usual.
@2:30 - VIX (up 22.5% and Dow down by 2.5%).
Buy Side Liquidity for the E-mini declined 55%
($6B to 2.65B) & SPY by 20%.
@2:32 – An Algo was used to sell 75,000 E-mini contracts worth $4.1B using only the Trading
Volume parameter and disregarded the price or time parameter’s. This was executed in 20mins.
Other notable events happened but we want to focus on the Algo setup and execution.

FIXatdl
Algo Trading Definition Language

Algo Parameter Settings
…
<Strategy name="VWAP" uiRep="VWAP" wireValue="1" version="1" providerID=“CompanyXYZ" fixMsgType="D" >
<Regions>
<Region name="TheAmericas" inclusion="Include"/>
</Regions>
<SecurityTypes>
<SecurityType name="CS" inclusion="Include"/>
</SecurityTypes>
<!-- input Parameters -->
<Parameter name="StartTime" xsi:type="UTCTimestamp_t" fixTag="6062" use="optional" />
<Parameter name="EndTime" xsi:type="UTCTimestamp_t" fixTag="6063" use="optional" />
<Parameter name=“Price" xsi:type="Int_t" fixTag=“4063" use="optional" />
<Parameter name="MaxPctVolume" xsi:type="Int_t" fixTag="6064" use="optional" />
<Parameter name="DisplaySize" xsi:type="Int_t" fixTag="6066" use="optional" />
<Parameter name="Trigger" xsi:type="UTCTimestamp_t" fixTag="6075" use="optional"/>
<Parameter name="InExcludeAuction" xsi:type="Int_t" fixTag="6077" use="optional" />
<Parameter name="Rx" xsi:type="UTCTimestamp_t" fixTag="6083" use="optional" />
<!-- Validation Section -->
<val:StrategyEdit errorMessage="End Time should be later than Start Time">
<val:Edit field="EndTime" operator="GT" field2="StartTime"/>
</val:StrategyEdit>
</Strategy>
Note: Example Only – not a real – validating set of parameters.

If it’s this simple – what’s the catch








Central Governance
Compliance and Certification
Monitoring and Control
Implementation Guides & Education
Budget and $$$
Transparencies to the right levels without compromising the Algo’s Special Sauce.
Multi-Asset and Multi-Industry Standards
Cooperation.
Versioning and Maintenance

Some of the Algo Players










Citadel Investment Group
Bloomberg
Credit Suisse
Deutsche Bank
Goldman Sachs
Barclays
Morgan Stanley
Susquehanna Investment Group
UBS
Etc.

Prime Service Providers
Hedge Fund
Mutual Fund
Prime Service Provider
Algorithmic
Trading
System
TWAP
VWAP
Sniper
Custom
Hedge Fund t
Exchange Exchange Exchange

Finally, Something New! Systemic Risk


Risks imposed by interlinkages and interdependencies in a system or market, where the failure of a single entity or cluster of entities can cause a cascading failure, which could potentially bankrupt or bring down the entire system or market
. (Schwarcz, Steven 2008)
CAPM gone?

Bricks for the Tower of Babel
"They are one people and have one language…”


Legal or Universal Entity Identifier
Product or Instrument Identifiers

LEIs are not that simple!








 up to date for name, address, electronic address, legal entity type changes. link parent, subsidiary and affiliate relationships (one LEI to all other links)
Link all persons who own or effectively control that entity
LEIs that own various interests in other entities in various
cascades including interlocking
Every security ever issued by that particular LEI
Entities that are freestanding legally, but economically are virtually 100% just combinations and permutations of other legal entities, such as exchange traded funds
Derivative products (futures, options, etc.) built off large baskets of underlying securities
Mortgage pools
Mortgage pool tranche

CFTC/SEC searching for a Fun,
New Toy


Algos that describe OTC derivatives
That are simple like tinkertoys

The Holy Grail


Calculation of Net Exposures
Real time, across entities?

The train has left the station!
JOINT STUDY ON THE
FEASIBILITY OF MANDATING
ALGORITHMIC DESCRIPTIONS
FOR DERIVATIVES
April 7 th !

Who will set the standard?
SM

Who will set the standard (2)

OWL Web Ontology Language

Who will set the standard (3)



Composing contracts: an adventure in financial engineering
Simon Peyton Jones, Jean-Marc
Eber, Julian Seward. ICFP 2000.
Following three slides are from that presentation

Combinator library
Denotational semantics
Operational semantics

But what does it all mean?
 We need an absolutely precise specification of what the combinators mean: their semantics
 And we would like to do something useful with our
(now precisely described) contracts
 One very useful thing is to compute a contract’s value

Routine for us, radical stuff for financial engineers
Summary






A small set of built-in combinators: named and tamed
A user-extensible library defines the zoo of contracts
Compositional denotational semantics, leads directly to modular valuation algorithms
Risk Magazine Software Product of the Year
Prize
Jean-Marc has started a company, LexiFi, to commercialise the ideas
Beats higher order logic hands down for party conversation

What about FIXatdl?

Algorithmic descriptions of derivatives are really algo trades for
EVERYONE:

Equities





FI
Options
Futures
FX
Cross Asset

Some other possible Solutions




Consolidated Order Book with Pre-
Analytic FIXatdl enhancements.
CEP/FIXatdl Integration points for surveillance and monitoring.
Centralized Algo Compliance and
Certification
Etc.

Wrap-up






Flash Crash – May 6 th , 2010.
FIXatdl – What is it?
A proposed solution
Future Directions
Summary
Q & A