FIXatdl and the

2010 Flash Crash

Robert Golan – DBmind TechnologiesRick 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 6th, 2010. FIXatdl – What is it? A proposed solution Future Directions Summary Q & A

Flash Crash ReferencesNov 5th meeting Webcasthttp://www.capitolconnection.net/capcon/cftc/110510/CFTCwebcast-live.htm#

Preliminary report:http://www.cftc.gov/ucm/groups/public/@otherif/documents/ifdocs/opa-jointreport-sec-051810.pdf

Follow up reporthttp://www.cftc.gov/ucm/groups/public/@otherif/documents/ifdocs/staff-findings050610.pdf

SEChttp://www.sec.gov/spotlight/sec-cftcjointcommittee.shtml

CFTChttp://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 30th, 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

Hedge Fund

Exchange Exchange Exchange

t

Algorithmic

Trading

System

Prime Service Provider

Custom

VWAP

TWAP

Sniper

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 THEFEASIBILITY OF MANDATING

ALGORITHMIC DESCRIPTIONSFOR DERIVATIVES

April 7th!

Who will set the standard?

FIXatdlSM

FIXml

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

Combinatorlibrary

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

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

Routine for us, radical stuff for financial

engineers

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 6th, 2010. FIXatdl – What is it? A proposed solution Future Directions Summary Q & A