Cooperative Brokerage Integration for Transaction Capacity Sharing:

A Case Study in Hong Kong

Dickson K. W. CHIUSenior Member, IEEE

Dickson Computer Systemskwchiu@acm.org,

dicksonchiu@ieee.org

Anthony C. Y. Lam Dept. of Computer Science

Hong Kong University of Science & Technology

yuenchi@ust.hk

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Application Background Further automation of Hong Kong Exchange and

Clearing Limited (HKEX) Third Generation Automatic Order Matching and

Execution System (AMS/3) Open system Many stock trading system developers integrate

their flagship solutions such as the Broker Supplied System (BSS) for connection to HKEX

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System Architecture of AMS/3

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Open Gateway Connection Point

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Client Placing a Request

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More Advanced Emerging Requirements

Sharing very expensive trading capacity rights Throttle rate control Buying additional throttle rate is less expensive but on a

monthly-fee basis Improve trading order response Hardware failure and outage Business integration and extensibility

credit controllers, settlement officers, …

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Problems Motivating this Research

Communications among partners have no common standard of message protocols

No intelligent mechanisms for integration with the trading system for capacity sharing

Hard to manage the security issues using different kinds of encryption techniques.

Web services based integration for capacity sharing of partner brokerages.

Transaction Capacity Sharing System (TCSS)

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TCSS Overview

HKEX Trading Host

Router Hub

`

Workstation

`

Workstation

RAS withWeb ServicesiBSS

Open Gateway(OG)

SO

AP

/ Http

Global Brokerage Partnerwith

Web Services

SOAP / Http

Local Brokerage Partnerwith

Web Services

Local Brokerage Partner

withWeb Services

SOAP / Http

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Main TCSS Mechanism

When the request queue length exceed a certain threshold, route the request to TCSS in order to forward it to partner brokerages

Via asynchronous Web services TCSS has to handle many outstanding orders

simultaneously while the time when the orders can be fulfilled is unpredictable

Req 1

Req 2

Req 3

Req 3

Req 4

Req 5

Req 6

Req 19

Req 20

...

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TCSS Intelligence and Heuristics Outstanding backlog and forwarding threshold Forwarding limit and cost of different brokerages Number of partner brokerages

Base on these, TCSS adjust its forwarding threshold and forwarding limit

dynamically according to its current queue length to achieve an effective flow control

send piggy-back with acknowledgements or broadcasted to partners if necessary

use such information for choosing an appropriate target of the next forwarded order

observe and honor this limit to maintain good relationship

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TCSS Architecture

Partner Brokerage with TCSS / BSSInternet

Service Dispatching

and Aggregation

Transaction Web

Services

BSS ApplicationWeb Services

Interface

Database

SOAP

SOAP

TCSS Process Manager

Adaptation Manager

TCP/IP

ODBC

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TCSS Protocol

Standard protocol called Financial Information eXchange (FIX) developed specifically for real-time electronic exchange of securities transactions

Adaptation Manager translates the message as FIX Markup Language (FIXML) using the FIX protocol

8=FIX.4.2;9=199;35=D;34=10;49=VENDOR;115=CUSTOMER;144=BOSTONEQ;56=BROKER;

57=DOT;143=NY;52=20000907-09:25:28;11=ORD_1;21=2;110=1000;55=EK;22=1;

48=277461109;54=1;60=20000907.09:25:56;38=5000;40=2;44=62.5;

15=HKD;47=A;10=165;

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FIXML and SOAP example<FIXML> <FIXML Message><Header>. . .</Header><ApplicationMessage><Order> <CIOrdID>ORD_1</CIOrdID> <HandInst Value="2" /> <MinQty>1000</MinQty> <Instrument> <Symbol>EK</Symbol> <IDSource>1</IDSource> <SecurityID>277461109</SecurityID> </Instrument> <Side Value="1" /> <TransactTime>20000907.09:25:56</TransactTime> <OrderQuantity> <OrderQty>5000</OrderQty> </OrderQuantity> <OrderType> <LimitOrder Value="2"> <Price>62.5</Price> </LimitOrder> </OrderType> <Currency Value="HKD" /> <Rule80A Value="A" /> </Order><ApplicationMessage></FIXMLMessage></FIXML>

<?xml version=”1.0” encoding=”UTF-8”?><SOAP-ENV:Envelopexmlns:SOAP-ENV=”http://schemas.xmlsoap.org/soap/envelope/”xmlns:SOAP-ENC=”http://schemas.xmlsoap.org/soap/encoding/”xmlns:xsi=”http://www.w3.org/2001/XMLSchema-instance”<SOAP-ENV:BodySOAP-ENV:encodingStyle=”http://schemas.xmlsoap.org/soap/

encoding/”><sendMessage><FIXMLMessage><Header><Sender> <CompID>Hopgood</CompID> </Sender><Target> <CompID>Lloyds</CompID> </Target></Header><ApplicationMessage><Indication><IOIid>41926</IOIid><Instrument><Security> <Symbol>IBM</Symbol> </Security></Instrument><IOISide Value="1"/><IOIShares>2000</IOIShares><Price>30.00</Price><Currency Value="GBP"/><ValidUntilTime>22:50</ValidUntilTime></Indication></ApplicationMessage></FIXMLMessage></sendMessage></SOAP-ENV:Body></SOAP-ENV:Envelope>

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WS-Security

W3C security specifications SOAP Header element to carry security-related data

XML Signature header can contain the information defined by XML

Signature that conveys how the message was signed, the key that was used, and the resulting signature value

XML Encryption encryption information can be contained within the

WS-Security header WS-License

describes how existing digital credentials and their associated trust semantics

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Summary

TCSS share transaction capacity => decrease order queuing time

Avoid significant costs of buying extra trading rights, which is very expensive

Group SME brokerage together against large brokerages that have much better facilities and trading capacities

Employment of Web service technologies Phased approach

Best for SME brokerages having multiple broker licenses Alliance of different brokerages => legal / regulatory

issues

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Future Work

Legal / regulatory issues Inter-brokerage charging policies and schemes How detail heuristics could be best formulated Simulations to experiment various parameters

order processing and turnaround time choice of parameters

Priority management in the routing for valued customers transactions that involve a large amount

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Question and Answer

Thank you!