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NYU-Poly

Finance and Risk Engineering Department

NASDAQ Connectivity &


Algorithmic Trading

Course: FRE 7251- Algorithmic Trading & High Frequency Finance


Professor: Roy Freedman
Semester: Fall 2013
Group # 4
Members:
ID
Surya L Gurung 0449604
Cheng-Fang Lin 0466478

12/16/2013

Abstract:
Nasdaq changed the stock trading world by inventing first electronic
trading market in 1971. In this paper, we are going to start with a brief
history of Nasdaq. Our primary focus is going to do a case study on the
NASDAQ connectivity.
NASDAQ provides many different ways to its customers to connect to
its major U.S. data centers directly. It also provides many different protocols
to implements financials their own algorithmic strategies. So, we will discuss
the different ways to connect to NASDAQ data centers and different
protocols.

NASDAQ and Its History:


NASDAQ was founded in 1971 by the National Association of Securities
Dealers (NASD). So, it is basically a collection of connected hundreds of
dealers who are allowed to make markets in a particular stock. (Freedman,
23) It is regulated by the Financial Industry Regulatory Authority (FINRA), the
successor to the NASD.(3)
NASDAQ began trading on February 8th 1971. It was the world's first
electronic stock market. At first, it was merely a quotation system and did
not give a way to actually do electronic trades. The NASDAQ helped lower
the spread but it was unpopular among brokerages because it made them
difficult to make money on the spread.(3)
In the beginning, NASDAQ was the successor to the over-the-counter
(OTC) system. Even around 1987, the NASDAQ exchange was still commonly
referred to as the OTC in media and also in the monthly Stock Guides issued
by Standard & Poor's Corporation. (3)
After 1987 market crash, Small Order Execution System (SOES) was
established, which provides an electronic method for dealers to enter their
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trades. NASDAQ requires market makers to honor trades over SOES. But this
system allowed to give birth of entirely new era of electronic trading,
Algorithmic Trading. Sheldon Maschler, Jeff Citron, and Josh Levine
discovered arbitrage over SOES system by developing low level fast
software. (1) The firm was called Datek Securities. It was the beginning of
the High Frequency Trading.
In 1992, it joined with the London Stock Exchange to form the first
intercontinental linkage of securities markets. NASDAQ separated from NASD
in 2000 to form a publicly traded company, the NASDAQ Stock Market, Inc. In
2006, NASDAQ changed from stock market to licensed national exchange. In
2007, NASDAQ bought the oldest stock exchange in America Philadelphia
Stock Exchange (PHLX) and the Scandinavian exchange group called OMX to
become The NASDAQ OMX Group.(3)
The NASDAQ OMX Group owns and operates 24 markets, 3 clearing
houses, and 5 central securities depositories. Eighteen of our 24 markets
trade equities. The other six trade options, derivatives, fixed income, and
commodities. (2)
Following are the markets, clearing houses, and securities depositories:

Since its inception in 1971, NASDAQ OMX Group has become world
biggest stock exchange. Lets see the growth of NASDAQ in following graph.

Source: nasdaqomx.com

NASDAQ Connectivity:
Any firm who needs the lowest latency data feed, NASDAQ OMX offers
direct access to its U.S. equity and derivatives data feed products from its
U.S. data centers. They can connect to Nasdaq U.S. data centers via
1. Co-Location
2. Wireless Connectivity
3. Extranets
4. Direct Connectivity
Investors and Traders can also access to Nasdaq data feeds through
more than 100 authorized market data redistributors. (7)

Co-Location:
It is opportunity provided by an exchange to the high frequency firms
to place their trading computers directly next to the exchanges computers
in their data centers for some fee.
NASDAQ offers networks in 10G, 10G Ultra, and 40G Ethernet for all Nasdaq
OMX order entry protocols and data feeds. (8)

Wireless Connectivity:
Metro Millimeter Wave (MMW) network connects customers in Nasdaq
data centers to traders in New York Metro trading hubs in 40% faster than
any fiber based network.(10)
NASDAQ OMX, in conjunction with CME Group, recently started
providing a new wireless connectivity offering providing a direct, low-latency
microwave route between Carteret, NJ, and Aurora, IL, for delivery of select
NASDAQ and CME data up to 36% faster. (9)
Source:
www.nasdaqtraser.com

Where is the Nasdaq Data Center?


The main Nasdaq data center is located at Carteret, NJ. Following aerial
view is the building housing the data center where actual trading happens.

Source:
www.floatingpath.com

Extranets & Direct Connects:


Firms outside the Nasdaq OMX data centers can connect to Nasdaq
OMX data centers through approved third party Extranets or Direct Connect
networks providers.
The monthly co-location fees for the Nasdaqs data center in Carteret,
NJ (where all the trading actually happens) run up to $14,000 per month. (6)
Not all traders can afford this price.

Equity Protocols:
Financial Information eXchange (FIX)
FIX Lite
OUCH
Routing and Special Handling (RASHport)
Nasdaq Information exchange protocol (QIX)
Computer-to-Computer Interface (CTCI)

FIX
FIX is created by Fidelity and Salomon Brothers in 1992 to
communicate electronically between buy and sell sides. (Freedman, 247) It
is a vendor-neutral standard message protocol that defines an electronic
message exchange for communicating securities transactions between two
parties. It is free and open standard format used today by most of U.S. firms
in the options securities business.(14)
FIX supports message for order entry, cancel, and modify for
1. US Equity trading
2. Option trading
3. Order routing system ACES
4. Trading reports (14)

OUCH
This protocol allows customers to quickly enter orders into and
receive executions. OUCH subscribers and their software developers can
integrate NASDAQ into their proprietary trading systems or build custom
front-ends to NASDAQ systems.
OUCH accepts limit orders from system subscribers, and if there is a
matching order, they will execute. Non-matching orders are added to the
Limit Order Book, a database of available limit orders, where they are
matched in price-time priority. OUCH only provides a method for subscribers
to send orders and receive status updates on those orders. (18)

RASHport
RASHport allows subscribers to enter orders, cancel existing orders and
receive executions while providing smart order routing and special handling
features. RASHport also provides advanced functionality and the ability to
process sophisticated order types including discretion, random reserve,
pegging and routing. (15)

CTCI
It is a method by which NASDAQ subscribers can enter transactions,
such as NASDAQ Market Center orders and trade reports, from their
computer systems to NASDAQ's computer systems without using a NASDAQ
Workstation. CTCI interface is based on the Common Message Switch
protocol. (16)

QIX
It is an efficient protocol that allows automated, real-time trading. QIX
offers reliability in placing orders and quotes in the NASDAQ system, while
providing improved throughput and reduced latency. (17)

Algorithmic Trading
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It is a computarized trading using proprietary algorithms. In this trading


the speed of data feed (fastest boat in Jim Fisk Algorithm), reliability and data
quality are essential. This is the reason why Nasdaq Connectivity is so
important for the High Frequency Traders.
As Professor Freedman mentioned, it is the Nasdaqs connectivity issues
(late to update quote) which lead to creation of Datek and eventually birth of
Algorithmic Trading.

Algo-Testing Facilities:
NASDAQ provide next-generation Algo testing environment offering a
market-wide equities testing platform that provides a comprehensive testing
universe well beyond just the NASDAQ market systems. The Algo Test Facility
will provide High Frequency traders with a safe environment to rigorously
test and calibrate their algorithmic strategies by replaying and interacting
with real historical market data. (19)

Conclusion:
Nasdaq changed the stock trading world by inventing the first
electronic trading system. Even though, Nasdaq has made the electronic
trading market more robust and advanced by continued technological
innovation, I think lots of challenges still remains unsolved. Periodic news of
flash crashes because of various algorithmic glitches such as one in Aug 22 nd,
2013 could cause investor to lose their confidence in electronic trading
markets.

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References:
1. Freedman, Roy S. Introduction to Financial Technology. Academic
Press/Elsevier, 2006. Print.
2. What is Nasdaq? Nasdaq OMX. Retrieved from
http://www.nasdaqomx.com/aboutus/companyinformation/whatisnasdaq on 12/14/2013
3. Nasdaq. Wikipedia. Retrieved from http://en.wikipedia.org/wiki/NASDAQ
on 12/14/2013
4. Traders. Nasdaq OMX. Retrieved from www://www.nasdaqtrader.com
5. Nasdaq OMX Timeline. Nasdaq OMX. Retrieved from
http://www.nasdaqomx.com/aboutus/company-information/timeline on
12/15/13
6. Mid-Week HFT Primer: Co-Location. Retrieved from
http://www.floatingpath.com/2013/07/03/mid-week-hft-primer-colocation/ on 12/14/13
7. Market Data Vendors. Retrieved from
http://www.nasdaqtrader.com/Trader.aspx?id=MarketDataVendors
12/13/13
8. Low Latency Connectivity. Nasdaq OMX. Retrieved from
http://www.nasdaqtrader.com/content/Productsservices/trading/CoLo/Lo
wLatencyFS.pdf 12/14/13
9. Nasdaq OMX Co-Location. Nsdaq OMX. Retrieved from
http://www.nasdaqtrader.com/Trader.aspx?id=colo on 12/14/13
10.
Wireless Connectivity: Metromillimeter Wave Offering. Nasdaq
OMX. Retrieved from
http://www.nasdaqtrader.com/content/Productsservices/trading/CoLo/m
illimeter.pdf on 12/14/13
11.
Margaret Rouse. RASHport. Retrieved from
http://searchfinancialsecurity.techtarget.com/definition/RASHport on
12/14/13
12.
Margaret Rouse. QIX. Retrieved from
http://searchfinancialsecurity.techtarget.com/definition/QIX on 12/14/13
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13.
Margaret Rouse. CTCI. Retrieved from
http://searchfinancialsecurity.techtarget.com/definition/CTCI
14.
FIX. Nasdaq OMX. http://www.nasdaqtrader.com/Trader.aspx?
id=FIX on 12/14/13
15.
RASHport. NasdaqOMX. Retrieved from
https://www.nasdaqtrader.com/Trader.aspx?id=RASH on 12/14/13
16.
CTCI. Nasdaq OMX. Retrieved from
https://www.nasdaqtrader.com/Trader.aspx?id=CTCI on 12/14/13
17.
QIX. Nasdaq OMX. Retrieved from
https://www.nasdaqtrader.com/Trader.aspx?id=QIX on 12/14/13
18.
OUCH. Nasdaq OMX. Retrieved from
https://www.nasdaqtrader.com/Trader.aspx?id=OUCH on 12/14/13
Nasdaq Testing Facilities. Nasdaq OMX. Retrieved from
https://www.nasdaqtrader.com/Trader.aspx?id=TestingFacility on
12/14/13
19.
Chuck and Campos. Nasdaq market paralyzed by three hour
shutdown . Retrieved form
http://www.reuters.com/article/2013/08/22/us-nasdaq-halt-tapecidUSBRE97L0V420130822 on 12/14/13

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