Exchange operator NasdaqOMX and technology vendor Thesys Technologies today announced plans to jointly launch a testing facility where the bourse’s clients can test their algorithms and simulate trading on all major equities exchanges before going live to the public.
The facility, dubbed “Algo Test Facility,” is designed to provide the exchange group’s electronic trading customers a safe environment to rigorously examine algorithmic strategies by replaying and interacting with real historical market data. The Algo Test Facility is expected to launch in the first quarter of 2014, and will provide customers a market-wide equities testing platform.
Thesys is the infrastructure affiliate of Red-Bank, N.J-based high-frequency trading firm Tradeworx.
The facility comes in response to the recent exchange and firm glitches that stemmed from algorithms that have “gone wild.” Critics, including the Securities and Exchange Commission, have said that algorithms should be more thoroughly tested before being made available in the live trading markets.
“Currently there is heightened realization that the all market participants need to adequately test software that interacts with the market, and given how much trading volume is generated algorithmically today, the testing of these algorithms has to be a key component to the industry’s efforts,” said Manoj Narang, chief executive officer of Tradeworx, in a release.
The Algo Test Facility will allow market participants to simulate their automated trading strategies against real-world scenarios, transactions, and competitors to manage their risk exposure and their capital expenditure, according to Nasdaq. The facility is designed to allow traders to test all aspects of their strategy from the quality of their quote processing, all the way down to order handling and the interaction of the trading algorithm with the market microstructure.
By testing in advance, exchange customers may mitigate the risk of aberrant or potentially destabilizing behaviors like quote stuffing. In addition, the Algo Test Facility will provide traders with valuable insights about risk and performance, including the ability to evaluate the cost of adverse selection for specific trading strategies, a Nasdaq release said.
The first phase of the Algo Test Facility will include simulations for Nasdaq, and over time the test system plans to support all major U.S. equities exchanges along with their order types and protocols so user activity may interact with the historical orders of other market participants.
The Algo Test Facility will be accessible through the Nasdaq OMX Data Center, enabling customers to use their existing trading infrastructure, including risk systems, order management systems and feed handlers. Each simulation will recreate market microstructure and provide an accurate view of adverse selection, time priority, fills versus misses, latency and bursting.
