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The Trading Mesh

Applying ISO 9000 Standards to High Frequency and Automated Trading

Thu, 06 Sep 2012 09:01:00 GMT           

Around two years ago, in September 2010, HFT Review interviewed Professor Andrew Kumiega of the Illinois Institute of Technology (IIT), about applying quality control standards to the development and testing of high frequency trading systems. You can read that interview here: “Why Quality is Critical in HFT Systems


Since then, technology has continued to play an ever greater role in today’s financial markets.


But unlike other industries where technology has had a significant impact - industries such as manufacturing or aerospace for example - in automated trading there are currently no clearly defined or widely adopted quality standards around technology.


This raises a fundamental question. Given recent technology-related failures in the market, such as the system glitch that cost Knight Capital $440m and the problematic Facebook and BATS IPOs, is it now time for such standards to be introduced?


Professor Kumiega and Professor VanVliet certainly believe so. Dr. VanVliet formed a working group with his colleagues Rick Cooper (both Assistant Professors at IIT) and Andrew Kumiega, along with Jim Northey, Americas Regional co-Chair of FIX Protocol Ltd, to recently author a paper entitled “The Rationale for HFT 9000: An ISO 9000-style Quality Management System for High Frequency Trading(read it here).


Northey, who is also X9D Subcommittee Co-Chair at Accredited Standards Committee X9 and Senior Partner at The LaSalle Technology Group, LLC, provides some background to HFT 9000.


“It originated with some academic work done by Andrew and Ben, whose book ‘Quality Money Management’ serves as an intro to quality control practices throughout the entire lifecycle of investment, with a particular focus on automated trading,” he explains.


“Early in 2012, Ben approached me with the idea of an ISO 9000-like quality management system to address some of the concerns he was seeing around automated trading. The idea was that this could be independently audited, it could bring all market  participants to a level of competence and expertise and it would improve the overall safety of the industry, much like what happened when manufacturing and aerospace were automated in the 1990’s.


“So in May of this year, we met with various people from the ISO standards organization and decided that our approach should be to first create an ANSI standard, get that approved and then move towards the ISO standard. The ANSI standard can be approved much more quickly than the somewhat labyrinthine ISO process, so we felt that this approach would be the best way to get the standard adopted quickly,” explains Northey.


Despite its working title, the proposed HFT 9000 standard is not just aimed at high frequency trading firms. The idea, as Northey points out, is for a quality standard that applies across the automated trading industry.


“In the US alone, there are probably more than eighty execution venues, most of which are interconnected,” he states. “A lot of these venues aren’t following proper quality controls or operational procedures. There are also ISVs, broker/dealers, FCMs etc, who provide platforms and connectivity into the market centres. We see this quality standard applying to all those firms.


“The quality and integrity of a market is really the sum of the quality of ALL the market participants, not just the proprietary HFT firms. So the HFT 9000 name will probably change,” says Northey.


Andrew Kumiega believes it is the speed of trading and the interconnectedness of the markets that makes a quality standard much more critical now than it has ever been before.


“With the speed of today’s markets,” says Kumiega, “if you make a mistake, within seconds that mistake has been booked, entered into your portfolio and is probably hedged somewhere else. If you sell me something incorrectly, there’s no out-trade because I’ve already taken what you sold me in New York and delta-hedged it in London. And my London book has probably rippled across to a book in Dubai or Hong Kong.


Kumiega is convinced that even having some basic standards in place will increase the overall quality of the market. “It’s not a question of whether this ISO-style quality standard is going to come; it’s a question of when,” he says. “After you make the leap that you have to put in some minimum standards, you get a nice baseline, and then everyone starts to look at how they can make things better, so the whole market improves.”


So what can trading firms, exchanges and other institutions expect as this initiative progresses?  Will the HFT 9000 standard (or something similar) be imposed upon the market by regulators or some other third party and will firms be forced to comply?


Not according to Bob Binder, President at System Verification Associates, LLC, another veteran of quality management who has been working closely with Kumiega and his colleagues on this project.


“We are looking for voluntary compliance, based essentially on competitive pressures,” he says. “The way quality management has evolved in other industries, we’ve seen that once you reach critical mass, it becomes the price of doing business. And when it gets to that level of acceptance, it really does become self-regulating.


So firms won’t be forced to comply?


“If you look at the standards that are part of the ISO 9000 family, they are not exactly enforced, but there is an independent third-party group of auditors who will assess compliance. Again, no one is obligated to seek certification. Self-certification is accepted practice for many ISO 9000-based QMS standards.  Once the business case is strong enough, we expect that many market participants will seek certification. To get certified by those auditors you have to have concrete evidence that you comply with all parts of the standard. And that’s what we’re envisioning,” explains Binder.


Given that there are so many new regulations on the horizon, including Dodd-Frank in the USA and MiFID II/MiFIR is Europe, how much resistance is the HFT 9000 team seeing from trading firms?


Northey recognizes that there is pushback, but he looks at the bigger picture.


“A quality marketplace attracts more participants, whereas anything that kicks people into fear mode is really bad for market participation,” he says. “And let’s not forget that ANSI and ISO standards are voluntary. That’s not to say that markets couldn’t come together and say that firms can only participate in their markets if they comply with the standard, but it’s still the market place on a voluntary level requiring their participants to certify, not regulations requiring certification.”


There is another dimension to this, according to Northey.


“There’s a growing view from market participants that if they don’t do something themselves – and do something meaningful and substantial – the regulators are going to come in and impose something more draconian upon them.


“We do have to be diligent because there are detractors. But that’s a good thing because we don’t want to have any steps in this process that do not lead to materially better markets. If something goes into the quality management standard, there has to be a reason for it being there, Done poorly, this initiative could become nothing more than a documentation tax and a barrier to entry for new participants,” says Northey.


“There’s a big misconception to what this is,” believes Kumiega. “People think it’s a legal standard that will just lead to more documentation, but that’s not the case.


"If you are a trading firm, right now you might have a dozen or more audits a year from all the various exchanges and their questions and documentation requirements can be all over the place. When you realize that with this standard, you’re writing just one set of documentation versus a dozen sets for each auditor that comes in, you can see the value. It’s very similar to ISO 14000 in fact, where you have just one set of documentation, you do one internal audit per year, and when each group of auditors comes in, you just show them the certified documentation.”


This certainly makes sense, but will trading firms be convinced?


Keith Fishe is a Managing Partner at TradeForecaster Global Markets, a technology driven proprietary trading group headquartered in Chicago. He welcomes the initiative, but also sounds a cautious note.


“In our experience trading on multiple exchanges, while each exchange does have its own individual testing regime and compliance process, that hasn’t really translated into a high cost of compliance,” he says. “We take the approach that our desire to have high quality software exceeds whatever any of the individual exchanges are requiring anyway, so we try to meet our threshold versus what they might impose upon us.”


“From our perspective, one of the biggest sticking points to this proposal, and what might inhibit adoption, is the idea of independent auditors coming in and having the ability to look at your “secret sauce”, either the proprietary code or the documentation that details your strategies and engineering decisions.  A process for meaningful self-certification would encourage firms to support this proposal.”


Bob Binder is quick to address this concern.


“Looking at proprietary code is completely unnecessary to support a quality management standard,” he states. “This proposed standard will  not be a detailed programming standard; it will be  a standard that defines best practices and processes to prevent errors and failures. You don’t have to look at software line-by-line to do that.”


Kumiega agrees, citing the example of Microsoft, which has been ISO 9000 compliant since 1994, yet does not give away any trade secrets.


“That’s why ISO 9000 is so nice,” he says. “You write the documentation at the level you feel comfortable for an auditor to look at.”


Northey sums things up: “One of the key things here is that we are looking to adopt existing recommendations from the FIA, FOA, ESMA, IOSCO, ASIC, etc. Wherever we find sound practices designed by industry practitioners we want to use them. The proposed quality management system for automated trading will be the framework for evolving these best practices,” he says.


And moving forward?


“Initially we want to provide pointers and checklists for self assessment and self certification, while the governance model sorts itself out. Our initial plan is to organize these practices and get folks using them, while we do the work to get the standard created within the official standards process to provide legitimacy to the work that is going on. Additionally, we believe there is a great deal we can learn from other industry sectors on managing automation,” concludes Northey.



For more information about HFT 9000, please visit



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