World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading Tools and Technologies Presented by Larry Tabb (Founder & CEO)

Agenda To the winners go the spoils Buy-side needs multiple tools Tools Dark pools Flash Sponsored access Technologies

Immediacy Size Low Impact (size) 1) Blocks/Dark pools 2) Dark Algorithms Quiet Accumulation 1) Dark / Opportunistic Algorithms 2) Blocks/Dark pools 3) Broker Capital Delegation 1)VWAP/Implementation Shortfall Algorithms 2) Direct Market Access Need it, want it, got to have it 1) Direct Market Access 2) Accumulation Algorithms 3) Broker Capital Different trades need different tools Source: TABB Group

No. of Dark Venues Source: TABB Group Estimate % 4% 7% 7.5% 12.5% 1% 2% 3% 5% 10% 11.5% USEurope % Traded Volume (dark) Dark pools are steadily gaining market share in both the US and Europe

1 of 9 National Exchange Broker Buy-side/ Investors/ Liquidity takers Brokers, Buy-side, Prop, and Other Bidders for Liquidity When trading at the exchange, you are competing against the marketplace Source: TABB Group

Broker National Exchange Broker Brokers, Buy-side, Prop, and Other Bidders for Liquidity Broker Dark Pool 1 of 91 of 1 In a dark pool, you get first look, and generally better than market pricing Buy-side/ Investors/ Liquidity takers Source: TABB Group

HFT Tools Co-lo Being first is everything Low latency connectivity Fiber and networking Market Data infrastructure Direct feeds CEP Models Execution engine Risk modeling

Exchange w/ Best Price Exchange w/o Best Price Market Maker Liquidity Provider Market Maker Liquidity Provider Sell Retail Order Execution Using Flash Order 1)Retail order comes into broker 2)Broker routes order to ECN/Exchange using Flash Order 3)If ECN/Exchange does not have the best price it either needs to match the best price or send to the Exchange/ECN displaying the best price (Reg NMS) – maximum time.5 seconds 4)Since the ECN/ Exchange doesnt have best price it flashes order to market markers/liquidity providers (typical time.02 to.05 seconds) 5)If MM/LP wants the order it either needs to match or better bid 6)If not – order must be routed to exchange showing best price 7)Typical flash order is free – typical charge to route order to another ECN/Exchange is 25 to 30 cents per 100 shares 8)The challenge with this order is that the market maker / liquidity provider gets to see this order up to.5 seconds before it is routed to the exchange with the best price 9)This is enough time for the market maker / liquidity provider to either change their quote or take out the lower price, change quote and execute the order at the higher quote – locking in a profit Retail Investor Retail Broker Sell Not best bid Best bid Will match or better bid? Yes / Trade No / No Trade Free Execution 25 to 30cents/100 Shares Problem is if MM/LP executes against the better price and/or changes quote Flash orders – a second chance to match orders before they are routed

Sponsored access provides thin gateway veneer between client and exchange Sponsored access allows brokers & other trading firms to trade directly on an exchange using the access brokers credentials Mostly for liquidity providers / high frequency traders Issues are Risk management – order goes to the exchange before broker sees it If they fat finger an order or the trading model goes errant then the broker is on the hook Firms are developing technology to mange this Equal access Easier to co-lo / obtain sponsored access than ever before Better understanding of liquidity in exchanges vs. dark pools Exchanges have open access – dark pools dont Brokers & dark pools usually get order flow before exchanges Dark pool order flow is more protected than exchange liquidity Otherwise execution quality would be worse, and Institutional investors would shun dark pools like the plague

InvestorBroker Matching Venue Order Execution Traditional Access Market Maker Liquidity Provider Broker Matching Venue Order Execution Sponsored Access While all orders need to be represented by a broker they dont need to go through brokers pipes

Investor Broker Exchange Orders Traditional Access Benefit Unique Liquidity from Other Customers Investor ECNs Dark Pool FirstSecond Market Maker Liquidity Provider Broker Matching Venue Order Execution Sponsored Access Benefit Speed to External Matching Venues Sponsored access benefit is exchange execution speed which does not necessarily mean access to best orders

Sponsored Access Challenges Broker Market Maker Liquidity Provider Matching Venue Co-lo Facility Investor Dark Pool Broker Data Center Matching Venue Fast Not as fast Sponsored Access Challenge While access to co-loed matching engine is quick, significant volume (and better liquidity) comes through brokers (institutional and retail orders). Traditional Access Benefit Unique Liquidity Comes from Customers Order Flow Investor Exchange Orders Investor ECNs Broker Dark Pool SecondFirst Traditional (Better) Liquidity hits Brokers First The majority of orders come through brokers first. As such they first match in broker crossing networks & dealers dark pools – unless prop shops also co-lo or have high speed access to dealer dark pools Dark pools generally get access to best order flow – which is hard for sponsored access firms to get access to

The amount of data that needs to be processed is astronomical PITCH, ITC 2.1, DirectEdgeX, TotalView-ITCH 4.0,UQDF, UTDF, ArcaBook for Equities, CQS, CTS, OPRA, Canadian Venture Exchange Level 1, Toronto Level 1, NASDAQ Index Dissemination Service, NASDAQ Trade Data Dissemination Service, NYSE OpenBook --- Source: Exegy – marketdatapeaks.com August 13, 2009

World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading The Tools and Technologies Presented by Larry Tabb (Founder & CEO)