World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading What Is It & Should I Be Worried? Presented by Larry Tabb (Founder & CEO)

Agenda What is high frequency trading Who does it Why has high frequency become an issue How does this impact exchanges?

What is high frequency trading? Wide definition Firms leveraging high speed market data and analytics to look for temporal supply and demand trading opportunities. These firms typically are self capitalized and hold positions for very short periods of time (typically less than minutes) Includes Equity market making Index arb Options market making ETF arb Stat arb/pairs trading Narrow and more typically used definition Equity market making

Who does it? Typically Equity market makers Proprietary trading shops And a few high frequency hedge funds Many located in Chicago This is typically done by self-capitalized firms This is market-driven and not PM driven Significant investment in technology infrastructure Not your standard investment strategy

Who trades? US Equity Share Volume by Market Participant High Frequency Trading accounts for 61% of Share Volume Source: TABB Group Estimate

US Equity Share Volume by Market Participant High Frequency Trading accounts for 61% of Share Volume Source: TABB Group Estimate 3%7%13%16% 4%28 %29% Investors Liquidity Providers Retail Hedge Funds Investment Bank Prop Long Only HFT Hedge Funds HFT Broker/ Market Makers Independent HFT InvestorsLiquidity Providers The majority of trading is done by professional traders / liquidity providers

Goal of HFT - first to spot an opportunity & first to take advantage of it Co-location Depending upon the firm, the HFT may need multiple locations May also want access to dark pools Sponsored access Flash trading Market data Direct feed Messaging Low latency time series Back testing tools High speed analytics CEP (mostly home grown) to locate trends Execution technology to trade

Why has HFT become an issue?

The floor is empty – most trading is done by machines

Source: TABB Group and Exchange Data Electronic Trading Has Caused Steep Decline in Average Trade Size US Equity Share volume and trades

Shares by Execution Venue (volume weighted)2 Year CAGR Algos have broken up flow into much smaller executions Source: TABB Group – Institutional Equity Trading in America 09/10 – Preliminary

Capital usage is down because of credit crisis and advanced trading technology Directionality of Capital UsagePercent of Firms Paying More For Capital Percent of Firms Using Capital Source: TABB Group – Institutional Equity Trading 2008

Sales trader flow is declining – back to on-trend levels Percentage of Order Flow Firms Sent to Sales Trader 3 Year CAGR -19% % 2 Year CAGR -13% Source: TABB Group – Institutional Equity Trading in America 09/10 – Preliminary

Should exchanges be worried?

In last 23months, exchanges have lost 20% market share to dark pools and ECNs NYSE, NASDAQ, & Arca BATS / DirectEdge Crossing / Dark Pools Regional Exchanges Source: TABB Group LiquidityMatrix TM Matched US Equity Flow as a Percentage of Total US Equity Matched Flow

Market share of liquidity pools are beginning to converge around 13% US Equity Market Share (includes Internalized) Consolidated NYSE/NASDAQ Listed Equities Jul 2008 – Sept 2009 Source: TABB Group LiquidityMatrix TM Exchanges, BATS

Is it worth it? Benefits Greater automation Low fees – exchange competition Tighter spreads High certainty of execution Challenges Finding the needle in the haystack Massive quantities of Data, IT,& Bandwidth Greater obfuscation All of this tilts market toward larger brokers Will benefits remain when only mega-brokers can play? However Sponsored Access is changing this Market is becoming more open and accessible (for the technologically advanced)

World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading What Is It & Should I Be Worried? Presented by Larry Tabb (Founder & CEO)