Cinnober has published a white paper on how to measure market liquidity and understand the true impact of algorithmic trading on the market. The required functionality is supplied by the market surveillance system, Scila Surveillance, going beyond market surveillance in its traditional sense.

Today’s equities markets are increasingly fragmented, and the competition for liquidity among trading venues is fierce. To maximize available liquidity, venues routinely fine-tune the parameters that define their market models, such as the level of market transparency, counterparty information, tick-sizes, trading method, tariffs, etc. 

Moreover, algorithmic trading contributes to a growing part of trading volumes and marketplaces’ earnings, both in equities and other markets, and is a large determinant of liquidity. 

The potential negative effects of certain types of algorithmic trading are widely discussed in media, among market participants, regulators and other stakeholders. Some algorithmic trading is beneficial and adds to liquidity, but some harmful variants can reduce liquidity.  Does it increase market volatility, amplify short-term market reactions and in the long run cause traditional investors to pull out from these markets? 

As trading patterns change and trading techniques become increasingly sophisticated, our tools for measuring market quality also need to be upgraded. 

One of the key functional areas of Scila Surveillance is the detailed analysis of market quality. To get a more accurate picture of liquidity, simple measurements such as best bid/ask spread can be complemented by more sophisticated measurements, such as: liquidity measures over time, replenishment times after liquidity events, average order lifetime, etc. 

Measuring market quality. October 2011. Lars-Ivar Sellberg, Cinnober Financial Technology AB and Fredrik Henrikson, Scila AB

To download the paper with the complete methodological discussion, click here.

About Cinnober Financial Technology
Cinnober provides mission-critical solutions and services to leading trading and clearing venues. Cinnober’s solutions are based on the TRADExpress™ Platform incorporating everything needed for mission-critical solutions in terms of performance, robustness and flexibility. The portfolio of offerings includes price discovery and matching, real-time risk management, clearing and settlement, data distribution and surveillance. Cinnober’s customers include Alpha Trading Systems, Borsa Italiana, Burgundy, Chicago Board Options Exchange, Deutsche Börse, EDX London, Eurex, Hong Kong Mercantile Exchange, London Metal Exchange, Markit BOAT, NYSE Liffe and Quadriserv. For additional information, please visit www.cinnober.com.

About Scila AB
Scila provides a surveillance tool built on many years of experience from both market surveillance and systems design. Scila Surveillance uses modern technology to give the customer a seamless route from detection of market abuse to presentable evidence. Scila delivers the future in modern market surveillance technology by offering the industry the most competitive solution available. Cinnober owns a minority stake in Scila AB and there is an exclusive sales agreement between the two companies. For additional information about Scila AB, please visit www.scila.se