Your Russian Visa: DMA to Russia

Otkritie’s Tim Bevan describes the intricacies and idiosyncrasies of the Russian markets, and offers suggestions on how to effectively access the deep liquidity there.
How would you profile the firms that are interested in DMA to Russia?
There is an interest in DMA to Russia from prime brokerage desks because many of the hedge funds that use the global prime brokers have expressed interest in Russia, now that the liquidity has reached the point it has. It is worth pointing out that the liquidity in the local equity market is approximately $2.5 billion a day, and the derivatives market turnover is $10 billion notional a day. These are very significant and deep pools of liquidity. We are certainly seeing client pressure from different areas hitting Tier 1 banks, which in turn is reflected onto us. We are also seeing the big global electronic brokers looking to add Russia to their coverage.
There is sustained sell-side interest, but the other big pocket of interest we are seeing is from the low-latency, high frequency funds that utilize proximity hosting and co-location, who want to place hardware in Moscow and run their strategies in the electronic order books that are available there. There are many more of these types of participants now and they are often in London, New York, Chicago, Amsterdam, Paris and other parts of Europe.
How extensively are algos utilized in Russian DMA?
Obviously for a high frequency fund, the algo is the strategy. This is clearly different from execution algos, like VWAP, which are used to execute orders in a certain manner. Most Russian brokers have the most basic execution algos like VWAP, TWAP, icebergs, etc. It is a relatively new trend (i.e. 6-9 months old) for the big sell-sides to enter Russia, and many have not yet deployed their more sophisticated suites of algos into the Russian market.
Additionally, the Russian market itself, is quite unusual in that there is a lot of programming skill in Russia. The average Russian retail trader is quite often running an algo through an Excel spreadsheet with $10-20,000 worth of capital, so as regards alpha strategies, there is a lot of algo activity in the Russian market. In terms of execution algos, however, I think it has not penetrated this segment yet. As the sell-sides continue to move into the electronic market, the second phase will be to deploy their own execution algos and offer them to their main clients, but we are at the beginning of that part of the process.
With the majority of liquidity isolated in a dozen stocks, how would Russian DMA fit into a firm’s overall trading/investment strategy?
Liquidity is very concentrated in Russia. The top ten names account for the vast majority of liquidity, and even the top two or three probably make up 50% of the market. DMA is possible beyond the top 15 or 20, but it drops off fairly quickly thereafter. Obviously the big blue chip companies are where most of the interest is. Taking Sberbank as an example, there is no liquid Depository Receipt (DR) and there is an unsponsored DR trading of about $2 million a day in Germany. If you want to trade that stock, you have to trade the local market, where it trades between half to a billion dollars a day notional, so there are some very deeply liquid companies that are only available in the local market.
What other asset classes are being attracted or will attract DMA interest?
The biggest interest is in the RTS Index futures, which is an incredibly powerful product. Trading over $5 billion a day notional, more than double of all of Russian equity instruments (both DR and local), sometimes by a factor of two. RTS Index futures trade from 0700 UK time right through to the US close and are among the top ten most liquid equity index futures in the world. This instrument has generated the majority of interest from the quant funds, but interest is increasingly coming from more standard hedge funds and buy-sides where they are allowed to trade futures as it provides an instant hedge or leverage tool with an almost bottomless liquidity pool for any one player.
There is also good liquidity for four or five single stock futures and Dollar-Ruble contracts. Obviously trading a single stock future is more capital efficient than trading the underlying cash, so we are seeing an upturn in interest there as well.
What is the state of connectivity into the Russian exchanges?
From a technology viewpoint, the connectivity picture is fairly ‘vanilla.’ The MICEX platform is based on NASDAQ technology, whereas the RTS FORTS platform is a Windows-based SQL interface. RTS has struggled to keep up with the increased activity and order rates associated with high frequency players. In particular, it takes 15 milliseconds for RTS to confirm an order and they send out data with a 100 millisecond delay. If traders want a direct API connection, it is possible on both exchanges. Also, both exchanges have co-location facilities, though eye-wateringly expensive in the case of MICEX. With the exchange merger having now been announced, we recommend that clients use a proximity hosting solution until we get a clearer road map as to where the matching engine is going to be physically located.
An unusual aspect of Russian markets, however, is their pre-delivery. The cash market is a T+0 market. Unless you have the assets on the account with the executing broker, the exchange will reject the order. If a high frequency trader wants to run a strategy, they must have a basket of stocks and cash on the account for them to trade that strategy. Pre-delivery involves significant prefunding and that adds an element of cost. There are also limitations in stock availability around corporate actions or dividend dates.
The result is that risk management happens almost entirely at the exchange level and that traders are limited to the assets that they or their broker can provide. The equity repo market in Russia is deeply liquid, to the extent that repurchase agreements are an on-exchange transaction. Russian brokers need to have a significant equity finance operation with which to provide theseservices to international clients.
How does your technical platform minimize latency, for example, from London to Moscow?
One of the biggest issues with emerging markets is often the availability of information. In particular, the kind of granular detail needed to minimize latency and understand the exchange’s technology, the data streams and how it can be optimized. From a local perspective, having a presence in the data centres, understanding the local line providers and  precisely what type of fibre as well as the routes and hops involved, are all key.
This is not easily accessible data and it takes time to build a knowledge base and an understanding of how the infrastructure operates within Moscow. In short, traders encounter the same challenges as in any market, but the real challenge in Russia has been getting information. This is because, in many respects, we are educating the exchanges as to what this type of trading means and what matters to low latency traders; until about a year ago, sub-1 second was considered low latency.
I think the exchanges are going through what the western exchanges went through about ten years ago. It is difficult economically, because they are getting increased orders but not executions. They have taken a natural route, which is to limit orders per second to preserve core matching engine performance, but there are still spikes and delays. Any developments have been put on hold while they decide the future look of the market, but RTS and MICEX are likely to combine on a single technology platform in 2012.
The exchanges are in a fortunate position in that there are off-the-shelf, high capacity matching engines at fairly low cost because the US and Europe have been through this already, so the technology is readily available. The key points are that electronic access into Russian markets, whether latency sensitive or not, is rapidly growing in interest. The exchange merger is part of a broader project to make Moscow the regional financial hub and an international participation from the Russian markets and this is likely to grow exponentially over the next five years.