PHLX Pushes Capacity to Extremes

Facing intense competition from electronic options markets and traditional exchanges adopting electronic platforms, the Philadelphia Stock Exchange (PHLX) is reinventing the way it does business on its stock-options trading floor as it seeks new revenue-growth opportunities. William Morgan, executive vice president and chief information officer at PHLX, heads the in-house team that's building the exchange's Extreme Liquidity platform, or PHLX XL.

"It is a system that allows for an electronic trading model to coexist with a floor-based environment," explains Morgan, who took a five-phase approach to developing the system. The goals of the initiative are to increase liquidity; improve access to the market for all customers, broker-dealers and market makers; create tighter and deeper markets; and improve both the speed and quality of executions, he says.

After implementing the first two phases of the project in 2003, which included the building of an automatic-trade engine, Morgan is currently working on phase three: developing an on-floor streaming quote capability, which is pending SEC approval. "This provides the ability for our market makers to run an auto-quote model from a handheld system on our trading floor," says Morgan. Phase four includes the rollout of the on-floor streaming quotes program, along with other upgrades, and phase five involves expanding the streaming-quote capability to remote market makers.

The exchange's top project this year, developing the trading platform presented many technical hurdles, but the biggest challenge PHLX faces is finding the increased capacity needed to support streaming quotes, according to Morgan. Today, PHLX only has specialists running streaming quotes via auto-quote models. With XL, for the first time, streaming quotes will be expanded to individual market makers. "Not only do we have to worry about the high volume of OPRA [Options Price Reporting Authority] inbound data feeds [Editor's Note: The industry is anticipating 50,000 messages per second over OPRA lines.], but our own capacity is going to be going up significantly," says Morgan.

To solve the internal capacity problem, PHLX plans to migrate all options applications, including internal quote processing and all new PHLX XL components, to a brand-new Stratus architecture known as FT Servers (V Series). The exchange expects to initiate testing of the new FT Servers in late June and deploy the machines over the summer in a phased migration designed to coincide with the rollout of streaming quotes to the floor.

PHLX also built a generic application-programming interface (API) to connect with streaming-quote vendors that are providing software to the market makers. So far, the exchange is in testing with Actant and Preferred Trade, and is in discussions with Micro Hedge. To give market makers a choice, "The [XL] system is built to have a generic API so we can connect to other market-data vendors quickly," explains Morgan.

Another key project in PHLX's growth strategy that impacts both equity and options trading is PHLX's migration from the Common Message Switch (CMS) Protocol to the Financial Information Exchange (FIX) communications interface. According to Morgan, member firms asked PHLX to move to FIX, which is the direction in which most options exchanges are going. "FIX is not only a new way to communicate, it's also new message formats, which are larger and carry new information," says Morgan.

Other projects in the works include allowing floor brokers to execute orders from a handheld, and enhancing equity-trading systems with more automatic execution and competitive pricing. On the regulatory front, Morgan plans to significantly enhance the exchange's Trading Data Access System, both in the areas of prevention and detection.

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Despite a level budget, Vanguard CIO Tim Buckley strives to provide more. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio