NEW YORK Exchange operator Nasdaq OMX Group Inc (NDAQ.O) said on Wednesday it is partnering with a unit of high-frequency trading firm Tradeworx on an algorithm testing site for firms to examine automated trading strategies and reduce operational risk.
A number of high-profile glitches at trading firms and exchanges in recent years have roiled markets and impacted on investor confidence, causing regulators to place more scrutiny on risk controls for trading software and other technology.
Algorithmic trading uses computer programs to navigate a complex market structure made up of 13 exchanges and dozens of non-exchange trading platforms, placing orders that can be executed within fractions of seconds.
The new "Algo Test Facility," which will be accessible through Nasdaq's data center, will allow firms to test their trading programs using historical market data to simulate trading on all major U.S. stock exchanges, and is expected to launch in the first quarter of 2014, Nasdaq and Tradeworx said.
"Algos-gone-wild" have been in the spotlight since last year when a software error at Knight Capital Group sent a high-speed flood of unintentional trades into the market, financially crippling the firm and forcing its sale to rival Getco LLC. There have been a number of market-related glitches since then, including a three-hour outage in Nasdaq-listed stocks in August.
All "market participants need to adequately test software that interacts with the market, and given how much trading volume is generated algorithmically today, the testing of these algorithms has to be a key component to the industry's efforts," said Manoj Narang, chief executive of Tradeworx.
The Financial Industry Regulatory Authority conducted a sweep of high-frequency trading firms this summer, seeking detailed information on the testing and supervision of trading algorithms and other software. And last month, the U.S. Securities and Exchange Commission (SEC) ordered stock exchanges to jointly draft an action plan to strengthen and improve the resilience of their critical market infrastructure.
The costs associated with operating, monitoring and upgrading technology can be significant, and both Nasdaq and Tradeworx offer services to firms and organizations as cost-effective alternatives to in-house development.
Nasdaq has responded to a multiyear decline in trading volumes by diversifying away from transaction-based revenues and into services that provide a steadier income flow, like providing technology and data to other companies.
Red Bank, New Jersey-based Tradeworx, sells trading technology to other firms and recently developed a system for the SEC that gives the regulator access to real-time trading data, helping it better monitor and analyze the market.
(Reporting by John McCrank; Editing by Kenneth Barry)