by Craig Donner
National Securities Clearing Corporation (NSCC) is laying the groundwork for the launch of several new equity exchanges this year, collaborating with NYSE Euronext, Nasdaq OMX, Direct Edge and BATS, all of which plan to go live with new exchanges. This burst of activity is attributable to high-frequency trading, dynamic pricing models and anticipated changes to the regulatory environment.
NSCC is taking the lead on working with these market centers to establish connectivity and perform testing to ensure trade data can be seamlessly transmitted, processed and output. These functions, known as trade capture and reporting, represent the first steps on the road to clearing a transaction.
“Exchanges operating multiple venues is due, in large part, to markets wanting to employ different pricing strategies on different platforms to capture greater market share,” said Susan Cosgrove, DTCC managing director, Clearance and Settlement/Equities. “Since exchanges provide NSCC trade data, their lines of communication must be fail-safe or else the security and soundness of the marketplace could be jeopardized. We have a rigorous process for bringing on new markets so that when the first trade is executed, we have tested and re-tested our connections to ensure a seamless flow of information from the market center into NSCC for clearance and settlement.”
Planning for success
When a market center informs NSCC of its plans to open an exchange, the two companies begin working together to establish a formal onboarding plan, which includes establishing connectivity for the electronic exchange of trade data and other information. This process can run from four to eight weeks and involves a series of tests that ensure the communication lines are operational and that data are correctly formatted and can be processed.
The plan also incorporates a series of conditional tests to ensure NSCC can process the various types of input an exchange may send. Another test checks the exchange’s ability to send large volumes of data that could result from an unexpected spike in the market. NSCC also provides output to participants for market-wide exchange tests, where exchanges test their functionality with their members.
“We’re meticulous in onboarding and testing new exchanges, because once we receive transaction data, the clock starts ticking on clearing, guaranteeing and settling those trades,” Cosgrove said. “We devote months of work to preparing a market for launch in order to protect the stability of the entire equity market.”
Simplifying the process
Next year, when NSCC launches its Universal Trade Capture (UTC) application, the process of preparing for the launch of a new market will be simplified.
UTC will replace the multiple applications currently used by NSCC with a single system that introduces a standardized input record from all marketplaces and standardized real-time output messages to participants. The UTC application will automate the onboarding of a new exchange in NSCC’s systems and eliminate the need for coding changes. However, NSCC will still require thorough testing to mitigate the risk of processing problems. @