The Gateway to Algorithmic and Automated Trading

The hammer, the sickle and the algo: Russia's unorthodox journey to a thriving market

Published in Automated Trader Magazine Issue 28 Q1 2013

Russian peasants performing calculations a couple of hundred years ago may have paved the way for the current boom in algorithmic trading in Russia.

According to some versions of the history of mathematics, one of the oldest algorithms was the Russian peasant algorithm, a method of multiplication using a binary structure. Nobody really knows whether Russian peasants used it, or where it originated. But if Russian peasants did dream it up, that long-established adroitness with algorithms, plus a Soviet-era legacy of strong focus on maths and applied sciences in the education system, might go some way to explaining the relatively high levels of algo trading in Russian markets compared with other BRICs. Mary-Ellen Barker reports.

"Russia is interesting - it's managed to achieve relatively high levels of algorithmic trading and HFT, but it's done so with less investment and fewer steps than other markets have taken," said Aite Group analyst Danielle Tierney.

And the biggest growth for algorithmic trading in Russian markets is happening in an unusual corner. Until not long ago, FX was typically down near the back of the asset-class queue for adoption of algorithmic trading, after cash equities and derivatives. But in Russia, it has been part of the first wave. Traders have been battling to contend with low levels of volume and volatility in nearly all markets around the world for most of the last 18 months or so. Russian FX is a striking exception.

One of the main reasons most experts cite is that high volumes of Russian FX are traded on the Moscow Exchange, unlike most other FX markets. The exchange's head of FX and money markets, Igor Marich, says 40 percent of spot FX transactions on the exchange are driven by HFT, and another 14 percent by other algo strategies.

Evgeny Somov Aton

Evgeny Somov, Aton

"A client can trade FX just as he would trade an equity," said Evgeny Somov, senior DMA sales at broker Aton. "That makes this market very interesting for algo traders for arbitrage or hedging because you have the same transparency in price and volumes as you do with equities, so it's pretty straightforward, and you also have a market that's often got more liquidity than the equity market."

FX trading accounts for about 40 percent of all volume on the Moscow Exchange, and average daily volumes across all FX instruments have risen 25 percent during 2012 to $14.7 billion. Average daily volume in dollar/rouble, the biggest currency pair accounting for more than 80 percent of volume, was $12.37 billion in 2012 against $9.87 billion the year before. In any swaps longer than overnight, average daily volumes grew 40 percent to $1.6 billion in the first nine months of 2012.

Moves by both the exchange and the central bank have helped fuel the growth. The central bank policy of keeping the rouble's floating band fairly wide against its dollar/euro basket has helped power rouble volatility. And the Moscow Exchange, fresh from the merger that brought RTS and MICEX exchanges together at the end of 2011, has progressively broadened access to FX trading. The first step allowed banks licensed to trade FX to offer direct market access to primary clients. The second step, completed in December 2012, widens access to open direct FX trading on the exchange to licensed brokerage firms. Marich said trades by Russian subsidiaries of foreign banks and non-resident DMA customers accounted for a combined 35 percent of volume during 2012.

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