FFastFill is the leading SaaS Provider for trading and risk management serving the electronic trading community.

“We’re seeing the metals market continue to have high-frequency traders come into it,” he told MB. 

“A very significant percentage of our order flow comes from the algos, and we expect it to increase. It’s the fastest-growing part of the market and we certainly have clients that are currently looking at the London Metal Exchange as a new opportunity,” he said. 

The LME should think carefully before giving traders unfettered sponsored access to the market though, Purdey said. 

“What we’re seeing in other markets is something that we don’t want to see here, and that’s naked direct market access, where a firm gives its customer access directly to the exchange API,” he said, a possibility that is being discussed in metals brokerage and trading circles. 

Sponsored access at the LME would mean brokers’ clients being able to send bids and offers directly into the exchange’s electronic trading platform Select, without those orders running through the pre-trade risk assessments that are part of the platform that FFastFill offers to over 20 members of the LME. 

While Purdey acknowledges that many of the firms that would want sponsored access to the exchange have extremely sophisticated risk management systems, “you’re giving the keys to the castle away” if you allow it. 

To do so would place the onus for risk management on to the exchange instead of its members, he argued. 

Rather than giving clients unmediated access to the market it is Purdey’s view that member firms should retain control of the risk management of their clients’ positions. 

FFastFill’s software, which enables brokers to manage risk as well as providing access to the market, “adds an extremely small amount of latency [a measure of the period between the receipt of an order and its execution] in the context of the market that offers protection to the sell side”. 

“The right and proper way for these customers to have access to the market is through member firms. The software offers protection: you receive an order, the software checks whether it should be allowed, and it is then passed on to the exchange,” he said. 

“We’re seeing a single-digit millisecond latency in terms of that FFastFill process. It’s incredibly small in terms of the overhead of that risk management process.” 

The issue of latency is of growing significance in the metals markets, and raises issues about co-location — that is placing members’ trading software as closely as possible to the exchange. 

“It’s a question the market needs to think about. Co-location is a significant issue,” Purdey said, noting that there are two alternatives. 

Either you locate customers’ servers in the same facility as the exchange gateway, or you nominate a facility or set of facilities which become the co-location facilities for both exchange and member firms’ servers. 

“You need to create a level playing field: you either co-locate with the exchange matching engine or you create a meet-me infrastructure where everyone transitions through a certain point in terms of their telecommunications,” Purdey said. 

“There is an enormous amount of cost for this type of connectivity and infrastructure to be put together, to be reliable, to be full tone. The market needs to be accepting of that type of cost.” 

It is unclear who would pay such costs at this point. 

“It depends how the exchange structures it as to whether there’s a cost to the exchange,” Purdey said. “It may be there’s a cost for us as the intermediaries, or to the end-members.” 

While it may be a coming issue, he noted that the LME market is not yet one where co-location is crucial. 

“Certainly, as it is today, the market is not dependent on co-location, because the market doesn’t need it yet, unlike Nyse Liffe or Euronext. The speed and volumes are not there yet,” he said. 

But the evolution of members’ clients and growing volumes on the exchange suggest that it and its members must develop a strategy to address co-location. 

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