The Toronto Stock Exchange announced this week that it will soon roll out its "Leapfrog" trading system. According to the TSX, the system is tailored to algorithm-based trading where near instantaneous data exchange is required. The system will outpace those offered by the NASDAQ and other major exchanges. Will this system result in more trading volume for the TSX? The Canadian Press reports:

An emerging Canadian competitor to the TSX responded that shaving transaction times is a basic function in an era when trading firms jostle for space in the buildings that house exchange computers in order to take advantage of shorter signal transits at the speed of light.

"Without wanting to get into the competitive aspect, low latency is just part of what you have to provide," said Richard Carleton, vice-president of corporate development at the Canadian Trading and Quotation System, or CNQ, established last year and promising a faster and cheaper alternative to the established markets.

Think of the importance of speed to profitability if firms fight to be in the same building as exchange computers. Millionths of a second count in arbitrage.

Why is algorithm trading so important? Here is an excerpt from a Newsweek story on the subject:

Trading algorithms automatically break up large orders into bite sizes and feed them directly into the market. But they can be tuned to execute almost any strategy. Some aim simply to capture the average price over a day, others to gain an edge by, say, trading more heavily at the opening and close, when volume is high, and less when it slows down around lunchtime. And they can be customized, for example, to sell stock stealthily over several weeks if a manager holds a 3% position in a particular stock and wants to cut it to 1%. Not only (...read more...)