TABB Says Long-Distance, Low-Latency Networking Increasingly Critical To Trading (TABB Group)

By | June 21, 2010

This is the PR on my latest two reports on optical networking and its role in financial services.  Also check out the executive summary here.

North American Financial-Services Firms to Spend $2.2 Billion in 2010 on Connectivity

Two New Research Reports Reveal the Dividing Line between Data-Center and Optical Networking for Capital Markets is Seen Crumbling

NEW YORK & CHICAGO & LONDON–(BUSINESS WIRE)–Long-distance events have grown critical to trading and hedging strategies. While Chicago and New York, London and Frankfort and Hong Kong, Singapore and Tokyo will never be moved geographically, long-distance, low-latency solutions bring these trading venues virtually closer together. As a result, being on the fastest route and employing the lowest latency technology can mean the difference between being first, putting on a hedge or getting completely run over.

“It’s not just about getting orders to the market first, but gathering the information to make those trading decisions before everyone else”

One of the most important of these routes is New York to Chicago. With significant futures and options liquidity in Chicago and the cash markets in New York, being able to move data between New York and Chicago is critical for equity, foreign exchange, fixed income and index arbitrage strategies.

In one of two new research reports published today, TABB Group analyzes the complexities, challenges and opportunities of managing long-distance, low-latency connections and looks at new providers attempting to breach the sub-14 millisecond round-trip route between New York and Chicago.

This is not merely about trading profit, says Kevin McPartland, a TABB senior analyst and author of “Long Distance Latency: Straightest and Fastest Equals Profit,” Low latency futures market data helps sophisticated risk and hedging strategies, generating additional alpha and improving investment returns for many firms. “It’s not just about getting orders to the market first, but gathering the information to make those trading decisions before everyone else,” he explains.

During the past few years, latency reduction has focused on writing better algorithms, using faster machines, reducing network latency, and co-locating at execution venues. However, if roughly 115 miles can be cut from the distance between New York and Chicago, network latency can be reduced from the current 16 milliseconds to approximately 13 milliseconds.

According to TABB estimates, North American financial services firms will invest $2.2 billion for connectivity in 2010, with spending on managed bandwidth for low-latency paths between New York and Chicago to reach nearly $225 million annually. This does not include spending by firms maintaining private optical network, which would add hundreds of millions more to the total.

In the second research report, “Optical Networking for Capital Markets: The Bright Side of Dark Fiber,” co-authored by McPartland and contributing analyst Andrew Cartine, TABB says the need for speed has created a dramatic priority shift, forcing network engineers to relearn the rules. This new approach to technology deployment has begun to manifest itself in every cog of a trading organization’s technological wheel from how engineers program to how financial markets firms are buying their own dark fiber optical networks.

According to McPartland, a typical proprietary trading firm pulls in over 400 gigabytes of market data daily and generates 20 gigabytes of FIX traffic between itself and the markets, activity generating roughly 1.5 terabytes of input and output each day between core trading data centers and auxiliary counterparts. “A shop like this is spending millions of dollars just to move all this traffic back and forth between data centers, which is why, put simply, the goal today is to reduce the places data must go before trading decisions are made.” Choosing how you acquire network connectivity is not a decision to be made lightly, the authors claim, as running a fiber network essentially turns a trading firm into a telco provider with just one customer.

Moving forward, they point out, the dividing line between data-center networking and optical networking is crumbling. Many trading firms already view the multiple data centers in New Jersey as one big virtual data center whose networks seamlessly move traffic between disparate servers with less than 100 microseconds of latency added by jumps on and off the optical path.

With latency reduction no longer confined to the data center, now involving the miles of conduit carrying fiber optic cables, trading volumes will only increase and matching engines will only get faster. Says McPartland, “Only those with a deep understanding of how their data moves around the world will remain competitive. Reducing latency and increasing bandwidth is all well and good, but just counting on Moore’s and Metcalfe’s Laws doesn’t cut it anymore. Firms need to optimize their infrastructure, rather than expand it with brute force. Even for firms that count every last microsecond, it’s a misconception they’ll pay anything to cut latency. In the end they are still businesses looking to keep costs low and revenues high.”

“Optical Networking for Capital Markets,” based on conversations with trading firms, optical equipment providers, telecommunications firms and high-speed trading solution providers, gives a detailed description how fiber optic networks are used by financial services firms and potential pitfalls inherent in gaining access to and utilizing an optical network. The report discusses sources of latency, bandwidth usage, methods of accessing fiber optic networks and optical equipment providers and provides estimates for optical connectivity spending by financial services firms. “Long Distance Latency” outlines the importance of reducing the time it takes to trade and market data messages to travel between two cities, how that can be done and those firms most likely to succeed.

Both reports are available now for download by TABB Group Research Alliance Equities clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write to info@tabbgroup.com.

About TABB Group

TABB Group is the research and strategic advisory firm focused exclusively on capital markets, with offices in New York and London. Founded in 2003 and based on proven interview-based research methodology of “first-person knowledge” developed by founder Larry Tabb, TABB analyzes and quantifies the investing value chain from the fiduciary, investment managers and brokers to exchanges and custodians, helping senior business leaders gain a true understanding of financial markets issues. For more information, visitwww.tabbgroup.com. In January 2010, TABB Group launched TabbFORUM, www.tabbforum.com, the online community where capital markets professionals share and contribute commentary on current industry-wide issues.

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