Following the panel I moderated at the Telx financial service event, they shuttled us all upstairs to talk to TMCnet. Here is the interview:
High frequency traders are not the only ones trying to get faster. The last few years have seen exchanges enter an arms race for speed that rivals the most sophisticated trading shops in the world. The focus on reducing latency and increasing bandwidth is so extreme that we are watching the definition of “Exchange” transform right before our eyes. Not because physical trading floors in city centers have been replaced with massive data centers in out of the way industrial areas, but because the exchange business model has fundamentally changed from one that is transaction based to one that is technology driven.
The reasons why are quite simple. Execution fees have been driven down by competition largely brought on by field-leveling regulations (read Reg NMS and MiFID) enabling competition and in turn making technology the real differentiator. The exchanges are desperate to both retain and attract more liquidity, but with execution fees often below zero and market monopolies consigned to history only a serious investment in technology will ensure life throughout the next decade. And investments in technology are certainly being made.
I moderated a recent event put on by Telx discussing the challenges faced by financial services firms when creating low latency, highly reliable infrastructures. The event saw ~150 people come out to Telx’s new data center in Clifton, NJ to see what I felt was a pretty interesting panel. We also learned Telx is in the process of filing for an IPO.
But that could change dramatically if financial regulators took a more active role, he said. “If the SEC, CFTC or the proper regulatory body looked at certain cloud environments and was able to certify that they were secure enough for customer data, then we would see a whole new industry within the cloud computing world of financial services-targeted firms, that would be registered with regulators and clients could be assured that their data was secure,” says McPartland. “We think this could be a huge improvement for the industry.”
“From a sell side perspective, it means that those guys–major data center providers such as Equinix and Savvis– should look to expand current client footprints as the sell side looks to reduce server scatter (when firms use space in a variety of geographic locations),” McPartland explained to Securities Idustry News. “So if a major dealer is using three separate data center providers, they’ll look to use only one. Whoever wins that deal will see spending by that dealer grow significantly as they consolidate under one roof.”
So, the sell side will continue to invest in infrastructure to grow capacity as the market demand for trading U.S. equities grows, but McPartland predicts it will look for smarter ways to do this and that growth will be smaller in 2010 than in the past.
McPartland argues that because a completely virtualised and highly utilised infrastructure is still years away for sell-side equities technology, a large gap exists between what is currently possible and actually done. In that same vein, cloud computing will be a part of equity IT strategies in the future but security concerns leave it more interesting than useful.
In conclusion, he says: “Operating data centres, servers and networks with the utmost efficiency will not be a trend but the only way to do business. In 2010, the winning brokers will be those that not only have the latest and greatest technology, but can manage it most efficiently.”
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The study focuses on US equity infrastructures and is based on conversations with CIOs, CTOs, and heads of technology at 24 sell side firms. Bulge bracket firms accounted for one quarter of total participants, however this equates to two thirds of all bulge bracket firms. The discussions covered usage and trends related to data centers, servers, CPUs, operating systems, networking, hardware acceleration, virtualization, cloud computing and IT organizational structure. Also discussed were top infrastructure projects, expansion plans for 2010, methods for expanding while under budget constraints and decision making factors when purchasing new technology.