Great feature piece originally printed in the Sunday Business section of the times examining both the drivers and requirements for high speed trading. The article cites TABB Group’s estimate for high frequency trading in the US equity market (56%) and includes a few of my comments.
According to Kevin McPartland of the TABB Group, high-frequency traders now account for 56 percent of total stock market trading. A measure of their importance is that rather than charging them commissions, some exchanges now even pay high-frequency traders to bring orders to their machines.
High-frequency traders are “the reason for the massive infrastructure,” Mr. McPartland says. “Everyone realizes you have to attract the high-speed traders.”
First it was shortening the time it takes data to get between New York and Chicago, now its New York and London. The big difference here is that the NY to London route is 3 times longer and has an ocean in the middle – no small feet of engineering and no small price tag.
Such links help inform trading programs that need to consider market data coming out of two separate locations, according to Kevin McPartland, senior analyst with market research firm Tabb Group.
“Say there’s a tick up in the price of a future, and all the stocks in a certain basket will tick up a fraction of a second later,” McPartland said. “If you can see two milliseconds faster where the futures moved in Chicago and subsequently make the stock trade in New York, you can more quickly capture the spread.”
The Flash Crash may very well be talked about more these days than the credit crisis. Not only is it an area of interest for regulators and traders but technologists as well. IET takes a look at the issue from a technology perspective in this article.
‘It seems to be more of a market structure issue,’ says Tabb Group’s Kevin McPartland. He points out that the collapse was fast, but the recovery from the situation where valuable shares were offered for a penny each came equally quickly.
‘Did it happen quickly because of the technology? Of course. But the rebound was also fast. Algorithms were able to spot what was going on, and to see a buying opportunity. In previous years, [in a situation like 6 May] the markets would have had to close for the rest of the day.’
I created this video while I was in Hong Kong last week for Trading Architecture Asia. The audio isn’t that great unfortunately, so we’ve transcribed the commentary which you see below (its also on TabbFORUM).
…and the transcription:
This week I’m in Hong Kong for Trading Architecture Asia 2010.
If it’s a sign, almost every session in the morning has been standing room only, so there’s certainly a big focus from exchanges, buyside firms, sellside firms and technology providers all across Asia on low latency trading and low latency infrastructure.
One of the main focuses has been on the Singapore exchange. They’re building out a tremendous new co-lo facility and co-lo offering. They’re also in the midst of creating a matching engine that’s supposed to be one of the fastest in the world – down to 90 microseconds – to match an order. That rivals most of the exchanges in the U.S. and Europe.
Japan also continues to be a focus area in terms of low latency trading. The Tokyo Stock Exchange’s new Arrowhead trading platform has tightened spreads and driven up volumes – and has been quite successful. One interesting point: before Arrowhead, it would take 300 milliseconds to execute an order at the Tokyo stock exchange. If you were a trader in Tokyo, it was actually faster to send your orders over to New York through fiber optics and execute at a New York exchange than it was to execute locally in Tokyo because the matching engine was so slow. So clearly this development, this new matching engine at the TSE will help them considerably.
There’s also a lot of fragmentation talk going on in Tokyo and in Asia as a whole. Chi-X, among others is looking to create not only new liquidity pools in Tokyo but pan-Asian liquidity pools. So we’ll have to see. That’s early stages but certainly causing the incumbent exchanges to pay attention and increase their strategies.
Lastly there’s been quite a bit of discussion around the markets in India. Cleary this is a big, big economy with huge potential. Both the Bombay Stock Exchange and the National Stock Exchange of India were here at the conference talking about their offerings and their approaches.
The National Stock Exchange of India is the market leader right now but the BSE is coming up close and trying to take market share back from them. There was just an announcement from the regulators in India that smart order routing is allowed and now acceptable, so that’s a huge step forward. Algo trading will grow and both the NSE and BSE will allow colocation as well, so there’s considerable competition there.
One thing that I found interesting, one of the other rules that was just passed India is now retail investors are allowed to trade over mobile phones. So on one hand we have colocation and ultrafast trading by institutional traders in India and on the other hand we’ve got retail investors in remote villages trading on mobile handsets. They also mentioned there’s quite a bit of trading that goes on via satellite. Satellite is at the opposite end of the latency spectrum where we’re talking somewhere between 800 and 900 milliseconds to execute an order via satellite.
The week in Hong Kong has been quite eye opening. Clearly there’s a lot of opportunity here. The East has been able to learn from the process that’s gone on over the past decade both in the U.S. and in Europe. It’s likely the 10 years or more it took for the U.S. to get to where it is will be shrunk considerably in the Asian markets. So within two or three years, the amount of low latency trading happening in the region across listed cash equities, options and futures and other derivative products is definitely set to grow.
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 email@example.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.
Following a panel I moderated at Telx’s CBX event I spoke with a reporter from NPR about latency, co-location, high frequency trading and everything in between. The one sound bite of me they used in the podcast is about 3 minutes in where I refer to a move from milliseconds to microseconds in only a few years and the claims of one person on the panel that their customer said they could make an extra million dollars a day by saving a microsecond. Whether that’s completely accurate or not is open to debate, but here you go:
Hardware acceleration has become a hotter and hotter topic in financial services as latencies are now measured in microseconds and codeoptimization is starting to hit its limits for the upper echelon of low latency traders. I authored a TABB Group report on this subject in the summer of 2009, and recently spoke with Hanweck Associates about their use of GPUs to speed up options analytics. The fact that the Wall Street Journal is covering this also talks to the level of acceptance and adoption that hardware acceleration is seeing.
“When you’re talking about trading where microseconds make a difference, the extra hops within the server can make a difference,” said Kevin McPartland, a senior analyst with research firm Tabb Group.
Not only does everyone on Wall Street need faster servers, but they need them to also take up less space and less power. No small order. This story discusses where “exchange in a box” is feasible.
The amount of market data is growing at the rate of 100 percent … every year, notes Kevin McPartland, the well-wired Tabb Group analyst…..“The prop guys aren’t going to want to put their software in someone else’s box,’’ says McPartland. “So that begs the question: does the technology drive the business or does the business drive the technology.”