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.”
Read the full story at WSJ.com
There is a lot of buzz around cloud computing, but its use in financial services is still negligible. This piece examines how State Street is using internal cloud technology to create cost efficiencies.
Creating cost-savings to put into other areas of development is why boards have come around to cloud. Yet, as Kevin McPartland, a senior analyst at consultancy Tabb Group, notes, it is not the technology that institutions fear—it is how that technology fits into the business scheme.
“Cloud technology has been around for a long time, but for financial services, people still want to really vet not the technology, but the approach and process to see if it really works and for what types of applications and what types of business functions,” McPartland says.
Read the full story at waterstechnology.com
We at TABB Group (and me more specifically) have written quite a bit about infrastructure in the past 6 months. This isn’t just because I find it all fasinating (which I do) but because that is where some of the biggest change is happening in the low latency trading world. eFinancialCareers took our research to mean there is big opportunity for infrastructure specialists, and I tend to agree:
“Unfortunately, there is no perfect architecture, but by understanding the relationships between latency, bandwidth, scalability and cost, the latest and greatest networking technology can underpin an infrastructure that delivers the highest possible ROI. That technology exists today; but since money never sleeps, neither can the men and women designing the networks of tomorrow,” says Kevin McPartland, Tabb senior analyst and author of the report.
Read the full article at eFinancialCareers.com
Talk of the importance of moving data between NY and Chicago has heat up considerably in the past two years. TABB Group published a piece on this “Long Distance Latency” issue back in June. Here II tackles the topic:
“Ten years ago firms would rely on telecom providers to advise them,” he says. Now the same firms are hiring away those experts to get the jump on the competition and also ensure it won’t figure out their strategy. Telecom experts are paid well for their closed-mouth discretion, sources tell us. Also fueling the need for secrecy is that although “there’s tons of connectivity,” as McPartland says, there is “very little in the fastest” modes.
Read the full article at Institutional Investor.
This is the press release for my latest research report on data center networking. You can find a more detailed executive summary here. Now to the PR:
Despite the cost and complexity created by meeting high bandwidth, low latency and global reach requirements sought by capital markets firms trading across asset classes globally, the industry’s current data center-centric server-to-server approach has actually simplified underlying networks.
According to new research by TABB Group, less equipment, fewer hops and robust management tools are allowing networks to actually flatten as they expand. Once implemented, explains Kevin McPartland, TABB senior analyst and author of “Data Center Networking: Redefining the Total Area Network,” servers and networks can run beautifully – “if people don’t get in the way.”
This trend toward simplification has expanded to several areas of the infrastructure where TABB forecasts that globally capital markets businesses will spend $13.4 billion in 2010 on their infrastructures across equities, fixed income, FX, derivatives, commodities and other capital markets businesses, with 41% of that investment occurring in North America alone for data servers, servers, storage and networking.
“Switches are handling much of the work once left to routers,” McPartland says. “As a result, Storage Area Networks (SANs) are quickly becoming an integrated part of Local Area Networks (LANs) and lines between LANs and Wide Area Networks (WANs) are blurring. This is giving way to what TABB calls the redefined Total Area Network (TAN).” Using the Total Area Network, he explains, network equipment and protocols will be more standardized regardless of their function, and moving data between computers will be seamless despite physical location or the underlying data type. “Those who have the money and infrastructure will see serious efficiencies that will guarantee the return on investment.”
With the server-to server model, virtualization, top-of-rack switches, 10-Gigabit Ethernet (10GE), kernel bypass and other new technological approaches in place and evolving quickly, McPartland believes that although “tomorrow’s flattened network will be simpler to manage, knowing what to deploy, how to deploy it and what to think about based on business needs will be ongoing concerns.”
He gives three examples. According to TABB estimates, in 2010 the network of every major market participant in the US will consume at least 125 terabytes of market data alone with the expectation that no microsecond is wasted and no packet is lost. Second, reducing latency within an infrastructure is centered on removing hops. In a legacy co-location environment, an order message would require 10 hops to move from the client’s order-generating server to the server running the matching engine. A flattening of the network driven by new, faster, more intelligent switches requiring fewer routers can drop the hop count to six, a 40% decrease few trading firms’ CIOs can overlook. Third, assuming a network with 100 switches, which equates to 2,400 ports (physical network connections), a full upgrade to a 10GE environment for a single firm, would cost approximately $1.25 million at a cost of $500 per port, excluding network interface cards and personnel costs for installation.
“Unfortunately, there is no perfect architecture, but by understanding the relationships between latency, bandwidth, scalability and cost,” McPartland says, “the latest and greatest networking technology can underpin an infrastructure that delivers the highest possible ROI. That technology exists today; but since money never sleeps, neither can the men and women designing the networks of tomorrow.”
The 21-page report with seven exhibits is based on conversations with trading firms, network-equipment providers, telecommunications firms and high-speed trading solution providers. It provides a detailed description of how financial services firms are utilizing cutting-edge data center networking equipment and paradigms and discusses tradeoffs between low latency and high scalability and the move to 10GE and beyond.
This story gives an overview of the presentation I gave at the Accelerating Wall Street conference in May 2010. Much of the data was based off our our Sell Side Technology study from December 2009.
“Clearly the sell side loves its data centers,” McPartland told the audience. “There’s a lot of horsepower that has to sit behind these equity businesses. … It’s getting more and more complex to manage the infrastructure.”
And more costly. Equity firms spent $1.8 billion last year on data centers; half of that total came from sell-side shops, according to the TABB Group report, which predicts that the sell side’s use of data center space will increase slightly in 2010.
Read the full story at wallstreetandtech.com
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.
From the Sunday edition of The Record, a interesting article focusing on the move of “Wall Street” to New Jersey. The vast majority of US equity order matching actually goes on somewhere in NJ, regardless of where the exchange itself is officially incorporated. If it wasn’t for the relatively small bit of trading that happens on the NYSE floor on Broad Street in Manhattan, it would be safe to say all US equity trading happens in NJ:
“NYSE is looking to move the epicenter of U.S. capital markets from Broad Street to Mahwah,” said Kevin McPartland, a senior analyst with the Tabb Group, a New York consulting and researching firm. McPartland estimates 8.5 billion shares are traded on U.S. equity markets every day.
Full article at NorthJersey.com
Reducing latency is critical for those in the ultra-low latency high frequency trading game; but the number of firms that fit that category is
relatively small. DirectEdge has a new offering that it hopes will appeal to the entire spectrum of latency sensitivity.
“It’s a little bit of a misconception that high-frequency firms will pay anything to save latency,” said Kevin McPartland, senior analyst at TABB Group, a financial markets research firm. “They’re still running businesses and want to save costs.”
“There’s a lot of smaller broker-dealers and hedge funds that until now just kept their servers in a closet in their office,” McPartland said. “They’re realizing that’s not a good long term strategy and need to get those servers in a data center.”
Read the full story at MarketWatch.com
