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.