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February 24, 2006

Traders Battle Latency with: Fast Data Applications

By Nina Mehta

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In November, Merrill Lynch contracted with Wombat Financial Software to provide a market data infrastructure for the broker-dealer's next-generation electronic trading platform. The initiative underscores a trend underway at major trading houses: Grappling with the large quantities of real-time market data demanded by algorithmic and automated trading systems and other applications. Electronic trading groups at broker-dealers, proprietary trading firms, hedge funds and other sophisticated players are beefing up their market data infrastructures and eliminating as much latency, or delay, as possible in the quest for speed.

Vendors such as Wombat are pouncing on the opportunities they see. "A firm can't trade without knowing exactly where the market is and the shelf life of market data is steadily dwindling," notes Ken Barnes, Wombat's vice president for business and planning. "Proper market data infrastructure provides that price discovery in a matter of milliseconds, while the data is still indicative of the actual market."

Low latency is Wombat's calling card. That's because slow market data-data that's just a few hundred milliseconds tardier than the next guy's-translates into slow trading decisions. And slow trades are lost opportunities in the world of automated trading. The tick data fueling trading decisions also feeds other applications such as pre-trade analytics and real-time risk management programs.

The primary elements of a market data infrastructure are feed handlers, ticker plants, a messaging

platform that transmits data between systems and integration software.

Electronic trading groups and prop traders increasingly need direct exchange feeds instead of consolidated market data feeds provided by data vendors such as Reuters and Bloomberg. With volumes increasing, they must also continually build, enhance and customize their market data infrastructure to efficiently process and distribute that data internally. Many organizations have multiple infrastructures, data feeds, feed handlers, databases and applications to get the data where it needs to go in the right format-all roped together with middleware and other integration tools.

Quick and Quicker

Everyone wants the same thing: speed. "All data has the same essential characteristic-it's constantly updating and customers want to get it as quickly as they can with the lowest possible overhead and latency," says Mark Mahowald, president of 29West, a provider of high-speed messaging software for financial market data.

Data volumes have multiplied as a result of decimalization and the continuing need to hide orders by breaking them down in size. Volumes are set to rocket even higher as the New York Stock Exchange sees more electronic trading in a Regulation NMS environment. That, in turn, will drive more electronic trading, algorithmic and other high-frequency types of trading, which will further boost volume. New data products from market centers will also push volumes higher.

According to the Financial Information Forum, a centralized information bureau for U.S. equities and options market data run by the Securities Industry Automation Corp., message traffic has surged in recent years. In November the sustained 1-minute peak for market data was 121,000 messages per second, up 116 percent from the 56,000 messages-per-second rate in November 2004. As the peak rate increases, the ceiling for market data traffic must also rise to ensure there's enough headroom for sudden spikes in data.