Supercharged Routing Firms Court Rapid Traders

Getting a Speed Edge with Wider Bandwidths

February 2007

Black box traders want-and need-greater bandwidth to execute their high-volume and quant strategies. Traditional voice and Internet protocol telecommunication lines just can't handle the sheer volume they churn into the marketplace. To execute their statistical arbitrage and pairs strategies, these traders need information highways with unlimited space and autobahn-style speed limits if market data, trades, and even clearing and settlement are going to move at lightning speed. As a result, these information aqueducts-or ultra low-latency communications networks-are red hot.

A select group of traders is betting on them, and the stakes are large. High-volume proprietary trading through algorithms and black boxes demands that latency drop into the realm of milliseconds. High-volume traders fear that without these fast networks, they will miss out on fills.

But help is on the way. Some vendors are looking to fill this niche and hoping to garner the business from these black box and quantitative traders.

Brennan Carley, chief strategy officer and global head of product operations for NYFIX, a New York-based provider of front-to-back office trading technology, explains the reason behind the demand for ultra low-latency networks: It's just not the sheer number of trades that require the expanded bandwidth, Carley says. The demand is also driven by the high number of cancellations.

"As markets become both more electronic and more fragmented, many traders place orders in multiple exchanges or ECNs, and then need to cancel (or change the size) of those orders when they get filled (or partially filled) somewhere else," Carley says.

Traffic Jam

These so-called cancellation rates are creating more data traffic-hence, the greater demand for ultra-low latency. Looking forward, the onset of Regulation NMS in the U.S. and Markets in Financial Instruments Directive (MiFID) in Europe may slow down routing and increase latency even further, all because more data have to pass through the pipes.

The move to quoting options in pennies in the U.S. is also going to have an effect on how many messages are being delivered at any one point in time. Larry Tabb, founder and CEO of the consultancy TABB Group, says the introduction of penny options at the end of last month will begin to push quote traffic up from a current peak of around 190,000 messages per second to more than 500,000 messages per second in the options world.

"This is a huge issue," Tabb says, and although a high-speed network is part of the answer, he believes many high-volume trading firms will still need to co-locate their black boxes.

Co-location is a strategy in which a trading firm places its black box or algorithmic trading solution and servers in an exchange or ECN's data center (or very close to it). This reduces the latency associated with long-distance telecommunications transmission to nearly zero.

New York to Chicago

Ultra low-latency networks are also designed to diminish transmission delays, but are limited by necessity to one geographical area (the typical latency between Chicago and New York is 35 milliseconds each way.).

Tom Chippas, head of Deutsche Bank's electronic equity trading platform, dubbed Autobahn Equity, says there is a need for this kind of solution because firms under Reg NMS won't be able to put a box at one market center and solve all of their latency problems. "Historically co-location was the key to reducing latency between the customer and the market center," says Chippas, who's in charge of the product in North America. "Common thinking today is that you will have to have low-latency access to all of them."

To address this, financial services connectivity provider BT Radianz is building a super-large pipe' connectivity network in the New York City metropolitan area. Due to be launched this month, it will offer a super-fast, managed Ethernet local area network that runs directly from large banks and hedge funds to the exchanges where they trade.

This solution, combined with BT Radianz' existing Proximity managed hosting and co-location product, supports those of its customers' trading strategies that require extremely low latency, says Mark Akass, the firm's CTO.