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October 14, 2009

Cover Story: The Race to Zero

Industry in drive to reduce latency of trading infrastructure

By Peter Chapman

The blink of an eye is an eternity.

At least it is these days on Wall Street. It takes 400 milliseconds, or four-tenths of a second, to blink--and that's far too long for an increasing number of traders. Black box traders, direct market access traders and algorithmic traders are all in a race to beat the other guy. And the best way to do that is to get their hands on the market data first and their orders to the exchanges first. They expect to do it in microseconds or, at least, single-digit milliseconds.

To accommodate today's demand for speed and the accompanying surge in message traffic, market centers and brokerages are spending millions to upgrade their infrastructures. Tabb Group last year estimated the industry was spending about $100 million a year on low-latency technology. It predicted that figure would reach $170 million by 2010. New hardware and software are replacing older technology. Co-location facilities are sprouting up. Consolidated feeds are being snubbed for direct feeds. Code is being rewritten.

At the same time, a slew of vendors and service providers have mushroomed in the past five years offering high-speed software and connectivity to traders and venues alike. Firms like Options IT, FTEN and Lime Brokerage command a significant share of the exchange access business. Messaging middleware vendors such as 29West are replacing incumbents such as TIBCO. Blazingly fast FIX engines from the likes of Rapid Addition are pushing aside traditional boxes. The upshot is a wholesale revamping of the market's infrastructure.

Michael Lynch, B of A Merrill Lynch

"The Street is in a race to zero latency," Michael Lynch, Bank of America Merrill Lynch's head of Americas equity execution services, told Traders Magazine. "It's very important. There is no question about it."

The drive to reduce communication delays on Wall Street is at least as old as the telegraph, but the push to microseconds--one equals a millionth of a second--is the latest chapter of the story. For the past several years, speed has been measured in milliseconds, or thousandths of a second. But with improvements in hardware and software--notably Intel's Nehalem chip, multi-core CPUs, InfiniBand linkages, Microsoft's .NET framework, bigger network pipes and specialty messaging software--faster speeds have become possible.

Behind the drive to reduce latency are two groups: direct market access traders, such as statistical arbitrage shops, and the algorithm-wielding electronic trading departments of the major brokerages. The former, often of the high-frequency variety, are considered the more obsessive of the two, but the electronic trading desks are equally vigilant.

"DMA clients tend to be more focused on their latency," Merrill's Lynch said. "Our algorithmic trading and private clients tend not to be as focused about getting the lowest latency, but we are focused in getting it for them."


Speed of Light