Mirror, mirror on the wall, who operates the fastest marketplace of them all?
It may be Nasdaq. It may be BATS. Both claim that mantle. Both announced breakthroughs in processing speeds this year. But then, so did all the major trading venues.
The year, now passing, witnessed trading speed become a major talking point for the top market centers in both the U.S. and Canada. Nasdaq grabbed headlines when it claimed that upgrades to its technology have made it the fastest exchange in the world. BATS Exchange, which had been driving the speed agenda, was quick to react, notifying this reporter that it was prepared to test its technology against Nasdaq’s any day of the week.
Behind the push to reduce system latency is the push to win business from the most active traders in the market: the high-frequency players. These market makers and statistical arbitrage traders base their strategies on speed and are very choosy about where they send their orders.
Direct Edge ECN, for one, got that message loud and clear. It has seen its share of trading volume rise from about 5 percent a year ago to 11 percent today, partly on the back of high-frequency traders. The gains came as most of Direct Edge’s competitors lost share.
They’ve come, said Direct Edge executive Bryan Harkins, because of improvements to speed and processing. "The high-frequency traders have been voting with their order flow because of the enhancements we made," Harkins told the crowd at this year’s Security Traders Association national conference.
Direct Edge intends to "power down" its two ECN platforms and convert to a new trading platform that Harkins said is at least 10 times as fast as its current system.
A new matching engine will be capable of processing 400,000 messages per second, Harkins said. It will be able to reduce its response times to below one millisecond," he said.
For its part, Nasdaq reported in September that upgrades to its INET platform and other parts of the technology that underlie five of its trading venues have given Nasdaq an average latency of less than 250 microseconds. That’s faster than BATS Exchange, which pioneered low-latency trading. BATS announced in June that it executes 80 percent of its orders in under 400 microseconds.
The upshot, said Brian Hyndman, a Nasdaq senior vice president responsible for transaction services, is that latency has gone down, throughput has gone up and order acknowledgement times are more consistent. "We eliminated the outliers," Hyndman said. "That’s very important to a lot of Nasdaq’s customers."
On the same day Nasdaq made its announcement, Chi-X Canada ATS, owned by Instinet, claimed it was the fastest market center in Canada.
The ECN said it boosted its capacity to be able to handle 175,000 messages per second, a 500 percent increase from its previous capacity of 30,000 messages per second. Chi-X Canada has benchmarked its average response time for marketable immediate-or-cancel orders at about 350 microseconds. That’s at least 10 times faster than any other major Canadian market center, it contends. Previously, Chi-X Canada’s internal latency was pegged at 890 milliseconds.
"We need to keep up with our customers," Tal Cohen, Chi-X Canada’s chief executive, told Traders Magazine. "The drive for latency is not slowing down any time soon."
Both BATS and NYSE Arca also announced latency reductions this summer. BATS cut its average latency, or the amount of time it takes to execute an order, by 50 microseconds to 395 microseconds. It also announced that it can now convert an order into a quote for transmission on its market data feed in 631 microseconds.
NYSE Arca, a unit of NYSE Euronext, announced that its order acknowledgement time, the time it takes to confirm receipt of an order, had been reduced to under one millisecond for Tape A and Tape B names, and under 650 microseconds for Tape C issues.
Even the New York Stock Exchange is getting on the bandwagon. In July it scrapped its 33-year-old SuperDOT platform order-delivery and processing system, as well as an internal routing system called Post Support System. In its place, the NYSE installed its Super Display Book system, technology based on NYSE Arca’s trading engine.
The move cut the time it takes to execute an order from 105 milliseconds to five milliseconds, according to the exchange. That’s down from 350 milliseconds in 2007. NYSE customers now get order and cancellation acknowledgements in two milliseconds, the NYSE added.
All things are relative, of course, and speed is no different. Market centers are forever engaged in a ferocious battle with each other to win market share. In their desire to impress traders, they will often put out overly rosy latency numbers, critics charge. "There is a lot of confusion, and, in some cases, obfuscation about the actual latency at the venues," said Donal Byrne, chief executive of Corvil, a Dublin, Ireland-based maker of latency monitoring and management tools. "It is impossible to make apples-to-apples comparisons."
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