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Accelerating wall-street-2010-next-stop-nanoseconds 8049450

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J u n e 2 0 1 0$ 4 9 9 . 0 0A n a l y t i c s . I n f o r m a t i o n W e e k . c o mA n a l y t i c s R e p o r tPOWERED BYAccelerating Wall Street 2010N e x t S t o p : N a n o s e c o n d sWith data latency on its way to being measured innanoseconds, message volume exploding, and intensifieddemand for innovative trading products, Wall Streetorganizations are turning to the fastest and newest tech-nologies to stay ahead. This special Wall Street &Technology digital report examines some of the latestinnovations in the low-latency arms race, including hard-ware acceleration, complex event processing and coloca-tion, and provides exclusive insights from WS&TsAccelerating Wall Street 2010 conference.Report ID: S1330610A c c e l e r a t i n g W a l l S t r e e t 2 0 1 0 A n a l y t i c s . I n f o r m a t i o n We e k . c o mA n a l y t i c s R e p o r tS 3 The Low-Latency Imperative:How Fast Is Fast Enough?T 4 Figure 1: 5 Factors Influencing Latency8What’s All the Fuss About?11How Low Can You Go?N 14 Silicon:The Next Tool for Low Latency16What’s the Next Low-Latency Tool? Try PeopleE 18 Data Center Costs, Oversight Challenge the Sell Side20Firms Still Not Analyzing Unstructured Real-Time NewsFTONELBOATC2June 2010© 2010 Wall Street & Technology/InformationWeek Analytics, Reproduction ProhibitedA c c e l e r a t i n g W a l l S t r e e t 2 0 1 0 A n a l y t i c s . I n f o r m a t i o n We e k . c o mA n a l y t i c s R e p o r tThe Low-Latency Imperative: How Fast Is Fast Enough?Conventional wisdom may assert that everyone on Wall Street wants to be as fast aspossible. But latency is a matter of perspective, influenced by trading style, instrumentclass and even the tools used to measure it.By Daniel SafarikAsk any trader, vendor or marketplace operator in the global securities market, “How fast doyou need to be in order to be successful?” and the answer will most likely be, “It depends.”Technological advances move at such a pace, and firms rely on such varying strategies, that thelevel of latency—defined as the time it takes for an order to travel to a marketplace and to beexecuted or canceled, and then for a confirmation of that activity to return to its source—acceptable to any given party will vary, though none of the intervals are perceptible to thehuman eye. For the past few years, hardware and software providers have been able to decreaselatency exponentially each year. We have gone from talking about milliseconds to microsecondsand even nanoseconds.Although it may seem to be accepted wisdom that everyone wants to be “as fast as possible,”that’s not necessarily true. And as the market saw graphically and frighteningly on May 6,speed, by itself, is not the ultimate goal. In fact, lacking business rules that acknowledge thefull implications of instantaneous transactions, speed is dangerous. According to Adam Honore, senior analyst at Aite Group, the level of latency consideredacceptable by market participants depends largely on several factors, including:• Trading style. If you have an aggressive trading style that relies on opportunistic pricing dif-ferentials, you need to be the fastest. If you are a long-only quant fund, speed is not as critical.• Instrument class. Generally speaking, equities are the fastest-moving markets, with futures,foreign exchange and fixed income lagging behind.• Venue characteristics. The capabilities offered by each exchange and marketplace will3June 2010© 2010 Wall Street & Technology/InformationWeek Analytics, Reproduction ProhibitedA c c e l e r a t i n g W a l l S t r e e t 2 0 1 0 A n a l y t i c s . I n f o r m a t i o n We e k . c o mA n a l y t i c s R e p o r tvary—dark pools, intraday matching, live limit-order books and so on—as will the level oftraffic they attract throughout the course of the day.• Instrument characteristics. Trading shares of highly liquid Microsoft would have a vastlylower latency requirement than an illiquid OTC Bulletin Board stock, for example.There are ranges of latencies that can be instructive, according to Steve Rubinow, CIO at NYSEEuronext. But it is important to remember that these numbers vary greatly with market condi-tions and that the methodologies of measuring latency are not consistent, he adds, stressingthat if latencies are quoted out of context with market traffic, they are essentially useless. “Everyone publishes numbers that were generated under the best possible conditions andhopes nobody asks the details, because those details would reveal whether it was comparableor not,” Rubinow says. “Having said all that, to be competitive today, you have to be in the fewhundred microseconds of turnaround time.”When it embarked on its Universal Trading Platform (UTP) program last year, NYSE Euronextstated that it was aiming for 150 microseconds to 400 microseconds of latency per round tripfor its European Cash Markets. By comparison, on May 14 NYSE rival Nasdaq OMX publishedan overall average result of 157 microseconds, while noting that 99.9 percent of orders werecompleted within 757 microseconds, at a rate of 194,205 orders per second.To illustrate how quickly the standard moves, the top class was in the tens of milliseconds aFigure 1year ago, according to Donal Byrne,CEO and founder of Corvil, a Dublin,Ireland-based vendor of latency meas-5 Factors Influencing Latencyurement technology. [Ed. Note: 1 mil-Trade logic—the code that runs matching engineslisecond = 1,000 microseconds.]and algorithmsSpeed of calculation hardwareAbout 40 percent of the U.S. equitiesSpeed of telecom switch hardwaremarket volume is comprised of marketQuality and number of connectionsmakers that are trying to match theDistance between network nodeslatency of the marketplace they areSource: Kevin McPartland, Analyst, TABB Groupusing, notes Shawn Melamed, founder,4June 2010© 2010 Wall Street & Technology/InformationWeek Analytics, Reproduction ProhibitedA c c e l e r a t i n g W a l l S t r e e t 2 0 1 0 A n a l y t i c s . I n f o r m a t i o n We e k . c o mA n a l y t i c s R e p o r tpresident and CEO of New York-based Correlix, which also sells latency monitoring devices toexchanges, including Nasdaq OMX. That group needs the fastest response times, he says.On the other hand, “For someone who is doing index arbitrage, the average latency they wouldrequire is really situational,” Melamed comments. “There is no fixed number there. [Becausethey need to get information from several marketplaces], they will be tolerant to higher latency,so that you can at least get full price information before you make your decision.”Knowing Latency Is Half the BattleThe emergence of companies such as Corvil and Correlix, which did not exist five years ago,illustrates an important consideration about latency: Often, knowing the level of latency at agiven marketplace is more important than the number itself. Traders—and the algorithms theydeploy—now can make decisions about execution venues using latency data, just as theywould use fill rate and price quality as decision factors.“To the extent that we have multiple paths to get to avenue, we can effectively normalize out the native latencywithin that venue.”—Jason Lenzo, Russell InvestmentsAt Tacoma, Wash.-based Russell Investments, which operates the Russell 2000 small-cap index,traders rely on this operational transparency to make decisions, bringing the latency data abouteach execution venue and market-data source right onto trader desktops, relates Jason Lenzo,head of equity and fixed income. “To the extent that we have multiple paths to get to a venue,we can effectively normalize out the native latency within that venue,” he says. “We can thenoptimize the speed to market across specific optical and telephony links in those networks.”When evaluating latency, it’s vital to consider all the contributing factors, including the tradelogic (the code that runs matching engines and algorithms), the speed of calculation hard-ware, the speed of telecom switch hardware, the quality and number of connections, and thedistance between network nodes, according to Kevin McPartland, analyst at TABB Group. The5June 2010© 2010 Wall Street & Technology/InformationWeek Analytics, Reproduction ProhibitedA c c e l e r a t i n g W a l l S t r e e t 2 0 1 0 A n a l y t i c s . I n f o r m a t i o n We e k . c o mA n a l y t i c s R e p o r tindustry as a whole is rapidly approaching the point where, “The code is so tight, hardwareimprovements are the main thing that will increase the overall efficiency of the operation,”McPartland says.Enter, vendors such as Blade Network Technologies (telecom hardware), Equinix (colocationhosting) and Nvidia (gaming graphics cards re-tasked to calculate derivatives). Each of thesetechnology providers is feverishly trying to reduce the latency of its layer in the stack.Santa Clara, Calif.-based Blade makes a 10-GB switch that connects feed handlers, algorithmboxes and matching engines at colocation centers, where firms have increasingly found it use-ful to situate their machines across the hallway from their counterparts, even if their offices andtrading staff are on opposite sides of the globe. By merging routers with switches, Blade has eliminated a layer that previously added preciousmicroseconds to a round trip, explains David Iles, Blade Network Technologies’ director ofproduct management. “We are providing sub-700 nanoseconds of latency, port to port,” Iles asserts. “We are alsodeterministic. You don’t want stale market data getting to devices. It has to take the same timeto get from Port 1 to Port 24 as it does from Port 1 to Port 2.”Technologies such as this tend to live side by side in colocation centers run by companies suchas Foster City, Calif.-based Equinix. Here, the issue is bandwidth and energy efficiency, both ofwhich are major cost contributors in the low-latency race. Trading firms are increasingly optingfor colocation rather than running expensive, high-throughput dedicated fiber from theiroffices to the marketplace.“We have a customer in Greenwich, Conn.,” relates John Knuff, general manager, globalfinancial markets, at Equinix. “They were spending about $20,000 a month to get trades toNew York. They moved a couple of cabinets in with us. It’s $3,000 to $5,000 a month for acabinet, and $200 to $300 for the cross-connects. They essentially offset the cost of theircolocation by getting rid of the network costs back to their office, which had no economic orcompetitive advantage.”6June 2010© 2010 Wall Street & Technology/InformationWeek Analytics, Reproduction ProhibitedA c c e l e r a t i n g W a l l S t r e e t 2 0 1 0 A n a l y t i c s . I n f o r m a t i o n We e k . c o mA n a l y t i c s R e p o r tThink Fast(er)An equally important question pervades the minds of traders: Once you’re satisfied with theturnaround time to your market, how do you maximize the value of time between transac-tions? That question interested Tobias Preis, managing director of Artemis Capital AssetManagement of Holzheim, Germany, to such a degree that he became one of the first customersof Nvidia’s graphical processing unit (GPU), a processor that has 480 cores, compared to thetypical four- to 12-core CPU.The GPU originally was developed to render high-resolution details for computer games. Preis,also a computational physicist, uses the GPU to calculate time series for the DAX-index futuresalgorithms he deploys on Eurex.“The increases in speed represented by the GPU are many times faster than the reductions inlatency by the exchanges,” according to Preis, who says he gets by on 100 milliseconds to 150milliseconds of average latency to Eurex. “We can now perform parallel-computing calculationsthat used to take one minute in one second.”Where will low latency be ina year? Many market partici-“I know we will break thepants say they won’t be sur-100-microsecond barrier.”prised if the discussion isabout nanoseconds in a year.—Steve Rubinow, NYSE Euronext“I know we will break the100 microsecond barrier,”NYSE’s Rubinow says. Beyondthat, it becomes enormously expensive to add each zero behind the decimal point, he notes.Despite the excitement over low latency and the extreme competitiveness of financial firms andthe vendors that serve them, it’s important to keep a clear head about the need for speed, addsAdam Afshar, president of program trading at Atlanta-based Hyde Park Global Investments,which is 100 percent automated and has no manual traders.“High frequency is just a method for implementing a strategy—it is not the strategy itself,”says Afshar. He notes approvingly that the decreasing cost of technology means that a $107June 2010© 2010 Wall Street & Technology/InformationWeek Analytics, Reproduction ProhibitedA c c e l e r a t i n g W a l l S t r e e t 2 0 1 0 A n a l y t i c s . I n f o r m a t i o n We e k . c o mA n a l y t i c s R e p o r tmillion investment in technology allows a smaller firm to rival the speed of the biggest bankson Wall Street. But the key to success in the marketplace, according to Afshar, is adaptability, and that stillcomes from human ingenuity. For Afshar, going forward, the more interesting question is not“How fast can you hit the market?” but “What do you do with that speed?”“The bottom line,” he says, “is your adaptability to the nonlinearity of markets.”What’s All the Fuss About?Despite the controversy surrounding high-frequency trading, the trading style is beneficial to long-term investors and to the market at large, argues Arzhang Kamarei,Managing Partner, Tradeworx.By Melanie RodierHigh-frequency trading remains mired in controversy, with regulators fearing that unscrupu-lous traders are taking advantage of individual investors. But what critics don’t realize is thathigh-frequency trading actually is beneficial to long-term investors and to the market at large,according to Arzhang Kamarei, managing partner at Tradeworx, a quantitative investment man-agement firm with expertise in high-frequency market strategy.“High-frequency trading creates opportunities for long-term investors by providing more liq-uidity,” asserted Kamarei, who presented the keynote address at Wall Street & Technology’srecent Accelerating Wall Street conference. The extra liquidity that high-frequency trading provides, he explained, narrows spreads forlong-term investors, ultimately helping them get better prices. “During the turbulent fourth quarter of 2008, it was high-frequency traders that stepped upand provided liquidity,” Kamarei argued. “High-frequency trading provides U.S. markets with8June 2010© 2010 Wall Street & Technology/InformationWeek Analytics, Reproduction ProhibitedA c c e l e r a t i n g W a l l S t r e e t 2 0 1 0 A n a l y t i c s . I n f o r m a t i o n We e k . c o mA n a l y t i c s R e p o r tbetter prices and deeper liquidity than markets in any other country or region. It helps smooththe course of long-term investors.”High-frequency trading is estimated to generate as much as two-thirds of U.S. equities dailytrading volume. But as it grows in popularity, it also has attracted the scrutiny of regulators,eager to appease uneasy investors after the financial crisis.Addressing the controversy surrounding high-frequency trading strategies, Kamarei pointed outthat high-frequency trading isn’t always profitable. “High-frequency traders make moneythrough spread capture,” he noted. “They optimize adverse selection to match rebates. Morevolatility increases spreads.”In April, the SEC unanimously approved a new proposal that would track transactions by high-frequency trading firms to improve oversight of their activity. Under the new rule, firms will be“High-frequency trading provides U.S. markets withbetter prices and deeper liquidity than markets in anyother country or region.”—Arzhang Kamarei,Tradeworxgiven unique identifiers and will be required to report next-day transaction data when request-ed by regulators. This will allow authorities to keep closer tabs on traders that aren’t registeredmarket makers or broker-dealers without having to follow lengthy audit trails from exchangeswhen they scrutinize a particular firm or trade.Next-day access to trading data also could assist investigators in finding manipulative, abusiveor otherwise illegal trading activity. The SEC estimates that the rule will apply to the largest400 market participants—firms or individuals whose transactions in exchange-listed securitiesequal or exceed 2 million shares or $20 million during any calendar day, or 20 million sharesor $200 million during any calendar month.Regulators also have been scrutinizing flash orders, which let traders briefly expose theirorders to others in the market, and “naked access,” which allows firms to buy and sell9June 2010© 2010 Wall Street & Technology/InformationWeek Analytics, Reproduction ProhibitedA c c e l e r a t i n g W a l l S t r e e t 2 0 1 0 A n a l y t i c s . I n f o r m a t i o n We e k . c o mA n a l y t i c s R e p o r tstocks on exchanges using a broker’s computer code without regulators knowing who ismaking the trades. Also under fire from regulators is the strategy of colocating at or near exchange data cen-ters, which authorities say gives high-frequency trading firms an unfair advantage overslower traders. Spurring CompetitionKamarei told attendees, however, that colocation isn’t unfair to long-term investors, as it helpsto create competition among high-frequency traders. Further, both high-frequency traders andlong-term investors can colocate, he noted.Meanwhile, Kamarei argued that any attempts to change the market structure will fail toreverse technology advances. Instead, costs will come down for less advanced users, which inturn will drive further adoption of high-frequency trading technology, he said.As for the future of high-speed trading, Kamarei suggested that sell-side broker-dealers will bethe main force for spreading the use of high-frequency trading to all market participants. He predicted that high-frequency trading volumes will stay at their current levels on a volatili-ty-adjusted basis, but many high-frequency trading desks will go out of business, even as high-frequency technology grows more ubiquitous.“New high-frequency trading firms will process more dimensional and complex data,”Kamarei said. Meanwhile, he noted, “The fascination with colocation will decrease as the technologybecomes commonplace.”10June 2010© 2010 Wall Street & Technology/InformationWeek Analytics, Reproduction Prohibited

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