Need for speed
January 17, 2011
If trading was once defined by a heaving exchange floor packed with dealers waving slips of paper, it is now almost purely driven by the need for speed and the dominance of hi-tech electronic trading platforms.
Deutsche Börse will switch its trading engines to a Frankfurt-based data center owned by Equinix, a global provider of data center services. The move will provide faster trading services to high-frequency traders who use computer-based algorithms to power trading strategies.
"There will be one single hub for all the trading systems of Deutsche Börse and the financial community," said Matthias Kluber, executive vice president and head of networks and infrastructure at Deutsche Börse Systems. "It is a bit like the floor of the old days but it is computers rather than people who are now talking to each other under one roof."
Deutsche Börse's move to Equinix's FR2 International Business Exchange (IBX) site will enable banks and trading firms using computer-based systems to install so-called proximity hosting services directly on to the exchange's trading engines. The move would shave vital milliseconds off the time it takes to buy and sell securities.
Sources at Deutsche Börse said round-trip trading times - which are dependent on factors such as the design and applications latent within IT infrastructures, along with the trading system load – could be as quick as 550 microseconds.
Regulatory 'witch hunt'
High frequency trading firms made headlines across the globe in May last year after a "flash crash" on US markets caused the Dow Jones Industrial Average to plunge nearly 1,000 points in 20 minutes. The incident prompted regulatory and political scrutiny on both sides of the Atlantic.
Kluber said the Frankfurt-based exchange has installed "volatility interruptions" to suspend trading in stocks or derivatives that undergo sharp price gyrations. This would enable traders to "look into each other's eyes" and rethink what the best price is - something Kluber said would prevent inappropriate risk-taking.
Hirander Misra, chief executive officer (CEO) and co-founding director of ALGO Technologies, a firm which provides high-speed trading solutions to banks and exchanges, pointed out that high frequency trading has now become part of the fabric of the financial markets, with traditional banks increasingly relying on the same advanced trading technology used by specialist computer-based trading firms such as Chicago-headquartered GETCO.
"You are seeing a general regulatory and political witch hunt towards high frequency trading while the boundaries of what exhibits high frequency trading or algorithmic trading behavior is becoming far less defined," Misra said.
Trading up to 'the speed of light'
Deutsche Börse's move to the Equinix data center is part of a paradigm shift, with exchanges relocating to the data centers where their member firms' computer trading systems are based, said Artur Fischer, joint-CEO at Börse Berlin Equiduct Trading, a pan-European trading platform.
"Where as before trading decisions were taken at a trader's desk or in a bank's computer center, they are now made inside systems that sit next to the trading engine of an exchange," he said. "The only physical limitation restricting trading speeds is now the speed of light.”
Trading firms - whether in Chicago, New York or London - use underground and undersea fiber optic cables to connect their systems to financial markets across the globe. Once an IT system has been connected to the exchange's data center, trading can be done remotely from any point on earth.
"Ten or 20 years ago, we had thousands of people coming to the floor in Frankfurt every day," Fischer said. "Whoever was not there had a big problem because they could not see what was going on in the market. Now you have Deutsche Börse relocating to where the computers of its members are based."
New platforms challenge incumbent exchanges
Fischer added that Deutsche Börse's trading engine relocation was also driven by the recent success new trading venues have experienced in pulling sizeable chunks of trading volumes away from established exchanges.
"Since newcomers like Chi-X Europe and ourselves have come to the market, the incumbent exchanges have been forced to compete on speed as well," said Fischer.
Thomson Reuters, a provider of information to the financial markets, recently published figures revealing that Chi-X Europe, a major alternative trading venue launched in 2007, recorded the biggest growth in market share of any trading market in November 2010 to capture 16.47 percent of the total amount of shares traded in Europe. Deutsche Börse had a 13.17 percent market share of pan-European equity trading during the same month.
Sources at Deutsche Börse said the exchange's Xetra cash market will move first in the summer to the Equinix data center, which will have completed a 12 million euro upgrade of its Frankfurt site.
Author: Joe Morgan
Editor: Sam Edmonds