Read couple of interesting article on how exchanges and trading institutions are gearing up to reduce latency of trading infrastructure. According to Tabb group, last year industry spent around $ 100 million on revamping the trading infrastructure which includes re-write of trading rules, hardware and software upgrade, co-location of trading servers, building direct market data feeds instead of consolidated feed. The investment is estimated to reach around $170 million by 2010.
The primary motivation for such massive revamp is dramatic increase in adoption of high frequency and algorithmic trading strategies. According to Tabb group, high frequency traders account for 70% of trading volume. In past, trading performance were measured in milliseconds, but now in this competitive environment, performance is looked from microseconds eye. High frequency crowd seems to be obsessed with the system performance, goal is to shave out every micro seconds to reach the speed of light.
According to article, majority of high frequency trading firm are going with server co-location that involves placing their trading infrastructure next to exchange facilities that will dramatically cut down the network latency in trasmitting orders or getting their first hand on market prices. An interesting story making rounds is how a trader who came to know that one foot of cable equals one nanosecond of latency, so to find out the true latency he visited the co-location facility and measured the cable that was connected from his trading system to trading venue.
Exchanges are always under the gun to place top notch infrastructure to cater to high volatility in the market. In 2004, the number of messages pumped from various trading venues were around 60,000 messages per second that includes option and equities, but in 2008, the volume has surpassed above market participant expectations, it is around 987,000 messages per second.
It is interesting to know that Nasdaq claims to have the fastest order matching engine. The big boost came from their INET platform acquisitions in 2005 that replaced exchange legacy trading system. Nasdaq executes order in less than 250 micro seconds, its a pretty impressive number. The second in the block is BATS exchange that came into existence in 2004, who is considered to be the first exchange to cater to high frequency trading crowd. When BATS exchange was launched, its unique selling point was that it executed 80% of order in less than 400 micro seconds, BATS seems to be the primary driver for other exchanges specifically NASDAQ & NYSE to re-visit their internal infrastructure before they lose their piece of market share. NYSE seems to have a work to do to catch up with NASDAQ and BATS because couple of years ago it took 350 milliseconds to execute an order, but after introducing new technology, it now get order and cancellation acknowledgment in 2 milliseconds. If we step outside our border, then Chi-X Canada ATS owned by Instinet executes order in less than 350 micro seconds.
