Where every millisecond counts, how can execution times be brought down even further? Frances Maguire reports on how hedge funds and prop houses can lower their high technology out-lays
The high level of messages needed for exchange-traded
derivatives means that latency can exist in both market data
feeds as well as the roundtrip of a transaction. Furthermore,
co-location, one sure-fire way to remove latency, means making
a decision to co-locate in one place, and does not suit brokers
offering access to multiple exchanges across asset classes.
But, as latency technology becomes more sophisticated so too
does it become cheaper and more widely accessible. Furthermore,
the competition between the exchanges means that they too are
investing to lower latency, which can only be a good thing for
Matt Meinel, global director, business development, at
29West says that for one stock there can be up to 15 different
options series being traded at any one time, with all of them
having bid/offer spreads generated. Every time a stock
price changes, it changes the bid/ask price on every
option, he says. This greatly increases the number of
messages generated by the derivatives market and while futures
require fewer messages they are still more complicated than
equities because of the multiple dates, with individual quotes
combine with the fact that futures traders will often do
combinations of futures or do futures with options at the same
He adds that latency is a bigger factor in the derivatives
markets than in equities, as the message volumes are always
going to be much higher. Meinel says: The guidance for
the Option Price Reporting Authority feed is that everyone has
to handle a million messages per second. All the derivatives
market makers and hedge funds dealing in the options market are
asking to upgrade their systems to handle four to eight times
the traffic they have been handling internally.
According to Meinel, the technology to handle this volume of
message data exists and is proven. 29Wests solutions on
commodity hardware can handle 2.5 million messages per second
and there are lots of choices open to traders. He says:
Whatever hardware traders decide to use we can give them
the best performance from it, using a combination of networks,
co-location and hardware. He adds that 29West has also
worked with exchanges to improve message distribution and
enable them to compete on lower total transaction times.
From when an order hits the exchange to the time it
emerges as a fill can be as fast as three to five
milliseconds, he says.
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