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max-bowie
Max Bowie, editor, Inside Market Data

Opening Cross: Get Ready for the New Age of 'Analatencytics'

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I shouldn’t be surprised that low latency—which at the end of last year looked like it was ready for a Lance Armstrong-like fall from grace, after trading firms began publicly questioning the rising cost for ever-decreasing benefits—has so quickly returned to the agenda in 2013, judging by the content of this week’s issue.

Illustrating that firms still place great value on being able to quantify latency and how it relates to execution performance, Corvil will this week announce another deployment of its latency monitoring technology, while San Francisco-based developer 4th Story has built a tool that analyzes algorithmic execution performance against trade data benchmarks, and Wilmington, NC-based appliance vendor Cape City Command has released a free Latency Evaluator tool to identify routing improvements that clients could achieve by using its full-function product.

Meanwhile, data and trading infrastructure supplier Fixnetix has partnered with Netherlands-based network specialist Custom Connect to offer connectivity between NYSE Euronext and Eurex, using a microwave network that slashes latency by up to 40 percent over fiber. This kind of latency reduction is still so cutting-edge that Olav van Doorn, co-founder of Custom Connect, says he only knows of two other microwave networks serving this route—both built by latency-sensitive trading firms exclusively for their own use.

And it’s this exclusivity to the wealthiest players that has led regulators to scrutinize latency and its enabling technologies following high-profile events such as the Flash Crash. A colleague asked me last week whether any moves to introduce a “minimum latency” level—i.e. holding up fast orders, so as to not discriminate against slower traders—would be a feasible move to level the playing field. The concept of holding orders and executing everybody’s trades at set time intervals isn’t new (see the Open Platform from the May 11, 2009 issue of IMD, where Michael Mainelli argues that periodic auctions would reduce latency issues—albeit in the interests of lower power consumption and environmental awareness, since datacenter power consumption now accounts for two percent of global carbon emissions, and many waste 90 percent of the power they take from the grid).

What piqued my interest, though, was how this would affect technology innovation, much of which has been driven by the need for low latency in recent years. Because one might argue that if you set an arbitrary latency “standard,” what incentive is there for firms to beat that time? And from vendors’ point of view, what incentive is there for them to invest large amounts of capital on research and development to produce faster systems?

Actually, there should still be plenty of incentive, though the focus will shift from trying to be fastest because speed alone will win the race, to being faster so that more tasks can be performed within any hypothetical “minimum latency” time—because the more analysis and risk checks you can perform within that prescribed time, the better-placed you will be to not only execute a trade, but execute the right trade.

In short, the competitive aspect will shift from just achieving the best price and hoping to make a quick buck from short-term price movements, to incorporating more fundamental analysis into trading decisions to capitalize on what promise to be the most profitable and least risky short-term movements. So potentially, your competitiveness will no longer hinge only on latency, but crucially, on what you do during that latency—regardless of whether it’s imposed by regulators, marketplaces or by components of the data and trading infrastructure that hit the physical limits of what they can achieve, giving you the opportunity to perform other functions faster and in greater numbers—and how you combine latency and analytics.

See, Lance, it’s not just about being fast—it’s what you do while being fast.

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Real Market Structure Reform - Let the Debate Begin

Trading Risk Management and Market Structure Reform Allan Grody Financial InterGroup I list ten things that should be examined in any new market structure debate that included latency issues. Things that would allow consideration of needed fundamental change, not the incremental change that is now being debated. First on the list: “Place risk management at the top of the pyramid when thinking about market structure reform and you’ll be amazed at how some fundamentally accepted principles of faster transaction rates and ever expanding volumes lose importance” It is a simple thought to contemplate, if we could only catch the problem before it becomes a problem. Can we do this? Here is set of possible approaches to consider: • use of pre-trade risk checks. To do this, the industry must accept a systemic risk overseer’s grant to all of the same time-out to do the risk checking before the market's next move, thus enabling a "peak around the corner." That would allow a determination of what would happen to that account against its limits if that trade was executed (I call this "shadow" execution); • duplicate order books mirrored dynamically in real time in a federated risk management "utility," preferably regionally located, to bring together all electronically traded markets; here we borrow the milliseconds from all to do millisecond pre-trade/shadow post trade risk checking; • entry of account level/product level credit/limit details placed through market centers and delivered up stream to the risk management utility; • use of automated risk management tools, i.e. risk-adjusted margin value, risk-adjusted portfolio value, position limits, trade and order size limits, intra-day net short-long limits, product permissioning, order frequency per time interval, maximum order quantities per trader/per product, orders placed within pre-defined price ranges, borrowing contingency, uptick monitoring, etc.; • definition of account level, to consider the multiple accounts that trade through a single omnibus account, definition of multiple accounts in pools, definition of multiple account in a collective fund, multi-trader pooled index funds, etc.; • ability to actually pull sitting orders out of market center books when a resting order would have executed through a credit limit, as bid/asked quotes change, and/or as an immediate last/next execution price would cause a resting order to be triggered. “The difficulty lies not so much in developing new ideas as in escaping old ones” — John Maynard Keynes

Posted by: Allan Grody Jan 21 2013

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