How did a high school kid studying for the priesthood eventually help launch an exchange? Daniel Friel may not have your typical CIO background, but after 30-plus years in the industry, he is on the cusp of unveiling what may be his greatest accomplishment.
It all started as a simple case of espionage.
As the leaves were changing color back in the autumn of 1998, Danny Friel was poring over a press release about a group that was looking to launch the first fully electronic options exchange in the US. At the time, Friel was running the technology for the American Stock Exchange (Amex) at the Securities Industry Automation Corp. (SIAC), which was then a subsidiary of Amex and the New York Stock Exchange (NYSE)—now NYSE Euronext. It’s clear why this announcement caught Friel’s eye, as Amex was the second-largest options exchange in the US, after the Chicago Board Options Exchange (CBOE).
But what he then noticed was the impressive list of people behind this new competitor: David Krell, Gary Katz, Bill Porter and Marty Averbuch—names Friel knew well. In the ’80s, Friel had worked with Krell and Katz; he knew Porter was something of an industry titan, having successfully launched E-Trade; and Averbuch came along with Porter.
A few weeks after the announcement of this new entity—which was to be called the International Securities Exchange (ISE)—Friel received a call from Krell to see if he was interested in running technology for the startup.
He wasn’t—not initially, at least—but Krell didn’t need to know that. Friel decided to go in and hear what his former colleague had to say. This new exchange could put a crimp in Amex’s business, so he wanted to judge for himself just how serious a project this was.
But what Friel wasn’t looking for was a new job: He had spent the last 22 years of his life at SIAC, he was married with three teenage daughters, one of whom was preparing to enter college. Ditching a well-established company at this time in his life didn’t seem like the sanest of ideas—that is, until he met with Krell.
Not only was this startup for real—he wanted in. After five meetings with Krell and others, it was Porter’s turn to meet with Friel, and it was Porter who would have the final say.
Friel hadn’t ever before been nervous heading into an interview, but this was different. Porter had hired and fired CEOs and built a hugely successful online brokerage service. What could Friel have to say that would impress this man? It was a cool March evening, 6 p.m. to be exact, and the two met for dinner. The meeting was supposed to last for about an hour, but five hours later, “we were talking like we were best friends,” Friel recalls. Porter told Friel the job was his if he wanted it.
On the train ride back home, Friel said to himself that if he could get the technology to work, the ISE couldn’t fail.
He was right.
Fast-forward 10 years, and the ISE is gearing up to go live with its new options trading platform. As daunting as it was to launch the exchange from the ground up, taking a new platform live is even more of a challenge, Friel says.
It’s one thing to start with nothing and build up from scratch. Back when the ISE launched, the exchange would roll out new products and if anything went wrong they would simply halt trading, figure out what went awry, fix it and keep going. The ISE was, after all, a startup and had nothing to lose, he says.
Today, however, there are eight options exchanges, with another on the way, and rumors of two more. Being the first all-electronic options exchange doesn’t have the same cachet as it once did because everyone has become at least partially electronic. Instead of being the insurgent opposition to Amex and the CBOE, the ISE is in the ruling class.
“We are launching a new platform and we can’t allow for any disruption in our existing market because there is too much at stake,” Friel says. “So we have more and more competitors going after slices of a pie that has contracted somewhat in recent years because of the financial crisis. So now we can ill-afford any misstep in the launch of this new technology. Our members depend on the technology to be reliable, so launching a new platform into a live market introduces levels of complexity that we didn’t have to deal with in our original launch.”
Paul Zubulake, a senior analyst with Boston-based research firm Aite Group, says the ISE doesn’t have to worry so much about the technology being sound as it does about the increased competition in the market. While the ISE and CBOE are the top two in terms of market share (see box, page 22), Nasdaq OMX PHLX—formerly the Philadelphia Stock Exchange—and Amex, now owned by NYSE Euronext, have applied considerable pressure.
According to the ISE, from January through September 2010, the ISE’s average daily trading volume for all options was 3 million contracts per day, for a total year-to-date volume of 564.8 million contracts. That figure is down from the same period in 2009, which saw 3.8 million contracts traded per day, for 960.2 million contracts in total.
“The ISE has always been on the forefront of technology when it comes to e-trading, so their issues are not based on technology,” Zubulake says. “The ISE’s issues are based on two different things. If you look at the market share changes just year over year, ISE’s and the CBOE’s share is in the hands of PHLX and Amex. Amex is basically a vested-interest story; NYSE sold a percentage of that exchange to the dealers and its market share is increasing based on flows from the dealers onto that platform. And then the other aspect is PHLX’s aggressive pricing across many different names.”
Additionally, over the summer the ISE had a couple of public spats with the Boston Options Exchange (BOX) and the CBOE over fee structures.
On this late September afternoon, eight weeks out from the launch of the new platform, Friel and his technology team are in the process of acceptance testing, which includes operational acceptance testing, application testing, member testing, quality assurance testing, and performance and capacity testing. All the systems have been built out and the target software has been installed.
The ISE declines to release specifics, but expects to see a latency reduction of more than 75 percent with additional plans for latency improvements in mid-2011 of perhaps another 50 percent. “I’m happy to say the system is meeting and exceeding the original performance goals,” Friel says.
The platform is a joint development project with Deutsche Börse Systems (DBS), the technology subdivision of parent exchange Deutsche Börse AG. DBS will deliver the base architecture but the ISE’s technology team will be responsible for US-specific components such as the matching engine and the interfaces. While the platform will eventually be rolled out in Europe, Deutsche Börse is not yet talking about its target date for launch.
The platform being replaced was developed specifically for the ISE by Nordic exchange operator OMX—now part of Nasdaq OMX. Plans to build a new platform changed when the ISE was acquired in December 2007 by Eurex, which is co-owned by Deutsche Börse and SIX Swiss Exchange. Eventually, the ISE teamed with DBS to create the new platform about to go live.
In addition to performance improvements, the platform is being built on what Friel calls “open architecture” so that as he and his team develop new functionalities and lower-latency technology, those products can more easily be integrated into the system. “It makes us much more flexible as we bring things to the market,” he says.
The ISE will launch with just a handful of lower-volume products and will roll out additional capabilities until eventually all products are moved over onto the new trading system. This process will take several months, says Friel.
One of the great benefits of the new system, he says, is the new interface for the ISE’s market-makers and anyone that connects to the system through the ISE’s current application programming interface (API).
With the ISE’s current system, almost all new software releases affect the way its members communicate with its current API. As the ISE rolls out a new release, it must coordinate carefully with its members, who need to reconfigure their systems and interfaces with the ISE’s every time the exchange adds a new message type or new functionality.
“We had to be very careful in the way we introduced it, implemented it and tested it. With the new system, we will have a much more flexible interface that will allow us to implement software changes that are, for the most part, transparent to the members,” Friel says. “The benefit is that we will be able to roll out upgrades more quickly, without having to coordinate with our entire membership.”
The new platform may also create new partnership opportunities for the ISE. Both Krell and Katz have stated that they would be open to exploring potential joint ventures in other geographic regions, and this may be another example of how the exchange can live up to the “I” in “ISE.”
“We are building a state-of-the-art, world-class system that will not only run a derivatives exchange in the US, but ultimately a derivatives exchange and a cash market in Europe,” Friel says.
The system is being designed from the ground up to be a multi-product, multi-asset platform that is flexible enough to run exchanges in multiple geographic regions. That was a design goal, Friel says—knowing it was going to be used in the US as well as in Europe—not only for derivatives but also for cash and futures and the other products traded by Eurex and Deutsche Börse Group.
With an eye toward Europe, the ISE is awaiting approval from the US Securities and Exchange Commission (SEC) for a new connection called the Eurex–ISE Link. This would allow Eurex members to use their existing clearing accounts but would give them access to the ISE’s order book and the US options market “in a much more efficient way than they can now,” says an ISE spokesperson. The technology is in place, but the exchange is awaiting approval.
This project was supposed to launch at the end of 2009, but with so much on the SEC’s plate, it is hard to know if and when approval will come. And not all plans for international expansion have worked out. In 2008, the ISE looked to partner with the Osaka Securities Exchange to create an equity options trading platform for the Japanese market, but that deal fell through.
On the day that the new platform goes live—set for November 23—the ISE will also go live with two new datacenters, which are being launched in parallel with the platform. This has been a two-and-a-half-year project but the ISE has stayed true to its internal mandate of a November 2010 launch. “It was a very aggressive project schedule, but we’ve held to it,” Friel says.
The new trading system presented the ISE with the opportunity to upgrade its entire infrastructure. Rather than do this upgrade in a live datacenter, where there is a market running, the ISE decided to build at two new datacenters. The primary datacenter will be Equinix’s facility in Secaucus, NJ, with a disaster recovery datacenter at Telx in Clifton, NJ.
Friel says the ISE chose Equinix in part because there was an opportunity to create an “ecosystem.” The facility houses other exchanges as well as market data providers, allowing ISE members to make multiple connections in one location. The ISE would be able to offer co-location services to members so they could cross-connect directly with the ISE’s network.
If you had known Friel in college, you never would have guessed that he would go on to lead the technology efforts of a major exchange. Even Friel himself wouldn’t have predicted it. After all, before he was a technologist, he was in seminary school—he was destined for the priesthood, and had been preparing for it since high school.
After enrolling at Cathedral College of the Immaculate Conception, though, he decided a new career path was in order. That led him to earn a bachelor’s degree in psychology, but upon graduation he wasn’t getting any bites in the field after dozens of interviews. He then interviewed to become a page on the floor of the NYSE, where he saw a flyer on the elevator to become a computer operator at SIAC—no previous experience in computers was necessary. Since Friel was already there for an interview, he decided to inquire about the opportunity. The rest, as they say, is history.
A decade after the exchange went live, and 12 years after he joined the company, Friel says he has no plans to explore other opportunities elsewhere. He has, you might say, finally found his calling.
The management at the ISE has a lot to do with Friel’s commitment to the exchange. “In many ways, David Krell and Gary Katz looked at this company more as a family than a business and they took a personal interest in every person who was brought in here,” he says. But at the same time, there was a demand for excellence. “If you were brought in, you were expected to perform at the highest level of your profession. Those were the expectations that were set and people live up to them to this day. And I felt the same way about building this technology team—we were going to hire the best and the brightest at what they did. I couldn’t be more proud of ISE’s technology team—and my greatest accomplishment is helping build it.”
DANNY FRIEL: FUNDAMENTAL DATA
What keeps Danny Friel awake at night: The “race to zero” for latency and making sure that technology doesn’t get in the way of growing the business. He wants the ISE’s technology to be competitive, but not bleeding-edge, which can be unreliable. “Reliability is always the key,”
Most influential mentors in his business life: “That’s an easy one,” he says. “ISE chairman David Krell, and president and CEO Gary Katz.” And he swears that he is not just sucking up—after 12 years, he probably doesn’t need to, anyway. He truly feels that they are two of the smartest people he knows.
Hobbies: Friel plays a mean guitar, with a focus on Irish music. But what he enjoys even more than playing the guitar is listening to his daughters sing and play musical instruments.
Favorite vacation spot: Friel and his wife just purchased a house in County Donegal in the northwest of Ireland. The house sits on a peninsula and is about 20 minutes from where his parents grew up.
Most important lesson learned in today’s regulatory environment: Be flexible. “That obviously applies to virtually every industry,” Friel says. “But the specific lesson in this industry is that an exchange must be able to bring new functionality to market quickly.” That was a design goal for the new system and Friel feels his staff accomplished that. The technology team in Frankfurt delivers the underlying architecture, but Friel’s technology team in New York has ownership of those components that will change the most frequently. “We have better control of our own destiny and better ability to bring changes to market more quickly given the fact that ISE controls the US-specific interfaces, the US-specific trading rules and our own matching engine,” Friel says. “We have ownership of those pieces and this gives us the ability to implement software changes and bring new functionality to the market more quickly.”
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