Opening Cross: The More Things Change...

Max Bowie, editor, Inside Market Data

… The more convinced I become that gaining an advantage in trading comes down to only a few differentiating factors, with speed a key component.

Already the New Year has brought a new raft of latency measurement and reduction initiatives. In this issue alone, we detail NYSE Euronext’s deployment of Correlix to monitor data and order latency, Colt’s new proximity hosting center for accessing the London Stock Exchange, and new initiatives from network providers Algo Technologies, IPC and Spread Networks.

Achieving lower and more consistent latency has a host of benefits, but achieving it doesn’t come cheap. In fact, Paul Adcock, executive vice president of NYSE Euronext and head of trading and operations at NYSE Arca, says he was taken aback by some of the fees outlined by vendors when the exchange started looking for a latency monitoring platform.

And that doesn’t even take into account the costs of putting in place a high-performance infrastructure, let alone maintaining and renewing it to ensure it remains such—something that vendors such as Algo Technologies and Spread Networks hope will make them a pretty penny as firms desperate for latency improvements seek the lowest-latency connectivity to markets. Both vendors are expanding their offerings: Algo Tech has partnered with UK utility Scottish and Southern Energy’s telecoms subsidiary to broaden its network and make it quicker and easier to connect individual buildings across London, leveraging SSE’s existing network of pipes, while Spread—which made a splash last year by digging its own fiber trench between New Jersey and Chicago to create the lowest-latency route between the two—is applying its methodology to connections between individual datacenters within New Jersey, digging its own secret trench via a more direct route between Equinix’s NY4 datacenter and Verizon’s Carteret facility.

The increasing cost of investment required to get the most out of low-latency data may play into the hands of vendors like Colt and IPC, who have set up facilities in London and Singapore, respectively, to provide low-latency proximity access to the London Stock Exchange and Singapore Exchange. In Colt’s case, proximity hosting may appeal to many clients for whom co-locating at every venue is prohibitively expensive.

Yet, when it comes to content itself, real-time data is not seeing the same growth as other areas—these latency initiatives only deliver the same data, faster. In fact, the highest-growth areas (though much smaller in terms of overall revenues) are currently research and analytics, according to research from Burton-Taylor International Consulting, which sees these areas being driven by growth among investment banking and portfolio management groups rather than sales and trading desks.

Buy-side traders, on the other hand, cited high-frequency trading as the most important structural and regulatory issue, but are also anticipating a buy-side rebound in 2011, according to a report from research firm Tabb Group.

Latency may hold the crown for now, but is it merely a usurper who will be displaced once the cost of achieving reductions outweighs the gains, allowing the true king—content, of course—to reclaim its throne? Rather, like the politics of olde, the ruler of this new world will probably involve a marriage between different clans—speed, content and analytics that help interpret information better and faster than before—and vendors like Selerity, which is now parsing its machine-generated events feed for consumption by human traders via StockTwits (rather than only by algorithms) are leading the way into this cross-pollination.

But until then, with the industry still so focused on eking out short-term latency gains, I wonder whether we risk not seeing the forest for the fast-moving trees as we speed past in pursuit of the “nirvana” of light speed.

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