Andrew Pryer is VP of EMEA execution sales at Merrill Lynch
Today's electronic environment is increasingly being powered by three main drivers; the need for speed; execution consistency; and systemic capacity or through put. Perhaps however the real market driver is a combination of regulatory change and commercial opportunity. This cocktail has increased potency as the market place has become increasingly crowded, as well as the reduction of trade sizes and commissions. MiFID, Reg. NMS, decimalisation (US), the continuing growth of MTFs, ECNs and institutional internalisers are leading to large-scale liquidity fragmentation. The result of these structural changes is becoming ever clearer, making it increasingly difficult for human traders to absorb, process and react to the plethora of data being generated. For example, the number of market messages in the equities and options field alone is predicted to grow from over 4 billion in 2006 to 130 billion by 2010!
In the quest for reduced latency, every part of the value chain needs to be examined for its contribution to the time taken to complete the whole round trip. This includes client's network connection, broker's internal latency, exchange configuration of hardware and software, order book processing time, even the use of proximity hosting services. Over the last three years, the benchmark for order round trip times (order entry to delivery of exchanges order acknowledgement) for the client has been reduced from 850ms to sub-60ms, although this figure varies by exchange. Broker's contributions to round trip timings have come down from 300+ms to single digit, despite large increases in volume, reflecting broad improvements in performance and consistency. In isolation, this improvement could have been be outweighed by the variance of exchange through put capacity. However over the same period, exchange processing times have also improved; one major European exchange's response times have come down from 450ms to 40ms. This trend of round trip time reduction is set to continue through exchange upgrades and competition with alternative, faster, liquidity pools as well as increased competition between brokers to provide the quickest service for their clients. The speed arms race is therefore set to continue with no perceivable end in sight.
The above shows round trip timing reductions of both Merrill Lynch and European exchanges (representative).
This begs the question, how should one be positioned in order to
effectively exploit this situation? As we are already more than
well aware, the execution universe has no basis in philanthropy
or a 'Love thy neighbour' ethos; those that get there first will
leave little behind. Does that mean that it is business critical
to have in place a high-speed trading architecture? If your
execution strategy is not solely-based on long-term investment
growth the answer should be yes, but not unequivocally. Speed
alone will not provide a satisfactory solution, control;
consistency and bandwidth are equally important pieces in this
equation. As ever, one series of answers provokes another series
of questions. What is considered fast and how does one square the
circle of the connectivity conundrum? For some 'getting done' in
low single-digit milliseconds is the key to their execution
strategy, either as part of a time series analysis (TSA) used
primarily for the production of stock-specific price predictive
data or in the case of black box trading as part of a complex
event processing (CEP) system where visualisation
frameworks and event-driven data bases assist the trader in automating execution response triggers.
The quickest car to circumnavigate a race track will not necessarily be the one that can accelerate from 060mph the fastest but rather the one which can consistently maintain maximum velocity as the course beneath it alters.
In this fast and continually altering execution landscape, one feature is absolutely clear, automated, low touch and no touch trading will continue to consume an ever larger percentage of the execution world. As firms plan and refine their responses to this phenomenon it will be prudent for them not to try to do everything at once but focus on improving the speed of the parts of their system that will maximise their bottom line.
All this change may appear revolutionary but the reality is that the tune and tempo of the markets may have changed out of all recognition, but essentially the song remains the same……….."Money, Money, Money!"