The ability to trade securities at nanosecond speeds has become a reality.
Cloud computing, hosting services, network connectivity and data analytics technologies have matured, and low latency trading is picking up in Asia's financial markets.
The Bank of England estimates that low latency trading accounted for 5-10% of equity volume in 2010 with rapid growth potential. That potential is driving more hosting services players to the market and transforming IT spending patterns among financial institutions in Hong Kong.
How fast is "fast"?
Low latency trading refers to the network connections and computing technologies used by financial institutions to connect to stock exchanges to execute financial transactions, according to Wikipedia.
Latency in trading could be found in the time it takes for: 1) securities trading information to reach the trader, 2) the trader's algorithms to analyze the information, and 3) the generated action to reach the exchange and be implemented. Delay in any of these processes can affect the financial institution's investment strategy and directly affect its revenue.
Low latency trading has moved from executing a transaction within several seconds to milliseconds, to microseconds, and now nanoseconds. Nowadays, a millisecond improvement in network speeds offers competitive advantage for financial institutions.
"The game has become near real-time," said Cyrus Daruwala, managing director at IDC Financial Insights Asia Pacific.
The demand for a low latency trading environment has changed the way trading firms and stock exchanges interact.
The major challenge for most stock exchanges, including the Hong Kong Stock Exchange (HKEx), is to provide an environment capable of processing billions of bidding requests without faltering when trading volumes spike.
"When trading volume goes up, real-time analytics and back office applications to process bidding requests create a demand-spike for compute power," said the IDC analyst. "The application can process billions of transactions, but can the infrastructure and network handle that?"
If a stock exchange relies solely on its own IT infrastructure--a rigid datacenter facility and infrastructure designed for a finite number of transactions--the entire system can stall when trading requests hit its limit.
"The system will hang, because it can't handle that volume," said Daruwala. "Trades drop or become corrupted, meaning that when the traders click 'enter', the trade does not register."
To provide a high availability trading environment, stock exchanges are turning towards cloud computing and hosted services. By providing high availability SLAs, cloud providers like Verizon and BT provide supporting infrastructure for stock exchanges to handle spikes.
When trade volume reaches the limit of the exchange's infrastructure, "the cloud providers provide additional compute power to handle the additional workload," said Daruwala. "This can only be provisioned through cloud."
Demand for analytics
For trading firms, low latency trading is driving investment in connectivity and data analytics technologies.
Most enterprises turn to hosted services providers for cost efficiency. But trading firms use hosting services--particularly those provided by stock exchanges and their partners--for connectivity-speed. To meet this demand, the HKEx's latest datacenter offers hosting services with access to its trading platform through an in-building low latency LAN.
However, trading firms still need to access market data, analyze data and execute orders. To support trading firms with these services, the HKEx encourages technology providers to bundle their hosting service offerings with data feeds, applications and international connectivity services.
"The idea is to bring more choice to our customers," said Jonathan Leung, VP and head of hosting services at the HKEx. "But we do not represent or recommend any particular vendors to our hosting customers."
This ecosystem approach is encouraging many new players to enter the Hong Kong market, and one of them is London-based IT services company MarketPrizm.
"Unlike other traditional IT hosting services providers, we focus on trading and provide a full stack of services for trading at HKEx," said MarketPrizm CEO TanujaRandery.
Randery added that his firm's services are also helpful for overseas trading firms to remotely trade in the HKEx. "Firms trading in multiple markets can easily reach the Hong Kong market without setting up an entire IT infrastructure, but still enjoy low latency trading," she said.
Traditional data feed providers like Bloomberg and Reuters are also entering the space with hosted services offerings bundled with their market data feed services.
"It's a value-added service," said IDC (http://www.idc.com)'s Daruwala. Since these players are already providing data feed subscription services to most trading firms, they're in a good position to provide other value-added services.
"Financial firms have trusted Bloomberg technology with their most secure front office information and prices," said Azhar Muhammad-Saul, head of Bloomberg enterprise products and solutions for Asia Pacific. "Markets are thirsty for data as well as faster data delivery speed."
Beside bundling its data feed subscription services with hosting services, the company provides content and tools to meet new regulatory requirements. Increasingly stringent regulatory requirements like Dodd Frank and Basel III are driving trading firms to enhance data transparency and risk management.
Bloomberg now offers risk and compliance applications to address regulations and operational risk. "The ever changing regulatory environment will undoubtedly continue to present growing challenges for financial services companies," said Muhammad-Saul.
The demand for data analysis is creating partnerships with business analytics providers. "Reuters has partnered with Tibco to bring real-time analysis on trade and markets," said Daruwala.
Moving to opex
The IDC analyst said that the phenomenon of multiple hosting services players entering the market is transforming the spending patterns among financial firms and stock exchanges. "Banks have started to examine this variety of new hosted service offerings," he said.
Instead of spending on datacenter facilities, financial institutions are spending on datacenter services. They are moving from capex to a monthly opex.
"They're still going to spend on IT, but they don't want to spend on building datacenters," said Daruwala. "Somewhere, somebody will have to buy it and provision for it, but it's not on the bank's asset books," he said.
"It's what we call the funny money," said Daruwala.
This story, "Low latency drives HK data center services for financials" was originally published by Computerworld Hong Kong.