High-frequency trading depends on the ability to execute trades so fast that it makes the blink of an eye seem like eternity. So access to a low-latency network offering the fastest, most reliable connection between dealing rooms and the servers of exchanges is a core requirement of firms engaged in the arms race for speed, says David Stanton, vice president, enterprise sales, Asia-Pacific, at Cable & Wireless Worldwide.
Traditional wideband or leased lines carrying voice, video and data traffic are insufficient to meet the needs of today's high-frequency traders. Stanton calculates that a one-millisecond advantage in trading applications can be worth US$100 million a year to a major brokerage. “Consider that US$1,400 of traded volume per millisecond can be traded on a single security. If the blink of an eye takes 300 milliseconds, that's just over US$400,000 of trading,” he says.
“We're seeing many firms redefining acceptable latency and the Singapore Exchange (SGX) is a good example. SGX has a very sophisticated matching engine that can match trades in 90 microseconds – which is phenomenal,” Stanton adds.
But speed isn't a factor for specialist high-frequency trading firms alone. Post-crisis, a number of buy-side and market-making firms in Asia have been developing trading strategies that involve multiple asset classes across multiple venues and geographies. “We are helping a number of our clients find alpha between Asian trading venues as fragmentation of the local marketplace heats up. That comes down to speed and experience,” says Stanton.
“Our clients are telling us that speed down to the microsecond is as important, or more important, than availability. Many of our investment clients say, ”I would rather be in a fast market or be out of the market. So if you give me a slow line to trade, I would rather not trade that day',” he notes, adding that clients of his firm's low-latency network include many of the world's biggest financial institutions.
Cable & Wireless Worldwide's network enables trading information to be optically switched across a ”core director network' (a high-performance transport facility that links major cities in Europe, US and Asia and provides multiple protection paths and diverse routing options for any bandwidth up to 10Gb/s) powered by core switching vendor Ciena over high-speed, predictable and deterministically the lowest latency routes.
“Folks that have a trading strategy that is dependent on latency, such as many FX traders, will directly correlate speed to making money. Because they are working on such thin margins, executing the trade faster than their competitor is really important. So achieving an incremental benefit of 500 microseconds per trade would be enough for them to change their infrastructure and modify their strategy,” Stanton adds.
Low-latency market connectivity is by nature more expensive than traditional telephony services delivered to financial institutions, but Stanton insists it remains a small part of the overall cost of trading at high speeds. “Many of our clients invest far more heavily in their trading infrastructure than they do in their corporate shared service infrastructure,” he observes. “Some of the specialist reporting tools cost millions of dollars. So if we look at the network component of the total business case investment, including algos, high-frequency technology infrastructure and co-location facilities, we are certainly the smallest part of that total investment.”
Because the company had already invested heavily in submarine cable assets and was an early adopter of optical switching technology – “switching data and network traffic at the speed of light” – the investments it had to make in its low-latency network were “fairly moderate” compared to building from scratch. According to Stanton, the physical network infrastructure put in place by Cable & Wireless also means clients can switch from their legacy infrastructure to the low-latency network with relative ease.
Despite serving the financial market's hunger for speed, Cable & Wireless's high-speed network was not initially built for the purpose of low-latency trading but to support clients' desire to rationalise data centres. “With data centre and application consolidation, all of a sudden networks had to be fast, not just reliable. So we were very deliberate about building our network infrastructure for speed as well as availability. That very nicely complemented what many of these same organisations wanted to achieve with their low-latency infrastructure as we already had foundation investment that was built for speed,” says Stanton.
However, service is as important as lightning-speed technology in delivering low-latency capabilities to financial markets clients. “The real trick for many service providers is redefining how they treat latency as a business,” Stanton asserts. “We have dedicated specialist teams that run this infrastructure in the trading day for our clients, and after the trading day is finished many of the investment firms will back test all of the tech data, consistently trying to refine and learn from the trading information. This really is a 7-day/24 hour high-care environment. It's just not good enough these days to give clients a piece of string between point A and point B.”