Technological advances remain a definitive factor in keeping exchanges ahead of their rivals, according to a study published Cisco Internet Business Solutions Group (IBSG), the global strategic consulting arm of network technology provider Cisco.
“Although critical, liquidity is a consequence of technological capabilities and resources and is not directly under the exchanges’ control,” Peter Robin, senior director at Cisco’s IBSG and author of ‘The Competitive Landscape for Global Exchanges’ told theTRADEnews.com.
From a technology perspective, members’ are demanding that exchanges can maintain performance levels regardless of trade volumes, the report stated. Supporting factors include latency performance, which is considered particularly important for attracting stat-arb, quant and algorithmic traders, and peak second transaction capacity – the maximum amount of transactions that can be completed in a second. Also significant, says the report, is the ability of exchanges to reduce tariffs for exchange members to keep up with the new pricing structures brought in by new platforms to attract liquidity, such as ‘maker-taker’ rebate schemes.
While much of current debate is focused on exchanges’ efforts to reduce latency, Cisco’s Robin said exchanges might be better advised to invest in processing capacity, rather than ploughing more funds into latency. “The main latency issues are now with the members and users of the exchanges, whose systems aren’t as fast at the exchanges,” he said. “However, by the end of 2009, I think most members would have finally developed low-latency, high performance systems, which will put pressure back on the exchanges to improve their latency.”
The report also acknowledged that the ability to support algorithmic trading is playing a big part in attracting flow to exchanges. Robin estimated that more than 60% of trades on US exchange NYSE Euronext and over 50% of trades on the London Stock Exchange were generated algorithmically in 2007. “In the next two years, 75% of all trades could be algorithmic. Further forward, it could be as much as 90%,” he predicted. “Processing capacity is important because exchanges need to cope with the increase in algorithmic trades without affecting performance.”
Robin said it was “highly advisable” for exchanges and their users to disclose their technology to each other to achieve better performance and attract more flow to the exchanges. “Trust is important in this case,” he noted. “Exchanges and members have so much in common, it just makes sense for them to share information.”
The study was based on interviews with 40 senior executives from a range of firms including investment banks and exchanges.