In 2006, 53% of institutional equities trades in the US were executed through direct market access (DMA), algorithms, programs or crossing networks and with steady growth in every electronic execution channel that percentage will increase to 64% by 2008, according to “Trading at Light Speed: Analyzing Low-Latency Infrastructure”, the latest research report from the TABB Group.
Jeromee Johnson, senior research analyst at TABB Group, believes that moving forward, components in the high-speed advanced trading infrastructure value chain will become more critical to trading success. This means “these technologies must get better and faster,” he says.
Although the bulk of technology investment has been and continues to be made in the equities sector, the entire industry has been spending steadily for years on advanced trading technology, the report says. TABB Group forecasts that total US capital market spending on advanced trading technology is expected to total $860 million this year, reaching $1.3 billion by 2010. It adds that if one factors in the effects of Regulation NMS, penny option pricing and MiFID, in the equity and options asset classes alone across the global exchanges, the volume of market data messages will soar from under 4 billion messages per day in 2006 to nearly 130 billion per day by 2010, a compound annual growth rate of nearly 140%.
As a result, buy- and sell-side trading firms are being forced to change the way they deal with these exploding market data volumes and processing requirements. “With the number of applications dependent on high-speed data climbing and the technology required to support these applications growing increasingly sophisticated,” writes Johnson, “firms are relying more than ever on time-series analytics, complex-event processing and more powerful automated-trading engines, applications requiring a support infrastructure consisting of more servers, greater bandwidth, new messaging capabilities and lower latency networks.”
Based on interviews, TABB Group forecasts a 34% increase in demand for servers dedicated to high-performance computing.
The report says many vendors are vying to capture revenues by meeting technology needs of trading firms. Building an enterprise-worthy, ultra-fast trading infrastructure is a daunting task, explains Johnson. Some vendors claim to provide end-to-end solutions, “but few do.”
“Firms need to be strategic, decide where being fast is most critical to them, invest where they have a competitive advantage and play the game on their terms,” adds Larry Tabb, CEO and founder of TABB Group.
“Being fast for the sake of being fast will absolutely not fly in today’s low-margin environments because every one of the components that your firm adds to further accelerate or automate trading processes drives complexity.
If all you do is try to move fast, you’ll simply be playing a catch-up game you will not win.”
The report includes several other findings and forecasts related to trading technology.
It says the expense of maintaining high-capacity, low-latency networks – WAN and LAN combined – is the largest area of advanced trading technology spending, at 25%, and one of the most difficult to manage.
Also, it finds that the production lifespan of key components is falling rapidly.
The average server production lifespan in 2006 was 4.2 years, but will fall to 2.3 by 2010, a compound annual growth rate of 26%.
It says bulge bracket firms added over 16% more servers in 2006 than they were predicting in 2005 and they are adding more powerful computers. By 2008, nearly 25% of all servers will have four or more processor sockets. It adds that Nearly 9 out of 10 sell-side firms have deployed grid technology, another 8% are investigating or implementing grid or utility computing and by 2009, grid adoption by the sell-side will top 98%.