Wall Street's Need for Speed

I started this blog talking about algorithmic trading. Not only that, but I even made a prediction- algorithmic and electronic trading would overtake floor traders in 2007.It had been a long time coming, and everything seemed to indicate that electronic forms of trading would become the premier means of trading on Wall Street. Well, the ballots have been cast and the results are in.

Information week recently published an article in which it states that electronic trading now makes up 60% to 70% of all daily volume on the NYSE. Algorithmic trading came in a close second with half of that. At the closing bell on April 4th NYSE officials vigorously rang cowbells in an attempt to drown out a combination of not-so-warm boos and jeers coming from the floor traders. The reason why: the NYSE has recently decided to merge with Euronext NV. This is all part of the NYSE’s plan to diminish the data latency of trade processing. What does that mean for floor traders? Their jobs are in peril!

The New York exchange is moving many algorithmic traders as close as possible to the exchange to cut down the processing time of transactions to a few milliseconds. The goal is to give e-traders that split second timing which could very well translate into millions of dollars in gain. The NYSE plans to reduce its data centers as well as those associated with Euronext in the next couple of years.

You see, every day algorithmic trading systems generate countless buy and sell orders. A great number of these are canceled or overridden by subsequent orders. By manipulating the time a processes is allowed to run and hiding their true intentions (“time-slicing”), or by breaking down orders in to smaller batches, the e- traders can capitalize on what Information Week writer Richard Martin calls “fleeting price anomalies”. The problem is that executing transactions takes time, and it takes even longer when the two computers processing the deal are further apart.

It’s all about how fast transactions can be carried out. This is putting floor traders out of work. But it’s also leading to some new developments. Remember those developments I was talking about? Well, it turns out that this need for speed may be opening the door for e-alternatives to compete with existing markets. By allowing buyers to respond to small price fluctuations, electronic trading has diminished the volatility of dealing in equity markets, and has given birth to a whole new type of vendor that promises even faster transactions speeds.

But it’s not all bad. The exchanges themselves do have some benefits to talk about. Because physical proximity can eliminate the time lags, these have experienced a spike in demand for server space. In fact the NASDAQ has now has over 100 firms paying a premium of 3500 dollars US per rack ,per month to place their servers within the walls of the exchange.

It may sound insignificant. I mean what is the big deal right? It’s only a few seconds. According the Martin it currently takes 7 milliseconds for data to travel between New York markets and 35 milliseconds between the coasts on the fastest network. But that’s slow, at least according to Yaron Haviv. Haviv is the CTO of Voltaire, the company
who is supposed to be able to cut down processing time to 1 millionth of a second.

Trust me this is not a trend that is likely to stop. Government regulation is taking a big part in making this happen, and traders (those that are left) are being forced to rely on automated systems with greater and greater frequency. Many organizations are already buying into the idea. Take Credit Suisse for example. It currently handles 10% of all US equity trades, and it is already one of the largest co-location customers out there. The question is when will these transactions be carried out fast enough? - and when they do what’s next?

If you want to read the full article click on the following link. < http://www.informationweek.com/story/showArticle.jhtml?articleID=199200297>