Is Your Network Aligned With Trading Opportunities?

Alternative Trading System (ATS) proliferation is causing extreme fragmentation in the market and creating acute networking challenges as well. Firms must decide whether to try to connect to as many platforms as possible or to strategically connect with specific partners.

Both paths mean that these financial services firms find themselves with the daunting challenge of connecting to all of these liquidity centers while also managing the networks and the services on them. Since the SEC first passed Regulation National Market System (Reg NMS) in 2005, which forced exchanges to electronically route orders to the venue with the best price, the number of ATSs has exploded.

Today, traders must navigate more than 50 independent exchanges as well as the electronic agency brokers and the exchange facilities that comprise this complicated and fragmented marketplace.

While the system hypothetically promises the best price for each trade, often times by the time an order is completed, delay has eroded the trader’s advantage and thousands of trades have compromised the strategy behind the order. The best way to battle this ATS weakness is to install a fiber network as the backbone of an ATS system.

The biggest advantage of fiber is low latency, or the ability to minimize the amount of time it takes for messages to be transmitted from one network endpoint to another. For traders, this means the time it takes an order to go from one market source to another. This trading data is driven by electronic trading algorithms, which determine when to initiate a transaction. The fiber network ensures that each transaction moves at the optimal available speed.

Firms that realize the importance of speed are dedicating just as much to the design and implementation of their fiber network as they are to creating new algorithms or trading products. They are focused on the performance, hardware, standards, and applications that ensure their networks deliver the high bandwidth and low latency so critical to distributed networked applications.

As they design and implement their low-latency networks, the most competitive organizations are weighing and measuring the following network dimensions:

High-speed architecture and topology to achieve large scale in network - Trading companies are typically avoiding services provided over switched Ethernet platforms because of the extensive latency introduced by these networks. Instead, they prefer utilizing DWDM (dense wavelength division multiplexing) wavelength services (traversing as few nodes as possible) or dark fiber routes to minimize the introduction of external latency as much as possible.

Network control and signaling, including traffic management and congestion control - Network equipment also introduces additional latency along a path. Each switch, node or router that a signal traverses through will introduce latency depending on the function of the device. For example, a router or an Ethernet switch will typically introduce more latency than a DWDM node.

Network subsystems, including routers, switches, and end systems - Different manufacturer’s equipment will introduce varying quantities of latency even though they are performing the same task. For example, one manufacturer's 10G DWDM transponder may introduce 10 times the latency of another manufacturer's transponder because of how the transponders are designed, manufactured and used in the network.

Physical distance of network routes - Shorter fiber optic routes are becoming a valuable commodity where trading companies are primarily shopping for low latency instead of price. So mapping the network is important too.

High-performance applications and how they interact with underlying protocols and the network – This includes both off-the-shelf applications, such as complex event processing platforms, or custom-built algorithms that carry out each organization’s proprietary trading strategies.

While the battle for the lowest latency solution in the upper layers of the OSI model remains a difficult variable, one constant network architects can rely on is the layer 1 transport properties of their infrastructure. Whether choosing to utilize a pure Dark Fiber network, or opting for a less resource- and knowledge-dependant managed service, network architects can obtain guaranteed latency numbers on which to build their platforms. High availability, low latency networks are the core infrastructure on which these microsecond-sensitive platforms are being deployed.

With their low latency networks in place, the leading adopters are also considering how to best optimize their networks to take advantage of the growing internationalization of ATSs as well as complementary technologies that can help drive down costs and increase trading speeds. Their network engineers are innovating in the following areas:

Inter-region ultra-low latency solutions – Connecting across regions or even nations enables a world-class trading network that can take advantage of the best pricing anywhere anytime.

Low cost multi-venue interconnectivity – The continuing emergence of new trading venues and marketplaces increases the complexity and cost of connecting to home and away markets. Today, a new breed of service provider is emerging in the European and Asian markets to offer connectivity to a range of regional market data sources.

Low latency sub-GbE private line services – With Gigabit Ethernet (GbE) as the standard interface for commercial network connectivity, using GbE for private line services helps lower the cost and complexity for low-latency networks.

Alternatives to the high cost of Proximity hosting— Locating trading servers in the same physical space as the trading infrastructure for major exchanges can generate microsecond improvements in latency. However, it’s also expensive. Smart network engineers are getting the same trading advantages from alternative server locations.

With U.S. futures trading alone set to grow by 14 percent in 2010, according to a recent TABB Group report, organizations need to optimize all aspects of their trading systems if they are to fully participate in a market rebound. The most competitive organizations will be those with low-latency networks that can scale to execute an increasing number of trades in every conceivable market.

About the Author

Rob Shanahan is president and CEO of Lightower Fiber Networks, a leading metro fiber network, bandwidth, and collocation service provider serving the northeast United States.