Direct From the Source

While the majority of financial services firms continue to obtain their U.S. equity data feeds from consolidators - including Reuters, Comstock and eSignal, among others - that typically relay best bid and offer data only, some brokerage firms are shifting to technology companies that can process direct exchange feeds and present ECN's full depth-of-book order books as part of a hosted solution.

In reaction to the demand, some consolidators, including Reuters, are attempting to provide greater depth-of-book information, according to industry sources. But, the sources say, the consolidators are struggling to process such large amounts of data.

On Aug. 31, eSpeed - the Cantor Fitzgerald subsidiary that runs a direct-market-access (DMA) trading service called eSpeed Equities - went live with a hosted market data solution from Chicago-based Infodyne to process the full depth-of-book order book feeds from two of the leading electronic equities markets, Archipelago and INET ATS. ESpeed's previous data supplier - which it declines to name - did provide the complete raw ECN order book data, according to Dan Windram, VP for equities technology at eSpeed. But it left the processing to eSpeed. Initially, eSpeed intends to migrate as many as 150 users to the new system, and there are plans to expand the rollout over the next year, note Infodyne officials.

According to Infodyne, the main reason for the switch was to avoid processing full depth-of-book feeds on eSpeed's machines. Further, Infodyne is able to aggregate all the orders on each ECN to create a single view of orders in a given stock by price and symbol.

Rather than take the feeds in-house, run its own ticker plant and incur the network and bandwidth costs, eSpeed hired Infodyne to process and aggregate the two ECN order books for its eSpeed Equities DMA service. "With ECN feeds, it's a lot more work on the broker that's taking it in," says Windram. By contrast, "Infodyne was able to get the data in a neat package," he says. Since Infodyne is providing a turnkey solution for ECN depth-of-book data, eSpeed is out of the ticker plant business, Windram adds.

Additionally, Infodyne's ticker plant is hosted in the Nutley, N.J.-based BT Radianz data center, which receives all the direct exchange and ECN data sources. As a result, its ticker plant introduces as little as one millisecond latency between the feed and the application, according to Guy Tagliavia, Infodyne's president. By contrast, providers of consolidated market data feeds first take the feeds into their own data centers, which requires an extra hop before the data is transmitted to the client application. "Customers find it useful to host their applications at a data center where the feeds are coming in," says Tagliavia. Even though eSpeed is not running its DMA application at the BT Radianz data center, eSpeed officials say performance has improved since the switch to Infodyne.

Reg NMS Provides Incentive

With Regulation NMS (National Market System) - which says that orders must be executed at the best price - set to take effect next June, Cantor Fitzgerald and eSpeed likely will not be the last brokers to shift toward full depth-of-book feeds. "This is going to be more important with Reg NMS," says Tagliavia. "You want to see where all the markets are at different price levels, and you want to make sure you executed that trade at the best price."

"You're going to see more hosted solutions with Reg NMS, and new exchanges are going to pop up," agrees eSpeed's Windram. Players like Infodyne "have all the interfaces to the exchanges and they're able to package it together. ... To us, it just worked."

In explaining why the DMA provider decided to make the move to full depth-of-book ECN feeds, eSpeed president Kevin Foley says, "We're taking our clients where the liquidity is - it's that simple." He adds that eSpeed may work with Infodyne to add additional market data feeds to the consolidated solution.

However, Foley acknowledges, the shift to direct feeds also is being driven by the need to reduce latency for algorithmic trading. "More and more, human traders have to compete with machines," he says. "That's why we felt we needed black-box-quality data." Currently, Cantor offers its own algorithms to external customers, Foley notes. But, in the future, buy-side firms could use their own algorithmic strategies and execute through eSpeed's DMA platform, he suggests.

Focusing on Customers

Sources at Infodyne say eSpeed's previous supplier of Archipelago and INET order book data provided unaggregated orders in multiple formats, forcing eSpeed to aggregate and consolidate the ECN orders on its end, which was slowing down the performance of its client application. The data rates from Archipelago and INET are very high, notes Dan Reinmund, VP of sales at Infodyne. "The orders had to be aggregated on the desktop," he says. "They were locking up the PCs, turning the PCs into mini-desktop ticker plants."

The deal with Infodyne "freed up eSpeed to focus on developing the functionality and selling the solution to its customers, as opposed to worrying about every quote and every tick," emphasizes the firm's Windram. "Let someone else focus on that."

Infodyne took the burden off of eSpeed's machines by moving the processing to servers in Radianz's data center. "We take in these feeds and we perform some processing on the data," explains Infodyne's Tagliavia. Customers want to combine the various order books from the ECNs into a single view to create an all-encompassing order book across multiple ECNs, he says. "You want to see where all the market participants are in a given security," Tagliavia explains. "We can aggregate all the orders at certain price levels."

For example, if there are 50 offers across several ECNs for Microsoft at $24 a share, Infodyne totals all the orders up into a single price level and publishes that book separately from the raw orders. In another view, it groups all the buy orders against sell orders in Microsoft at each price level across different market centers.

To Each, His Own

Still, direct exchange feeds are not for everyone. For example, on Sept. 20, Weeden & Co., a Greenwich, Conn.-based institutional brokerage firm, announced that it selected a consolidated market data service from ACTIV Financial Systems to deliver equities data into Weeden's program trading system and proprietary algorithmic models, even though ACTIV offers a direct-feed capability on a hosted basis. "It's more economical for us to buy it from them and they consolidate it," says Michael Mook, a limited partner at Weeden & Co.'s program trading group.

Weeden flows the equities data into its Tradewise Price Server, a proprietary application that it built to handle the price feed. "You have to take the prices in and put them onto your server," explains Mook. But the servers are located at ACTIV's site, so Weeden doesn't have any hardware to manage.

One of the problems with low-latency direct order book feeds, according to industry sources, is that they can blast quotes faster than a human trader can see them. If Microsoft's price changes 200 times a second, an algorithm would take advantage of the prices, but a human being wouldn't even see them.

ESpeed officials acknowledge that fast data rates from direct exchange or ECN order book feeds can tie up a user's system. To prevent the problem, eSpeed can increase or decrease the rate at which it provides data updates to its clients and avoid flooding users' machines, according to Tom Daly, the head developer on the eSpeed Equities project. "You can make it so fast that you can't even see the quote - you can bog up the system," he relates. But, "These are end-user applications," adds Daly. To make the direct feed work for clients, he continues, DMA providers have to keep the service "as simple or light as possible."

On The Net

www.espeed.com
www.weedenco.com
www.activfinancial.com
www.infodyne.com
www.cantor.com
www.radianz.com
www.tradearca.com
www.inetats.com
www.nasdaq.com
www.ml.com
www.charlesschwab.com
www.etrade.com
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio