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Exchanges Embark on a Performance Arms Race

09 October 2009  |  2456 views  |  0

The trading and exchanges environment is like the Olympics of the finance sector in performance terms, but in recent weeks we have seen a series of announcements by the leading exchanges as they seek to out-do one another. Years of relative stability in this arena were blown apart recently by the European MiFID directive which has opened the market to competition and, like the legalization of performance enhancing drugs, this has lead to a massive race to improve performance as one after another the world's leading exchanges have announced new strategies in an attempt to set new records in term of low latency and high performance.

In many industries technology is an important enabler, but in the financial services sector, where everything is digitized these days, technology is an essential part of every firm's operations. Banks need to have the largest, most secure, most reliable systems possible or they cannot hope to compete. However in the trading and exchanges arena, the cutting edge in terms of high performance operations, technology is actually a fundemental differentiator - the winning players will be the banks with best trading systems or the exchanges with the best matching engines and having the lowest latency, highest capacity, and highest reliability can mean the difference between life and death in this highly-competitive environment.

Don't just take our word for it. Here is what Duncan Niederauer, chief executive officer of NYSE Euronext, has had to say on the matter: "What I've tried to do since I was CEO is shift the focus of the company. We're not going to give up being an exchange or an operator of markets. But we're also thinking and behaving more like a technology company. Because I think in the end, the exchange of the 21st century is going to look more like a technology and processing company." http://www.forbes.com/2009/07/31/niederauer-technology-exchange-intelligent-investing-naked-shorts.html

And he continued: "We're global. We are multi-product. We are more a technology company frankly than a financial services company." http://www.japansociety.org/nyse_euronext_ceo_duncan_niederauer_examines_the_future_of_capital_markets

Two real areas of focus here are:

1) the battle between Linux and other operating systems where the open source operating system is winning across the board for its security, scalability and most important of all performance.

2) low latency messaging technology - where we have seen notable recent announcements by Deutsche Boerse http://www.finextra.com/fullstory.asp?id=20402 and Chi-Tech http://www.finextra.com/fullstory.asp?id=20506. In the battle to shave microseconds off their latency, low latency messaging technology is playing a critical role in helping exchanges set new performance records.

This performance arms race is going to run and run, but as with any arms race it tends to be the side with the greatest resources or investment over an extended period that tends to prevail. Exchanges may be becoming technology companies, but they (and indeed other technology companies) simply don't have the R&D muscle to match technology's big boys. If you want to back the winners in this arms race then you need to look at the fast-moving exchanges that hold key control points in the industry and the big R&D players that will be able to fund the development to fuel the arms race. Or can you see other winners emerging?

TagsTrade execution

Comments: (1)

A Finextra member
A Finextra member | 13 October, 2009, 13:11

Open Source? Name an exchange that actually uses open-source Linux or Solaris in a production environment for trade matching or clearing. They all use indemnified and supported OS (e.g. Redhat). Linux gets beat by Solaris everytime the test case uses the same os release, hardware/chipset and bios.

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