Firms to increase spending on low-latency options trading technology

Firms to increase spending on low-latency options trading technology

North American hedge funds and asset managers will spend $253 million on low-latency options infrastructures in 2008 and this is set to rise to $305 million in 2011, a compound annual growth rate (CAGR) of six per cent, according to Tabb Group.

Demand is growing for faster options trading technology, says Tabb.

Electronic options trading continues to become the norm and is acting as a catalyst for the volume spikes witnessed during the past two years, says Kevin McPartland, senior analyst, Tabb. So firms are moving to take advantage of this increased market accessibility.

"Although trading strategies vary wildly amongst market participants, a single element takes centre stage repeatedly - speed," says McPartland.

He says regulations and changes in market structure are affecting how market makers, hedge funds and proprietary trading desks generate profits. Both factors "increase the criticality of ingesting massive amounts of incoming market data through direct feeds, making trading decisions and executing on the exchange faster than ever before", says Tabb.

Although sell side firms will outspend the buy side on direct feeds, Tabb estimates that in 2011 buy-side firms in North America will spend $17 million a year on direct feeds for options trading, which does not include the cost of additional technology necessary to implement the incoming data.

Another area to see big rises in spending is complex event processing (CEP), which is becoming increasingly important for powering algorithmic trading and smart order routing. Tabb forecasts that the buy side and sell side will increase spending at a 12% CAGR on CEP technology to support options trading through 2011.

Andy Nybo, senior analyst Tabb, says in 2008 listed options trading daily volumes soaring 28%, compared to the previous year, so there is an opportunity for vendors to take advantage.

"IT vendors who can understand their clients' needs and traders who understand where reduced latency can enhance profits will ultimately gain," says Nybo.

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