The Exchange landscape looks set to shift dramatically over the next few years as banks demand new efficiencies. As traditional players, new MTFs such as Equiduct and Chi-x and new entrants battle to draw and create liquidity, a key factor in maintaining a competitive advantage is reducing the TCO (capital and ongoing cost) for technology. In context this has to be rolled into the current fixation on increasing speed and lowering latency.

Nigel Woodward Financial Services Director UK Intel

TowerGroup predicts that over the next 12 years the current 300 exchange market players will reduce to around 10. As Analyst Ralph Silva says in STP zone.com, “the lion’s share of the transaction flow will go through these institutions and this will mean the end of exchanges as we know them.”

Turquoise and Project Boat give the main players direct stakes in pre and post-trade utility service provision functions. The new consortiums will fundamentally change the established equilibrium of market membership. As Equiduct - and no doubt other new MTF plays on the drawing board - develops its intermediary role, re-regulation is opening the door for new entrants.

Although some clarity is still required around how MiFID will be implemented, regulated and enforced, the cards have been dealt. How strong each player’s hand is remains to be seen.

Discussion centres on traditional roles of facilitating democratic and regulated markets. Focus is swinging towards how a legacy originating in physical floors will fair in an electronic age. Matching, best execution and arbitrage could become automated functions with manual intervention and service-level value-adding becoming increasingly detached from the function of fixing a trade.

Technology is the disruptive force that creates new entrants and processes, and enables ever decreasing levels of latency across trades.

For liquidity providers of any form, speed and accessibility will be key factors in the choice of technology. Arbitrage engines will mercilessly exploit price discrepencies. DMA, currently via sell side infrastructures, could route directly to electronically enabled liquidity that goes beyond today’s market boundaries. Furthermore, broader MiFID-based regulation could create an environment in which execution risk can be managed.

Location, location, location

There is a cocktail of available technology and operational paradigms. In a market where downtime can damage credibility and cost millions, many exchanges are examining means of increasing trading speeds. Co-location and proximity hosting services are enabling traders to place their server close to, or even within the exchange itself, cutting down the physical network distance and shaving milliseconds off trade routing. Networking technologies are set to change the equation further, potentially eliminating the practical contribution of proximity to instead consider managing the operational risk of an increasingly complicated and highly-tuned infrastructure stack.

Innovation has been taking place. Atos Euronext’s well-publicised move to Linux-X86 industry standard technologies has improved operational risk from the single point of failure of a high end Solaris-Sparc environment and reduced latency. Order latency has reduced by 50% to less than 100 milliseconds. Plans this year are to cut latency to under 5 milliseconds. AEMS, the joint venture between Atos Origin and Euronext, ran its NSC solution 50% faster on the Intel processor 5300 series than the 5100 predecessor. In addition, the Intel® Core™ 2 Duo delivered associated power and thermal improvements.

Setting the Standard

Looking forward, the “exchange scene” will be under intense pressure. Technology will be crucial as legacy environments evolve. Existing, new entities and players currently in the wings will compete in a new market landscape. Those with the edge will have the potential to move quickly and exploit discrepancies in market topology.

Industry standards will have a vital role to play in this environment, be they FIX, FAST or open sourcing of infrastructure software. Solaris, as an industry stalwart, has been rejuvenated by open source, availability on X86, and an interesting new promise from the recent relationship announcements with Intel. Playing fields are levelling with the major players visible - Linux, Unix, Microsoft and middleware. So the winners in an open, automated world could be those who build technology strategies that can operate in the top percentiles of the market. There will be no second prizes.

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Filed under: Issue 1 - Spring 07