Risk Tools
The ever-instensifying low-latency arms race is driving increased competition for limited colocation space in heavily populated liquidity centers for exchange-traded products.
Why It's Important: The collapse of Lehman Brothers proved that no one is immune to the risks of the capital markets. And given the ban on naked access on the shoulders of 2010's Flash Crash, broker-dealers must implement a series of pre-trade checks on orders, which will add to latency and accelerate the push for high-speed trading solutions. Firms also need to develop and maintain systems and procedures to review the effectiveness of and enforce their risk management controls, quickly addressing any anomalies that might arise.
Where the Industry Is Now: Wall Street firms have been busily revamping their electronic trading platforms to ensure that they can perform pre-trade risk checks faster than ever before. In May 2011 Lime Brokerage started providing pre-trade risk controls via the BT Radianz cloud network for broker-dealers looking for a cost-efficient, ultralow-latency solution to help them comply with the naked access rule. The platform provides pre-trade checks in less than 10 microseconds, according to Lime.
Bank of America Merrill Lynch recently announced BofAML Express, an ultralow-latency market access and risk control platform for U.S. equities that provides embedded risk controls with sub-10 microseconds of wire-to-wire latency. Morgan Stanley is using software to shave latency from its compliant direct-market-access platform, Speedway 3.0, which is live with at least five exchanges, including NYSE, ARCA, Nasdaq, BATS and the two Direct Edge exchange platforms.
And Deutsche Bank is employing field-programmable gate array (FPGA)-based devices to lower latency for its risk checks. The platform, known as ultra FPGA, runs from Deutsche Bank's cabinets at exchange data centers. Latency-monitoring service Correlix RaceTeam recently measured ultra FPGA's pre-trade risk management gateway latency at 1.35 microseconds for messages sent to Nasdaq and at 1.75 microseconds for FIX messages.
Nomura, which went live in July 2010 with its ultralow-latency market access product, NXT Direct, also has turned to FPGA technology for its pre-trade compliance and risk checks. The bank says the platform offers risk-filtered, wire-to-wire direct connectivity in less than 1.8 microseconds for fixed-length exchange protocols and less than 2.8 microseconds for FIX protocols.
Focus In 2012: The low-latency arms race on Wall Street will continue, as firms look to provide compliant trading platforms that support the fastest trades, and beefing up data managment capabilities will remain a priority. As data volumes continue to rise exponentially, firms increasingly will focus on boosting their infrastructures for tick databases, according to Peter Lankford, director of the Securities Technology Analysis Center (STAC). "The number of quotes and trades you need to store on a daily basis has been skyrocketing. So that means more data to go through when you need to do queries, and firms are looking for ways to speed that up and support more queries and users from less infrastructure," he explains.
"Firms will take in all real-time data and store it so they can go back later and develop algos on what happened in the past," Lankford continues. "There are clients looking at the range of new server and storage technologies, to see what potential they offer [for low-latency data retrieval and analysis]."
Industry Leaders: Deutsche Bank, Morgan Stanley, Bank of America Merrill Lynch and Lime Brokerage have adopted aggressive strategies to provide low-latency pre-trade risk controls and market access.
Technology Providers: High-performance cloud infrastructure providers include BT Radianz, Thesys Technologies, SunGard Capital Markets, NYSE Technologies, Equinix, EMC, Options IT and VMware. FPGA providers include ACTIVFinancial, Impulse Accelerated Technologies, Altera, Xilinx and Novasparks.
Price Tag: A 2011 Aite report estimates that U.S. spending for pre-trade risk management will hit $83 million this year and reach $109 million by 2013. Aite reports that the SEC estimates the technical cost of complying with the naked access ban at $48 million ($21 million on hardware and software; and $27 million on maintenance). But the addition of just a few microseconds because of pre-trade risk controls can cost HFTfirms millions of dollars, hence their ongoing, big investments in low-latency technology.
