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Sell Side Continues to Invest in Data Centers

Financial firms spent $1.8 billion on data centers in 2009, and 2010 spending will go even higher, TABB Group says.

WS&T July 2010 Digital Issue

Data center oversight and network capacity are the top infrastructure-related challenges facing U.S. sell-side equity firms this year, even as companies spend more to optimize their data centers, TABB Group analyst Kevin McPartland said during his presentation at Wall Street & Technology's annual Accelerating Wall Street conference in May. Although costs remain a key concern, U.S. equity firms ramped up their investment in data centers within the past year, according to a recent TABB report, which noted that the larger players each support nearly five data centers on average.

"Clearly the sell side loves its data centers," McPartland told the audience. "There's a lot of horsepower that has to sit behind these equity businesses. ... It's getting more and more complex to manage the infrastructure."

And more costly. Equity firms spent $1.8 billion last year on data centers; half of that total came from sell-side shops, according to the TABB Group report, which predicts that the sell side's use of data center space will increase slightly in 2010.

"There's a race here to try to compete," McPartland continued. "Despite the cost-consciousness, spending is still high, with the sell side spending the most." In general, sell-side shops are pursuing a technology-driven agenda with an eye on lower latency, sleeker infrastructure and shrewder IT investment, according to TABB Group.

Keep Your Friends Close?

The report, which is based on conversations with high-ranking executives at 24 sell-side firms, found that proximity hosting has become prominent among all of the major broker-dealers, McPartland revealed. "There's an old mentality where we still need to be close to our equipment," he said.

Still, the vast majority of U.S. hedge funds are not yet colocated, with 76 percent opting to look to their brokers for infrastructure rather than buying it themselves, according to TABB Group. Sell-side firms, meanwhile, are aiming to boost their network capabilities. Demand for bandwidth is projected to soar this year on the strength of rising trading and data volumes.

Improved use of bandwidth will be crucial for brokers, McPartland explained, since growing data rates and the costs of managing data may slice into margins. This is helping to spark a rush toward server upgrades, with most sell-side firms expected to opt for Hewlett-Packard and Intel servers, according to TABB Group, which noted that the sell side already has spent $113.5 million this year on network servers.

"Connectivity is getting cheaper, but the price tag is still high," McPartland said, pointing out that large firms are increasingly opting for hardware acceleration. "For the bulge bracket, everybody's either using it or is looking into using it. Smaller firms are priced out -- it's too costly to buy and maintain."

The report also noted that while virtualization at sell-side shops is growing, a completely virtualized and utilized infrastructure is still a long way off for U.S. equity firms. "Even as virtualization improves," said McPartland, "there will still be some latency."

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio

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