The move will enable banks and proprietary trading firms on TT’s global trading platform to access eSpeed, one of the largest and most liquid cash markets in U.S. government benchmark securities.
The deal reverses a long-running feud between TT, the world’s largest trading software provider for futures, and eSpeed over a patent infringement lawsuit that began about a decade ago. TT won the patent suite in 2007 over the use of an order-entry screen, and then prevailed on appeal in 2010.
Negotiations began with TT and Nasdaq OMX after it completed the acquisition of eSpeed for $750 million from BGC Partners in July of 2013. Customers of TT, including banks and trading groups active in fixed income, had requested connectivity to eSpeed, which is one of the most liquid venues for cash instruments in fixed income.
“They never had the opportunity to trade our cash product along with cash futures products on other platforms commingled on one screen and using spreading technology. Nor were dealers able to easily develop algorithms for this type of market interaction,” said Joseph Noviello, senior managing director at Nasdaq OMX eSpeed.
“We hope it increases the order flow we receive and ultimately results in deeper liquidity and a better market position,” said Noviello. The TT connection also helps Nasdaq OMX eSpeed “eliminate obstacles that prevented us from serving our customers,” he added.
Many futures traders executing interest-rate futures are trading the cash products alongside the futures contracts, but they could not access eSpeed. "[eSpeed’s] Customers were accessing our competitors in the cash market through TT while we certainly had means for them to access our markets as well,” says Noviello, noting that TT will serve as a single point of access to fixed income cash markets, so that customers now see the full depth of liquidity in benchmark Treasury securities.
The linkage with TT will position Nasdaq OMX eSpeed to compete with Brokertec, an electronic fixed income network for bond dealers run by interdealer broker ICAP. BrokerTec and Nasdaq OMX’s eSpeed are the two biggest players in the benchmark U.S. Treasuries space.
Healing the Feud to Compete with Brokertec
When the rift between TT and eSpeed was intact, BrokerTec pulled ahead of BGC with their technology innovation by licensing exchange technology from Nasdaq OMX. In 2012, BrokerTec licensed a modified version of the Nasdaq OMX Genium, which Nasdaq sells to other exchanges to provide low latency and high throughput. Now that the global exchange operator has bought ICAP’s biggest competitor, it plans to use INET’s scalable backbone to strengthen eSpeed’s performance. “We see an opportunity because we can improve latencies, build out functionalities and expand the number of participants trading in fixed income,” said Noviello.
Nasdaq OMX is counting on eSpeed to grow its share in fixed income markets through TT’s network, which has 19 of the top 20 futures brokers. Thousands of traders use TT’s network to reach global derivatives markets.
“If traders are given an easy connection into fixed income, this could bring new players into fixed income or satisfy existing traders in options or derivatives that weren’t able to connect with eSpeed previously," said Noviello.
The TT deal also plays into Nasdaq OMX’s broader strategy to expand into global fixed income markets, which includes NLX, a European interest-rate futures market and a strategic ownership stake in LCH.Clearnet. “Certainly customers that are eligible to trade in that market can use the TT network to access not only the eSpeed platform but the NLX platform as well,” said Noviello. Nasdaq OMX already has a footprint in Nordic corporate bonds, as part of a move into other sovereign bonds. Since it operates U.S. options and futures platforms, Noviello said there potential to trade US derivatives in listed fixed income products — for example, it could list options and futures on U.S. Treasuries.
“As we expand our global fixed income footprint, we’re able to build upon the relationship that we established with Trading Technologies and other distribution networks,” explained Noviello.
For example, last December, InfoReach, a provider of order and execution management platforms, announced a direct connection to eSpeed’s fully executable central limit order book for electronic trading in benchmark US Treasuries.
About 40 percent of the roughly $500 billion US Treasury securities volume was electronic in 2013, according to SIFMA. However, some dealers facing revenue pressures across Wall Street, were said to be worried that electronic fixed-income trading platforms could attract some of their customers and erode some of their revenues from government bonds. Nasdaq has said it's not going to open up its platform to institutional investors.
“Right now the community we’re focusing on is the traditional dealers – predominantly the sell side community,” said Noviello. “We have no interest in disintermediating our core customers,” said Noviello, emphasizing that Nasdaq OMX is looking for ways to improve the trading experience for traditional dealers in the sell-side community.
Data Center Migration and Microwave Link
To attract customers to its bond-trading venue, Nasdaq OMX is looking to boost the performance of eSpeed. It has already reduced round trip latency by 35 percent. In the second quarter, Nasdaq OMX is planning to move the operation and matching engine of the eSpeed product from the legacy data center in Rochelle Park, New Jersey to its data center in Cartaret, New Jersey. “It represents an opportunity to not only improve performance, but also provides customers with cost efficiencies.”
“We are now moving into cutting edge networking techniques and service deployments, and we will see performance engineering gains,” said Noviello. Because many Nasdaq OMX customers already have a colocation presence in Carteret for equities or options trading, migrating eSpeed to the same data center is the next logical step on the agenda. “What it provides them is the ability to shed unneeded technology in Rochelle Park, which for many customers was a facility maintained for one product. As we move multiple assets into Cartaret and expand beyond U.S. Treasuries into products adjacent to benchmarks driven by dealer demand, it just furthers customers’ ability to leverage what they have in place,” said Noviello.
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For high-speed traders and banks that want faster access to prices, Nasdaq OMX also plans to leverage the microwave network it offers between Cartaret and the CME’s data center in Aurora, Illinois. Customers in CME’s facility in Aurora could access the eSpeed data set once they originate from Cartaret, while customers colocated Cartaret could receive the CME’s data. Customers that are colocated in either of the CME in Aurora, would gain the benefit of low-latency data distribution between the two facilities, which is close to 8 milliseconds round trip, noted Noviello.
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio