03:55 PM
New Market Data Model Promises to Boost Trading Performance
Since the birth of electronic trading, financial firms have valued the competitive advantage provided by technologies that quickly access trading venues and deliver key market data feeds. As the industry has evolved, technological advances have radically hastened the speed of trading, with transactions now completed in milliseconds. This has raised the market data infrastructure stakes for firms, which now need low-latency data feeds and support for high-frequency transactions in order to stay competitive.
As they have in the past, capital markets firms can rely on their internal development teams to help them build out their market data environments. Yet the upfront costs and ongoing maintenance and support demands of a low-latency infrastructure are daunting, driving firms to consider an outsourced approach whereby a third-party provider hosts all or key components of a market data infrastructure.
There are a multitude of considerations for firms contemplating the market-data-as-a-service model. While firms will have to trust an external provider to deliver mission-critical services, they will remove the infrastructure build-out as a gating factor in getting to market faster with new trading strategies. Additionally, hosting offers firms a potentially broader range of data and connectivity services, and it shifts maintenance challenges to a third party.
It's an understatement to say the industry landscape has changed during the past decade. Ten years ago, the predominant market data distribution model was based on data feeds flowing from third-party providers to a distribution platform that updated a firm's traders, applications and systems in real time. The industry has since embraced high-frequency trading technologies and low-latency data feeds. These developments, coupled with fragmented and highly volatile markets, have changed the market dynamics for trading firms.
As a result of the proliferation of low-latency fiber-optic networks and direct exchange feeds, most trades are being transacted at velocities approaching the speed of light. When firms are building or expanding their market data infrastructures, the technology options available to them are far greater than they were 10 years ago. In addition to the traditional consolidated data feeds, firms are considering direct, ultralow-latency access to futures, options and equity exchanges; foreign exchange venues; and dark pools. Wide market access facilitates transactions in multiple asset classes based on a firm's investment and trading strategies.
Firms also have more opportunities to expand their reach globally to key financial centers as well as to emerging markets. Firms can establish high-speed connections to these global markets by colocating their trading systems and matching infrastructures in data centers run by exchanges and other liquidity venues. By using proximity and colocation connections, firms can dramatically reduce market data latency to the millisecond level.
High-speed market data links are serving the needs of many traders, including electronic market makers and statistical arbitrage desks, and advanced trading platforms such as those running algorithmic-based transactions. Traditional asset managers, hedge funds, firms employing quantitative strategies and mid-market broker-dealers also can benefit greatly from low-latency links.Yet upgrading to a 21st century infrastructure presents a challenge. While technology has dramatically reduced latency, it has increased the complexity, and thus the costs, of market data infrastructures. The demands of managing an internal market data distribution platform feeding traders' desktops pale in comparison to those of managing global, low-latency market data feeds, colocation and proximity connections.
Market Data as a Service
The technologies that have enabled the internal development of low-latency market data delivery also have given rise to an alternative: Firms now can have a third-party service provider to host all or part of their market data infrastructure.
The main benefit of this approach is economic. An independent company can offer more cost-effective hosted data, networking and IT support services because the associated costs can be amortized across its entire customer base. And by working with a third party, trading firms can keep pace with technology upgrades and new products from exchanges and other data suppliers.
This service offering -- generally referred to as "market data as a service" -- can enable a firm to incrementally implement changes. Firms can start with a proximity or colocation solution to quickly capitalize on economies of scale. As a next step, firms might add more venue connections and data feeds that allow them to advance their trading strategies without substantially increasing their market data infrastructure costs.
A managed-services approach to low-latency market data delivery can mitigate the need for firms to build and maintain direct links between data centers and transaction venues. Firms also can delegate the ongoing maintenance of software and hardware, including networking protocols, operating systems, switches and routers.
Another option is shifting the ongoing testing and quality control for telecommunication links, port-to-port speeds, line speeds, and hardware and software systems to a third party. Hosting providers can take over the management of expensive upgrades to increasingly faster lines, and datacenter services and disaster recovery commitments become their responsibility.
"As trading firms become more nuanced in their usage of market data as a service, their implementations will become hybrids of internally and externally managed offerings," says Adam Honore, research director of the institutional securities practice at market research firm Aite Group. "By working with a third-party provider that can efficiently support and advance the premium, low-latency connections, firms can sidestep the inevitable point of no return on costs for internally developed low-latency infrastructures. At the same time, firms can take steps to streamline their incumbent services and reduce the infrastructure footprint and associated maintenance inside proprietary and colocated data centers."