All trading is, in reality, electronic. No one hands over cash for a stack of certificates. But today, the term "electronic trading" has become synonymous with the use of new technologies-satellite feeds, cable modems, packetized cell data, and, of course, the Internet. A trader can walk down to a local "day trading" office and be afforded the same access and technologies once used only by "pros" at large trading firms. But that same trader can also stay home and do those same trades on the Internet. Which is better? I conducted an informal test to find out.
It is hard to make comparisons just "by the numbers," since the speeds of the various technologies can vary wildly. A typical trading office with "direct" connections to their clearing house runs on one or more T1 lines, operating at a very fast 1.54mbps, and perhaps a satellite feed or two, operating at a relatively slow 9.6 to 56kbps. An Internet user can have anything from a slow 28.8 kbps modem connection to a cable modem capable of T1-like multi-megabit data rates. Instead, I wanted to find out what each technology was like in practice.
Trying to ensure that there was no bottleneck at my end, I assembled a formidable system consisting of a Micron Electronics Millennia MAX computer with 500MHz Pentium III processor, 128Mb of SDRAM memory, and a high-speed Ultra SCSI 18Gbyte IBM hard drive. This machine was not going to lack for speed. The only modification I made on the Micron configuration was to install an ATI Technologies All-In-Wonder 128 video card to complement the Micron 15" flat panel display. I consider a television tuner feed, for an onscreen CNBC window, essential for any trader's PC, and ATI sets the standard for PC video/TV combination cards.
For top performance on the Internet connection, I used a Motorola cable modem operating through Comcast's @Home Internet service feed, connected to the PC through a 10Mbps Ethernet card.
Although actual Net throughput with this setup varied depending on the Web sites I accessed, I have no reason to doubt the "3Mbps peak" guesstimate-roughly 100 times faster than my dial-up modem connection-given to me by a Comcast technician. I performed a rough test and found that a file that took 18 minutes to download through my dial-up connection arrived in 13 seconds over the cable modem.
At the Day Trading Office
Walking into the offices of the On-Site trading facility in Sarasota, Fla. is to risk disorientation. Here, in a modestly upscale strip mall, sits an elegant securities trading office. Beige tones, padded carpeting, potted plants, and $800 Herman Miller Aeron office chairs fill a room that is quiet, tasteful, and almost home-like. All cabling is concealed and two large corner-mounted televisions softly wash the room with the requisite CNBC background chatter. This office is a licensee of On-Site Trading, Inc. of Great Neck, N.Y., a five-year-old trading firm that specializes in both proprietary trading for its own accounts and as a service provider to licensees who offer On-Site's trading facilities to the public.
At the Sarasota office, 16 workstations are connected to a Windows NT-based local area network, which is fed securities data from a Ku-band satellite dish and transaction data from a T1 line. Multiple ISDN lines are installed as a backup should the main system fail. At On-Site's home facilities, trades from the remote offices are run through software that checks it for appropriateness, such as meeting proper margin limits, and then routed, again by T1 line, to the Nasdaq, or to its clearing house, Spear, Leeds & Kellogg. Traders use On-Site proprietary trading software and have access to Dow Jones News (headlines and stories). Data quotations are supplied by S&P Comstock.
I found the use of a satellite feed for the S&P Comstock data surprising. Earlier satellite-based data feeds typically used a 19.2Kbps bandwidth-a limited capacity that became hopelessly clogged with the explosive increase of investment data in the mid-1990s. But today, S&P maintains a much larger 512Kbps satellite window-adequate for real-time transmission of the entire "market," and has plans to add more capacity. Market volume from the S&P feeds, which currently supplies news and data to almost 3,000 Web sites, data providers, and brokerages, increased 40% over the past year. For now, 512Kbps can carry the load. In practice, the trading performance I saw at the On-Site office was very fast. Data retrieval and trade executions were what one would expect from a professional facility.
On the Internet
But what about the Internet trader? The number of sources through which a Net user can get quotes and data-often repackaged versions of those same Dow Jones and S&P feeds-is almost limitless. And because the Internet is a bi-directional medium, with each subscriber preselecting their desired data, rather than the entire market, the need for bandwidth drops all the way to 4kbps per subscriber for equivalent performance, suggesting that, even with a dial-in line, the Internet trader operates at no disadvantage. Under normal conditions, this turned out to be true.
I examined several Internet data providers, the most impressive being Data Broadcasting's eSignal and Quote.com's QCharts, and a typical on-line brokerage, Accutrade.
One of the older players in the end-user quote delivery business, Data Broadcasting has developed Signal, and now the Internet version, eSignal, into an extremely sophisticated software package and data feed that features multiple charting and quote display options with an integrated news feed. QCharts, an on-line service of the financial site quote.com, is a very impressive charting and technical analysis package-"a Bloomberg for the rest of us," in the company's jargon-that runs in front of a Web server using the proprietary, highly-compressed, QFeed streaming data feed. In terms of features, neither of these packages takes a back seat to what I saw at the trading office. Nor was performance observably different. Using 200 equity symbols in a sample portfolio, including some Nasdaq Level II displays, I found little difference in display or response time between eSignal or QCharts, and the local trading office.
For trade executions, both eSignal and QCharts support alliances with brokerages and trading firms. In eSignal, the technology is called the Integrated Trading Solution (ITS), and it allows a user to right-click on a displayed symbol and direct a trade through their on-line broker, without leaving the eSignal quote display. Four brokerages currently support ITS. Qcharts integration technology is called Direct Access Trading, and has two trading firms currently supporting it. As with eSignal, this technology allows one to quickly execute a trade directly from a data display, rather than going through a separate brokerage Web site.
To get a sense of trade-execution speed, I used the Accutrade on-line brokerage site. Accutrade handles over 100 thousand trades per day and, like On-Site, passes all trade requests through its "business rules" checking software before passing them on to the markets via high-speed T3 and DS3 lines. Accutrade General Manager Mark Gibson estimated that the time from the user striking the enter key to the appearance of the trade on the market maker's screen was "a matter of seconds" under average conditions.
There is, in fact, little difference in the course of a trade after one hits the enter key. Both direct-office trades and Internet trades are essentially "untouched by human hands." A trade appears in the computer system of the trading house, is automatically processed through some software-based checks and is passed on to the market, usually via a T1 or T3 line. Under normal conditions, the Internet-based trader loses a few seconds getting the trade to the trading house vs. the direct T1-based trader, but after that, all else should be the same.
If there is a problem with Internet trading, it develops when conditions are not normal. During a period of Net congestion-for example, during a major breaking news story-when the speed of a trade can be all-important, Net turnaround times can mushroom into delays minutes rather than seconds. And this is at precisely the time an active trader most needs speed.
In short, for data access and trade execution, the Internet and more direct "trading office" connections seem roughly equivalent. For the day trader, who needs every 1/16 on every trade, the more direct connection will be better. For everyone else, under normal conditions, I found that the Internet comes remarkably close.