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January 2012 Business Innovation Powered By Technology PLUS: The NYSE Invades Tokyo p.4 Competition Heats Up in Brazil As E-Trading Sizzles p.5 Interactive Map: Connecting The Liquidity Center Dots p.12 The Best Way to Regulate High-Frequency Trading p.14 Liquidity Centers Are Beginning to Look a lot Like Utility Centers p.18

In search of new revenue sources, the major exchanges are building out their own liquidity centers to offer capital markets firms a range of technology and services. p.7

Table of Contents p.2 Previous Next contents January 2012

COVER STORY 7 The New Profit Center In their search for new revenue sources, exchanges are building out liquidity centers that offer a full range of technology and services.

PLUS: 12 Shifting Liquidity Flexible, Scalable, Neutral. Most equities trades on Wall Street actually flow Savvis Markets Infrastructure, Making Markets Work. through data centers in Northern New Jersey. WS&T maps the most prominent destinations. Leading financial services organizations across the globe rely on Savvis Markets Infrastructure as the foundation for their trading and IT solutions.

• Savvis’ NJ2 data center in Weehawken, NJ hosts one of the top three consultant Wayne Arden UPFRONT 5 Brazil Still Sizzles US equity exchanges and six US equity dark pools, including three of 4 The NYSE Direct Edge plans to launch acknowledges. But strong the top five, representing 45% of average unlit daily volume Is Tokyo Bound an electronic trading competition may provide • The matching engines of three major global FX venues are located With the unveiling of its platform in Brazil, arguably the best market protection. within Savvis data centers, providing the lowest latency access new Tokyo liquidity center, the hottest emerging available to 43% of global spot FX average daily volume NYSE Technologies market in the world. PERSPECTIVES • Ultra low latency access points are available to a number of key promises high-speed access 18 A Matter of Utility exchanges and liquidity venues, across all asset classes to all of the major Tokyo INDUSTRY VOICE Liquidity centers will evolve • Access over 200 exchange feeds and a rich ecosystem of trading firms, markets through turnkey 14 The HFT Debate into utility centers for the applications and service providers focused on the financial markets trading, data and HFT firms need rules to equities markets, says Tabb For more information, call 1.800.SAVVIS.1 connectivity solutions. maintain a fair market, Group’s Adam Sussman. or visit www.savvis.com/financial. www.wallstreetandtech.com January 2012 2 © 2011 CenturyLink, Inc. All Rights Reserved. fromtheeditor Liquidity Rush

ruth be told, data centers aren’t all From a capital markets perspective, it also has gies, the commercial technology arm of the ex- that exciting. The server rooms been interesting to watch data centers trans- change that runs part of the facility, aims to T largely are nondescript, dimly lit, form from standard hosting and colocation op- boost its revenues to $1 billion, a large portion extremely utilitarian and cold — both literally erations to multibillion-dollar, multifaceted of which will come from the company’s liquidity and aesthetically. businesses. Today, data centers have evolved centers (and the Capital Markets Community But the technology inside the buildings is into liquidity centers, and they have become Cloud Platform, the financial industry cloud of- another story. The technology continues to the focus for market participants across the fering that is housed in NYSE’s Mahwah facility). evolve at blinding speeds, with stages of tech- world. These modern facilities offer the latest NYSE Technologies is about half way to its goal, Greg MacSweeney, nological innovation often visible inside a sin- in data center technology and efficiency, while ending 2010 with $475 million in revenue. Editorial Director gle facility. Newer data centers are huge — also providing the fastest access to exchange CME Group also is moving to capitalize on @gmacsweeney typically 200,000 square feet or more — and matching engines, dark pools and ATSs. the liquidity center trend. As one of the world’s they often roll out in phases, which makes it Traditionally, data center providers such as leading derivatives marketplaces, it is opening possible to witness improvement from Phase Equinix, Savvis and Telx offered server colo- a 428,000-square-foot liquidity center outside 1 development to Phase 3 development. cation space. As more and more market par- Chicago in Q1 2012. Similar to NYSE, CME In Equinix’s facility in Secaucus, N.J., for in- ticipants have chosen to locate at particular Group says its facility will offer the lowest stance, the cooling vents in the first phase were facilities, however, they have become liquidity latency to its matching engines in addition to located close to the ceiling. In subsequent destinations, with increasingly scarce rack colocation and hosting space for its customers. phases, the vents were lowered just above the space. But now the traditional data center Where the liquidity center concept will lead server cabinets to blast cool air directly into the providers are facing new competition — from is anyone’s guess. But consider this: NYSE racks. While the change may not seem like a the exchanges (see page 7). Euronext “future built” its massive New Jersey huge technological advancement, it increases NYSE Euronext in 2010 opened a 400,000- facility by including extra space that it would cooling efficiency, something that is extremely square-foot data center in Mahwah, N.J., and al- not need right away. And yet, less than one important in an operation where cooling and ready has 76 percent occupancy for colocation year into the life of the liquidity center, it’s power comprise the No. 1 cost. services. Furthermore, by 2015, NYSE Technolo- more than three-quarters full. I www.wallstreetandtech.com January 2012 3 upfront Liquidity Access Rises in the East

Drawing on its acquisition of Metabit, NYSE Technologies will provide access to liquidity in all major Tokyo markets through turnkey trading, data and connectivity applications.

By Ivy Schmerken @ischmerken

YSE Technologies officially intro- liquidity in the Asian markets as a driver behind maintaining a similar infrastructure themselves.” duced in December its new Tokyo liq- the facility. The company already has a foothold According to NYSE Technologies, customers Nuidity center, underscoring the global in Japan, including trading platform and data can access key Asian markets — including the demand for turnkey applications for trading, feed deployments; that foothold was strength- Tokyo Stock Exchange’s new Tdex+ derivatives data and connectivity. Citing the growth of ened in September 2011 with the company’s platform and arrownet cash equities network Asian markets, the company said in a statement acquisition of Metabit, a Tokyo-based provider — market data and other electronic trading in- that the NYSE Technologies Tokyo of market access products with a community frastructure services utilizing the NYSE’s Secure Liquidity Center would provide high- of more than 140 trading firms in Asia. Financial Transactions Infrastructure (SFTI) net- “With little to no hardware “In working with our customers to identify work. Each client installation, the company said, investment, ... we can have their primary trading needs and opportunities, will feature turnkey trading products that in- we found that Tokyo and the surrounding Asian clude connectivity, market data, order transmis- customers connected in markets were a very high priority,” NYSE Tech- sion and risk management services and support. just a few weeks.” nologies CEO Stanley Young said in the release. The Tokyo Liquidity Center also features many —Stanley Young, NYSE Technologies “Our Tokyo Liquidity Center addresses those of the infrastructure services, including the speed, high-reliability access to these needs ... with seamless connections to all major cloud-based Capital Markets Community Plat- markets with minimal infrastructure costs and Tokyo markets. With little to no hardware invest- form, that customers already use to access NYSE an acclerated time to market. ment or complicated maintenance, we can have Euronext’s global exchanges. It joins existing NYSE Technologies, the commercial technol- customers connected in just a few weeks as facilities in Mahwah, N.J., and outside London. ogy division of NYSE Euronext, pointed to in- compared to the challenging expense and Additional NYSE liquidity centers are scheduled creased trading activity and a consolidation of arduous process of designing, building and to open in Toronto and Brazil later this year. I www.wallstreetandtech.com January 2012 4 upfront CONSTRAINED BY Direct Edge Helps BUNDLED SERVICES? Heat Up Brazil DISCOVER Exchange will open an electronic platform THE FREEDOM in Brazil to compete with BM&F Bovespa for a share of the HFT market. TO INNOVATE

Leverage competition among leading service providers inside By Melanie Rodier @mrodier Equinix and gain the agility and perspective you need to power revenue and growth.

s high-frequency traders continue to push into ‡ AFFHVVOHDGLQJVHUYLFHSURYLGHUVZKRFRPSHWH emerging markets, Direct Edge, the N.J.-based stock IRU\RXUEXVLQHVV ‡ 'HYHORSLQQRYDWLYHVWUDWHJLHVWKDWOHYHUDJHPXOWLSOH exchange, announced plans to open a new electronic WUDGLQJYHQXHVDQGEHVWLQFODVVGDWD A DQGVHUYLFHSURYLGHUV platform in Brazil, arguably the hottest emerging market for ‡ ,QFUHDVHEDQGZLGWKDQGVSHHGZKLOHUHGXFLQJ algorithmic trading in the world. QHWZRUNVSHQG Direct Edge Brazil will operate as an independent local company ‡ 5HGXFHWLPHWRPDUNHWE\FRQQHFWLQJ WRFRXQWHUSDUWLHVLQGD\VQRWPRQWKV and will be headquartered in Rio de Janeiro. It is expected to launch in the fourth quarter of 2012, pending regulatory approval THE PLATFORM EQUINIX ADVANTAGE from Brazil’s Comissao de Valores Mobiliarios (CVM), the country’s ‡ H[FKDQJHVDQGWUDGLQJYHQXHV equivalent to the U.S. Securities and Exchange Commission. ‡ ¿QDQFLDOVHUYLFHSURYLGHUV Brazil is home to BM&F Bovespa, Latin America’s largest ‡ EX\VLGHDQGVHOOVLGH¿UPV exchange, which has been actively increasing its capacity to ‡ QHWZRUNVLQJOREDO¿QDQFLDOFHQWHUV support low-latency trading over the past few years. At the )LQGRXWZKDW3ODWIRUP(TXLQL[FDQGRIRU\RXUEXVLQHVV same time, regulators in Brazil have been easing the market’s DW¿QDQFLDOHTXLQL[FRP rules in order to attract electronic order flow and boost its competitiveness in the global marketplace. Last year, the CVM approved sponsored access to BM&F Bovespa, allowing high- www.wallstreetandtech.com January 2012 5 upfront

frequency traders to access low-latency tronic trading. “As a result of this maturity level, “We see more markets without pre-execution controls. Other we see more and more CEP tools ready to con- and more CEP new regulations for the equities market allow nect to our markets,” he said. tools ready to colocation and the connecting of networks. In the meantime, BM&F Bovespa has been connect to our BATS and local partner Claritas also recently modernizing its clearinghouses. In October markets.” announced plans to open an exchange in 2011, the exchange sealed a deal with Swedish —Marcio Castro, Brazil, putting them in direct competition with technology company Cinnober to license BM&F Bovespa Bovespa for a share of the algo trading market, TRADExpress RealTime Clearing, a flexible which comprises both local traders — includ- multimarket clearing system with real-time ing Brazilian institutions as well as hedge funds data processing and risk calculation capacities. and sophisticated broker-dealers — and The exchange also continues to grow rapidly. As high-frequency traders seek more un- European and U.S. traders. It traded more than 13.6 million equities in tapped markets, they also are eyeing Mexico, October 2011. Foreign investors were respon- which has the second largest exchange in Brazil Continues to Sizzle sible for 35.9 percent of that total volume, Latin America. The Mexican Exchange has In an interview with Wall Street & Technology compared with 33.8 percent in the previous been taking strides to catch up with Brazil as in late 2010, Marcio Castro, now CTO of BM&F month. Institutional investors in Brazil ac- a leading global marketplace for electronic Bovespa, noted that the Brazilian market was counted for 33.8 pecent of the volume, trading and in November announced a num- reaching a stage of great maturity after work- followed by local individual investors (20.4 per- ber of strategic and technology initiatives ing more than three years to promote elec- cent) and financial institutions (9.4 percent). designed to boost its capabilities. I

www.wallstreetandtech.com January 2012 6 Previous Next coverstory

Looking for alternative revenue Nasdaq OMX have developed high-tech liq- sources, NYSE Euronext, Nasdaq and uidity centers with ample space for customers CME Group have built out liquidity to place their equipment as close as possible centers that offer services ranging to the exchanges’ matching engines. Most from colocation to on-demand trading recently, CME Group, operator of the Chicago technology and market data. Mercantile Exchange and a powerhouse in derivatives trading, announced that it would go live in January with colocation services out of its newly built, 428,000-square-foot facility (which is the length of seven football fields) in Aurora, Ill., outside Chicago. But these new liquidity centers are more than just the computer warehouses of old; to- day’s cutting-edge data facilities come equipped with advanced dual power grids, high-speed fiber networks, state-of-the-art cooling systems and top secret security. By Ivy Schmerken @ischmerken The build-out of liquidity centers reflects the pervasive growth of electronic trading and ith the rise of electronic top exchanges have been seeking to cash in the demand for colocation space on the part trading and the shift of on Wall Street’s relentless desire for high-speed of brokerage firms, high-frequency trading U.S. equities and options trading and computing power. Now, with shops and hedge funds that execute trades at order flow from tradi- trading volumes sagging for the second year near the speed of light. “The majority of exe- tional market centers to in a row, the exchanges are eyeing alternative cutions are done electronically, and with the serversW located in nondescript data centers sources of revenue with renewed urgency. rise of algorithmic trading, the speed of exe- often miles from historic financial hubs, the Major players including NYSE Euronext and cution has become increasingly important,”

www.wallstreetandtech.com January 2012 7 coverstory

says Roger Freeman, a director and analyst “Our job is to provide hosted and managed tomers. According to Capaci, NYSE clients colo- with Barclays Capital who covers the major services in our data center,” says Jerry Capaci, cated in the Mahwah data center are connected global exchange operators. VP, SFTI and colocation services in the Ameri- to a high-speed liquidity network that provides But once the financial firms are inside these cas, at NYSE Technologies, the commercial the fastest route to the exchange’s matching liquidity centers, they need connectivity to technology arm of NYSE Euronext. “Customers engines for order flow and market data. other equity and options markets, data serv- can focus on the value they can provide “Having our customers directly next to our ices, and even additional computing power. through their algos and trading strategies, own matching engines is really the crown jewel So on top of providing what is commonly rather than on the pipes or infrastructure.” of the exchange,” Capaci comments, noting that known as colocation services, the big ex- NYSE Technologies has been perhaps the NYSE Euronext also built a second primary liq- changes also may see a potential windfall most aggressive technology provider among uidity center, in Basildon, England, outside Lon- the exchanges, building a virtual ecosystem don. “Just like the trading floor, there’s a com- “Customers can focus on within its U.S. data center. NYSE Euronext munity there,” he says of the liquidity centers. the value they can provide opened its mammoth, 400,000-square-foot The virtual community of traders in Mahwah through their algos and facility in Mahwah, N.J., in August 2010. The consists of market makers, investment banks, trading strategies, rather than exchange operator hosts the matching engines brokers and sponsored exchange members, on the pipes or infrastructure.” for three U.S. equities markets (the New York such as hedge funds, all of which are central to —Jerry Capaci, NYSE Technologies Stock Exchange, NYSE Arca and NYSE Amex) NYSE Euronext’s commercial strategy of build- and two U.S. equity options markets (Amex and ing liquidity and providing access to other from providing customers with Arca) in the data center. Larger than a World markets. “That community will be able to technology and related services, War II aircraft carrier, the Mahwah facility was grow, and its members are able to avail them- such as high-performance trading platforms, “future-built” with thousands of square feet of selves of a host of services within that commu- market data, network connectivity and even extra space to meet Wall Street’s insatiable nity,” he says, adding, “We not only offer co - on-demand cloud computing. “Colocation, need for computing power and connectivity. location, but a suite of market data and networking, interfacing, risk management and transaction solutions including a filtered op- those kinds of services are where the legacy For the NYSE, Speed Sells tions feed, access to market data from every equities exchanges are focusing their growth But while the modern data center is massive, U.S. market venue, and applications such as the efforts,” according to Freeman. speed is the name of the game in attracting cus- exchange’s Risk Management Gateway to help www.wallstreetandtech.com January 2012 8 coverstory

customers cope with evolving regulations.” Long-Distance Connections NYSE Technologies also offers other services. “If the client wants just a server, we have a s the arms race for ultralow-latency various international liquidity hubs come to- compute-on-demand service,” Capaci says, re- trading moves overseas, exchanges gether. “That makes our data center more at- ferring to the NYSE’s Capital Markets Commu- Aare connecting their U.S. liquidity tractive as a liquidity hub,” she says. “You can nity Cloud, the first capital markets industry- centers to other markets to expand their reroute to other data centers without having specific cloud platform, which the company global reach and pull in customers. to have colocation at other data centers, too. introduced in June 2011. Adds Eric Ryan, an In December, Nasdaq OMX established what It really depends on the customers and how NYSE spokesman, “The cloud could be another it says is the lowest latency route from its co - latency-sensitive they are.” A U.S. broker- way to access the liquidity center.” location facility in Carteret, N.J., to Brazil’s stock dealer that wants to have the fastest connec- and futures exchange, BM&F Bovespa. The tion to Brazil, Swanstrom explains, could Nasdaq Powers Up With a Partner new trade route, provided by Perseus Telecom, colocate in Nasdaq OMX’s data center in While NYSE Euronext built its own liquidity boasts round-trip latency of just 107 milli - Carteret and from there, pick up connections centers, Nasdaq OMX leases a 200,000- seconds, nearly 2 milliseconds faster than the that can be rerouted to competitors’ data cen- square-foot space in Carteret, N.J., through a next fastest route from the New York metro ters, such as the NYSE’s facility in Mahwah. partnership with Verizon Business Services. area to Brazil, according to Nasdaq OMX. Meanwhile, NYSE Euronext is building out Nasdaq OMX hosts all three of its U.S. equities “This strengthens our colocation services,” modified liquidity centers in Chicago, Tokyo matching engines and its two options match- says Stacie Swanstrom, head of access serv- and Toronto, where it leases space to clients ing engines in the Verizon-owned facility and ices at Nasdaq OMX, who notes that Brazil alongside other venues in those markets. “If also offers colocation facilities, access to high- is the fastest growing emerging market. you want to trade options and equities via speed market data feeds and connectivity to “We’re always working on our connectivity Arca in Mahwah while trading another piece other liquidity centers. strategy. Primarily we’re working on where of the derivatives business on the Liffe,” says “We felt it was a better route to partner with our customers want to go.” Jerry Capaci, VP, SFTI and colocation services a provider” whose core competency was According to Swanstrom, customers will in the Americas, at NYSE Technologies, “they running a data center, comments Stacie colocate “first and foremost in Carteret,” may colocate that piece of their business next Swanstrom, head of access services at Nasdaq where many of the fastest routes to and from to the matching engine in Chicago.” —I.S. OMX. According to Swanstrom, Nasdaq www.wallstreetandtech.com January 2012 9 coverstory

switched its strategy in 2007 from building its exchange to launch colocation services, out of lence. Building its own liquidity center, he says, own data centers to working with Verizon and a newly built, 428,000-square-foot facility out- was a “natural extension” of its capabilities. has gone through two expansions with the side Chicago. On Jan. 29, CME Co-Location According to Durkin, the CME colocation facil- telecommunications provider, completing the Services will launch live trading for all products ity is open, accessible and non-discriminatory. last one in 2010. Nasdaq has the majority of listed on its Globex matching engine out of “Everybody has the same access and oppor- the space in the Verizon-owned facility and the new facility, according to the exchange. tunity to avail themselves,” he asserts. currently has the capacity to expand, she adds. CME previously rented space at an Equinix While some competitors are touting the ad- data center in the Chicago metro area, where Colo Catches On Beyond Equities vantages of constructing their own data cen- its rival InterContinental Exchange’s (ICE) While proprietary trading groups and high- ters, Swanstrom doesn’t see the point of build- matching engine is housed, along with frequency trading firms traditionally have ing out more space. “We didn’t feel it was various dark pools and banks’ productive to build a whole new data center. servers. But now the operator of the “To the extent that you To house cabinets — it’s a power game now, world’s largest derivatives markets tell customers that not space,” she insists. “People are using fewer is striking out on its own. there is a way for them cabinets but need more power out of them. “We built this data center to house to get closer to the So you need less physical space than power. our Globex matching engine,” server, they’re going Even though the machines are getting smaller, explains Bryan Durkin, COO at CME firms want to put lots of servers within a rack.” Group. “We decided based on user to want to do it.” —Roger Freeman, Barclays Capital Meanwhile, Swanstrom adds, Nasdaq does feedback and demand ... to offer offer some cloud functionality as software as colocation services.” CME estimates a service, but only for pieces it thinks are that customers leveraging the colocation serv- driven the demand for colocation, exchange economically viable. ices in the new data center will shave approx- officials say a broad cross section of cus- imately 1 millisecond off of the current lowest tomers is requesting to locate servers inside CME Dives Into the Colocation Game latency connectivity point available out of the the data centers where they can have prox- The trend to build out data and liquidity center exchange’s previous Chicago data center. imity to the exchanges’’ electronic matching services is not limited to the U.S. equities mar- Durkin notes that the CME is known for its systems. “With the growth of technology in- kets. CME Group is poised to become the latest technology expertise and operational excel- novation, more of our end users have become www.wallstreetandtech.com January 2012 10 coverstory

“More of our end users have NYSE Euronext has talked “They’re always looking for sources of revenue, become sensitive in terms about generating $1 billion in and one of their biggest revenue sources has of response times for revenue by 2015 from its NYSE been colocation, particularly for their own electronic trading.” Technologies division, which order book,” observes Ralston Roberts, SVP of —Bryan Durkin, CME Group he suggests would include SunGard’s global trading business. colocation and related serv- However, exchange operators provide few sensitive in terms ices. Currently, NYSE Technologies has details on the amount of space that has been of response times achieved about $500 million in annual rev- leased or the amount of revenues these liquid- for electronic trad- enues. “To the extent that you tell customers ity centers are generating from colocation fees. ing,” says Durkin. that there is a way for them to get closer to While CME’s Durkin declines to reveal how “We’ve seen interest from futures commission the server, they’re going to want to do it — if many firms have signed up for the new CME merchants [FCMs] and from sophisticated they think that not doing so will disadvan- colocation facility, he says the exchange was end-user clients, as well as banks.” tage them,” the analyst says. pleased by the uptake for the space. According Barclays Capital’s Freeman says colocation Nasdaq OMX, for example, says its data cen- to a CME spokeswoman, 80 percent of Phase isn’t just for high-frequency traders anymore; ter in New Jersey offers latencies that are sub- 1 capacity is reserved. In fact, the response rather, it also can benefit a lot of fundamen- 100 microseconds. A variety of Nasdaq OMX from customers has been so rapid that CME tally based trade execution. “The desire to customers have adopted colocation, according already has started planning the second phase reduce the total turnaround time to complete to the exchange’s Swanstrom, including elec- of expansion. “We already anticipate greater a trade has driven customers to want to be as tronic market makers using algorithms, hedge demand,” Durkin reports. close as possible to the physical matching en- funds that execute between exchanges, and At NYSE Technologies, Capaci says the ex- gine,” relates Freeman, who draws analogies investment banks and broker-dealers that are change doesn’t talk about numbers of clients to when the most coveted booths on the floor trading on behalf of client orders. or specific firms, but that the space is 70 to 80 of the NYSE were in the main room next to percent full. “We’ve brought customers the specialists. “It’s really similar to the analog Liquid Gold together in a community … close to the work but in a high-tech framework.” As for building out liquidity centers, industry matching engines,” he says. “They’re getting As a potential revenue generator, colocation observers agree that the trend definitely is a improved latencies and, more important, “feeds on itself,” adds Freeman. He notes that revenue play for the big exchange operators. flexibility. It’s been a successful offering.” I www.wallstreetandtech.com January 2012 11 Previous Next LIQUIDITY CENTERS coverstory Liquidity Shift Electronic trading has shifted the destination for most equities trades away from Wall Street to suburban liquidity centers in Northern New Jersey.

Compiled by Greg MacSweeney @gmacsweeney

raders and investors are on a con- and alternative trading systems all under one to financial services in New Jersey, housing the stant search for liquidity. Over the past roof. And liquidity centers are big business, with major matching engines of NYSE Euronext, few years, however, that search has exchanges the latest market participants to Nasdaq OMX, BATS, BOX, CBOE C2, Direct Edge shifted from the traditional markets jump into the game. Not only do many of these and ICE, as well as many of the leading dark pools. Tlocated in historic financial centers in New York, facilities offer colocation and accelerated speed On the following interactive map, you’ll find Chicago and London to a growing number of to matching engines, many also offer financial key data for the major liquidity centers in the electronic venues housed in nondescript data firms additional technology services, server New York area, including distances between the centers, often miles from the major cities. space for hosting and even cloud deployments. facilities, their size, available space, key tenants These suburban data centers, increasingly In the New York metro area, almost all of the and more. Clearly, the market centers of the known as “liquidity centers,” bring electronic equity market activity now takes place in North- financial world no longer are found on Wall market participants together by offering low- ern New Jersey. Combined, there is more than 1.8 Street or in Chicago, but rather in places such latency access to matching engines, dark pools million square feet of data center space dedicated as Mahwah, Carteret and Aurora, Ill. >> www.wallstreetandtech.com January 2012 12 Previous Next Telx-Clifton NYSE Mahwah

CME Group CME to Wall St.: 748 miles

23 miles

Equinix NY4/NY5 CLICK ON THE NYSE Mahwah (inset): FOR FACILITY DETAILS. To Equinix: 21.1 2.72 miles To Nasdaq/Verizon: 34.5 MILEAGE DISTANCES: To Savvis: 23 CME Group (inset): To Telx-8th Ave: 24.6 To Wall St: 748 Telx-Weehawken Savvis: 5.26 miles Savvis Equinix: To Telx-8th Ave: 1.71 miles 1.71 miles To Savvis: 2.72 To Telx-Hudson: 2.94 16.3 To Telx-8th Ave: 4.4 To Telx-Hudson: 5.26 Map Key: Green Lines: Distance Telx-8th Ave Nasdaq OMX/ between Liquidity Centers 2.94 miles Blue Lines: Telx Financial Verizon (inset): XChange hub To Equinix: 16.3 To Savvis: 16.7 miles To Telx-8th Ave: 16.7 16.7 To Telx-Hudson: 15.47 Telx-Hudson Nasdaq Wall Street www.wallstreetandtech.com January 2012 13 industryvoice Balancing the HFT Liquidity Debate

When it comes to oversight of high-frequency trading, regulators should focus on simplicity, access and competition. Revamping the exchange order fee structure is a good place to start.

By Wayne Arden

he viewpoints on high-frequency change member in only one case and is not a So how do regulators reconcile such oppos- trading are all over the map. HFT market maker. The firm closes its positions at ing views? Do HFT firms add valuable liquidity, T firms strongly believe they are the end of each trading day, taking on no risk increase volatility in times of market stress or adding liquidity to the market while other overnight. Management believes that the firm both? Even recent academic studies differ in market participants claim that certain HFT provides exchanges with a valuable benefit, their conclusions. So should regulators imple- players hurt the marketplace. adding liquidity to many instruments and thus ment more stringent oversight of HFT than for This past summer, for instance, I spent several improving the efficiency of public markets. other styles of trading? days with the senior management team of a By contrast, Thomas Peterffy, CEO of Interactive The SEC already has taken several steps in re- high-frequency trading firm. The firm trades Brokers Group, argues that HFT firms damage sponse to the May 6, 2010, Flash Crash, includ- on more than 10 exchanges worldwide in U.S. markets. “Since they have low regulatory ing banning stub quotes and naked access and several instrument categories, but it is an ex- overhead, no market-making obligations and expanding circuit breakers. Regulators are con- few restrictions on their trading, they are free to sidering the implementation of additional About the Author take market share from registered broker-dealer measures to further reduce the probability of market makers in placid markets and then with- another flash crash. In addition, FINRA has been Wayne Arden is an independent consultant, concentrating draw or disappear entirely in times of increased inspecting the design specifications of HFT on financial technology and clean technology. Previously, volatility or serious market breaks,” he says. As software at several firms, and evidently, in some he was VP of sales for Nasdaq OMX’s Market Technology reported by the Wall Street Journal in October, cases, is even inspecting software code directly. division in the Americas from 2003 to 2008, focusing on Peterffy proposed to the SEC that exchanges exchanges, alternative trading systems and clearinghouses. hold orders for one-tenth of a second, allowing Weighing HFT Market Maker Obligations only market makers to trade during the delay. It’s important to note that Interactive Brokers www.wallstreetandtech.com January 2012 14 industryvoice

CEO Peterffy’s proposal to delay orders by a lose business to more advanced markets. sense. The incremental cost of processing the tenth of a second would roll back advances in Regulators could require that certain HFT orders that did not become trades was small. trading technology. First-generation electronic firms act as market makers — simultaneously Now that the ratio is much higher, though, the matching systems introduced 20 years ago make offers to buy and sell the same financial cost of building exchange infrastructure to could process a simple order in about one sec- instrument. But implementation of this handle so many orders is significant. ond. Second-generation systems, imple- requirement would inevitably be subjective. mented 10 to 15 years ago, could process or- What exactly constitutes HFT? What passed for At the moment, financial firms ders in a tenth of a second. Five years ago, HFT 10 years ago may only be medium- with low order-to-trade ratios are many exchange systems could process orders frequency trading today. And should HFT firms subsidizing firms that have high in a millisecond, or one-thousandth of a sec- receive a benefit in return for this new obliga- order-to-trade ratios. ond. And the most recent generation of elec- tion, similar to the time advantage given to tronic matching systems can process an order traditional market makers? So why don’t exchanges assess a fee for pro- in around 0.2 milliseconds (200 microseconds). cessing an order? Clearly, an exchange’s ability Thus Peterffy is arguing that orders should be Exchange Order Fees to the Rescue to rapidly process high volumes of orders has slowed down by a factor of 500. Before the advent of electronic trading, ex- economic value — it is essential to the busi- Ironically, Peterffy and Interactive Brokers, a changes in mature markets typically experi- ness models of many HFT firms. The reason is market maker, greatly benefited from the ad- enced a ratio of orders to trades of 3-to-1. Ten that there would be a first-mover disadvan- vances in trading technology. It has been a pi- years ago, when electronic trading first became tage: The first exchange to assess a fee for or- oneer in accelerating trading automation and the predominant business model, the ratio in- ders would lose market share. And HFT has be- in trading on electronic exchanges. Now, how- creased to about 10-to-1. With the advent of come a critical source of revenue for U.S. ever, other firms, some of which are not market HFT, that ratio now can reach 100-to-1 or higher. exchanges, accounting for more than 50 per- makers, have invested sufficiently in technol- But fees currently charged by exchanges re- cent of trading on U.S. equities markets. There- ogy to process orders and trades just as rapidly flect an earlier era. Look at the U.S. equities fore, at the moment, financial firms (and indi- as Interactive Brokers. If regulators were to markets: Putting aside a few specialized excep- rectly, virtually all individual investors) with low agree to Peterffy’s proposal to artificially con- tions, exchanges charge fees only for executed order-to-trade ratios are subsidizing those strain trading technology, U.S. financial mar- trades, not for orders. When the ratio of orders firms that have high order-to-trade ratios. kets would be weakened and over time would to trades was 3-to-1, that approach made If regulators were to encourage exchanges www.wallstreetandtech.com January 2012 15 industryvoice

to charge a fee for orders above a certain threshold, the new policy would adjust the relative advantages and obligations of HFT firms and market makers. This adjustment of market CIENACIENA ROCKS structure would be simpler and more comprehensive than adding market-maker responsibilities to certain HFT firms. 40G/100G TECHNOLOGY GlobalGlobal carriers have spoken HFT Is Neither Good nor Bad LearnLearn mormoree about this independent rresearchesearesearch highlighting Like many technological advances, HFT is neither inherently Ciena’sCiena’s #1 leadership position, and how Ciena powers good nor bad. For intermediaries trying to profit from momen- networks that drive capital markets. tary inefficiencies in the market, the ability to trade quickly Download at: wwwwww.ciena.com/number1.ciena.com/number1 always has been an advantage. A leading objective of regula- tors should therefore be to ensure that all financial firms have fair access to exchanges, so that the ability to pursue HFT strategies is not limited to a subset of firms. And most impor- tant, competition should be maximized among exchanges, market makers, exchange members, and the customers of exchange members — including, of course, HFT firms. Bad actors existed before the advent of electronic trading, and bad actors surely must also exist in the era of high- frequency trading. Regulators should remain vigilant in pro- tecting market integrity. However, vigorous competition will achieve the most uniform protection against HFT firms at- tempting to manipulate the market and also will lead to more efficient financial markets. Regulators have the resources to vet the software code of only a handful of trading firms. With limited resources, this course should be pursued only as a deterrent and a last resort. I www.wallstreetandtech.com January 2012 16 www.wallstreetandtech.com perspectives Liquidity Centers: Stepping Stones To Utility Centers

Liquidity centers will eventually become liquidity and utility centers for the equities markets.

By Adam Sussman, Tabb Group @Acsussman

Adam Sussman is a partner and t first blush, the concept of a central populations. Cities suffered net losses, in part The short-term benefit of liquidity director of research at New York- hub of liquidity housed under a because newly built infrastructure and trans- centers is cost savings, but in the based Tabb Group, a financial single roof feels nostalgic. There is no portation enabled worker mobility. In equities long-term, they are the corner- markets strategic advisory firm. A [email protected] probable scenario under which U.S. equity trading, cheap bandwidth, storage and stone of creating a more diverse markets will recentralize, as execution venue computational power — coupled with well- and vibrant trading community. competition is spreading across geographies documented regulatory mandates — allowed and asset classes. And yet, we keep hearing liquidity to shift to an increasing number of ignored because the rapid growth in volume more about liquidity centers. disparate execution venues. In the short-term, generated additional revenue well above the Perhaps the term “liquidity center” is hype, everything seemed swell: Kids had bigger increase in costs. Today, however, annual share Orwellian double-speak masking the fact that backyards and spreads tightened. volume is at its lowest since 2006, and we are liquidity is no longer centered anywhere. seeing the first two-year volume drop since Perhaps it is just clever marketing — a way to The Cost of Decentralization 1973-1974. The time to reexamine the indus- make data center sales sexier. Or perhaps it But a decentralized design has systemic costs. try cost structure is here. represents the opportunity to create the next- In the U.S. equity markets, geographically dis- Still, massive consolidation is unlikely. A more generation financial center. persed matching engines introduce increased likely outcome is the creation of shared utilities There are parallels between what occurred explicit costs, including connectivity, as well for a common technology toolset that in and in U.S. equity markets over the past decade as implicit costs, such as latency arbitrage. of itself offers little value-add. Likewise, match- and the opposing fates of city and suburban From 2000 to 2010, these costs could be ing engine technology is nearly commoditized.

www.wallstreetandtech.com January 2012 18 perspectives

A great example of this is the Gold- more diverse and vibrant trading en- innovation and value-added services. man Sachs SIGMA X MTF in Europe. vironment. Imagine the benefits if on- Thus, the short-term benefit of liq- The SIGMA X MTF is hosted in the the-run treasuries, interest rate futures uidity centers is cost savings, bu t the NYSE Euronext European Liquidity and swaps were contained within the long-term benefits are similar to Center in Basildon, England, and run same data center and cleared by the those identified by champions of ur- by NYSE Technologies. It shows how same clearinghouse. ban planning: multi-use buildings are shared technology enables different Matching engines offer just one ex- the cornerstone of creating a more business models to proliferate at a ample of how some industry costs diverse and vibrant community. much cheaper maintenance cost. If could be eliminated. There are a num- U.S. capital markets are ripe for re - that model were to become more ber of other areas in which a common invention and transformation. In the common, the industry could main- technology platform, or even front long term, the events of the past tain robust competition while elimi- end, could be shared among multiple decade will only be a prelude to what nating much of the frictional costs organizations. The buy-side execution lay ahead in the coming decade. In that work against it. management system (EMS) often has fact, it is the long list of circumstances been cited as a technology that could that often are blamed for freezing in- Can’t We All Just get Along? be provided as an industry utility. novation in its tracks that is creating While it is unlikely that direct competi- The idea would be to consolidate the groundswell of change that will tors would agree to share the exact the operations into a single shared overturn the conventional wisdom same platform, there is plenty of room unit, maintain a fair pricing scheme that the greatest change in trading is for “coopetition.” NYSE Euronext does and host it at a liquidity center. If behind us. I not see SIGMA MTF as a direct com- done correctly, the cost savings to petitor (at least as much as it might the industry would be significant. An Various Tabb Group analysts will write view Nasdaq OMX and Chi-X Europe EMS utility could allow each broker the “Perspectives” column for Wall in that light). Indeed, in some cases, to define its own screens, layout, and Street & Technology’s digital issues in bringing matching engines that cover look and fee; but by sharing the com- 2012. Tabb Group founder and CEO different but related instrument types moditized infrastructure, brokers Larry Tabb’s byline will return in print under a single roof could create a could allocate more resources to editions of WS&T. www.wallstreetandtech.com January 2012 19 EXECUTIVE VICE PRESIDENT, AUDIENCE DEVELOPMENT SALES Assistant Manager Adrienne Farquharson Martha Schwartz [email protected] [email protected] 212-600-3015 UBM TECHWEB SALES CONTACTS— INFORMATIONWEEK CEO Tony L. 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Bottega, Chief Data Officer, Robert Palatnick, Managing [email protected] 516-562-5583 Administration Pat Nohilly Federal Reserve Bank of New York Director/ Technology, DTCC Derek Stein, Head of Business Operations, BlackRock Publishing Services Manager Ruth Duggan SVP, Manufacturing Marie Myers Joseph Ferra, Chief Steve Rapp, Managing Director, [email protected] 516-562-5111 Wireless Officer, Fidelity Allianz Global Investors Capital Timothy M. Tully Jr., SVP & COO, BNY Mellon Wealth Management Joe Gawronski, President, Steve Rubinow, EVP & CIO, Rosenblatt Securities NYSE Euronext www.wallstreetandtech.com January 2012 20