At a recent Reuter’s forum a packed room heard the case put by a panel of vendor experts for the latest City nerd craze of “my data is faster than yours”! The panel entered into a debate but as they were all in basic agreement not much tension was created. Hence the consensus caused the debate to meander towards an inevitable agreeable conclusion. As one of the vendors leading the market data drive towards industry excellence and best execution compliance, Reuters are going to be a key solution for most financial services firms. When Reuters moves everyone takes notice and if the merger with Thomson is completed the industry is going to be served by an industry Gorilla with an eye for taking the market data provision to a far higher level.

The result of the debate was handshakes all round and with no conclusive outcome despite the inclusion of electronic voting by the audience in attempt to determine the importance of low latency to market users. Although the outcome could be anticipated with the background of the assembled panel it did raise some question over the exact value of low latency to the investor and possibly regulator with MiFID in mind?

It is hard to disagree with the laudable objective of low latency targets and this coupled with increased systems availability has undeniable benefits to all in the data supply chain and not least its end users. The concern arises on a straight cost benefit equation! Surely the ability to trade within fractions of a second is enough for most firms except those with egos to maintain. Mine is bigger than yours is a school ground debate but it is also commonly evident within the investment banking community where trade volume continues to achieve mountainous levels. How much future growth is there possible in the market or will it plateau in the future? We see no signs of trade volume slowing yet so perhaps there is a case for further increasing capacity to do more business?   

The panel included representatives from the London Stock Exchange (LSE), BT Radianz Hewlett Packard, and Intel and of course Reuters. So the complete data supply chain was out in force with their mutual hymn sheets at the ready. Each panel member presented their own perspective on their particular products value to driving down latency. Each of the vendors has a role to play within the securities industry march to low latency for market data and the performance and availability of their products is obviously key. It is the systems infrastructure providers who ultimately will determine the latency measurement, which financial services companies are able to operate in. However, one must question the end value against the implementation costs of achieving near real-time market data.

Each of the vendors represented will have some impact within the overall systems architecture of most financial services firms. They all have a strong interest in squeezing time by providing technology to lead to efficient market data as defined within MiFID. As such they all have a growing influence on the capability of the securities market to achieve regulatory targets. Reuters has a pivotal position in the international markets and as globalisation increases and cross border regulatory barriers are removed they will be a consistent force introducing new and higher levels of market data capability. It remains to be seen how important low latency is in the future for Reuters where the industry and its regulators are concentrating on systems availability and market coverage. The new definitions around best execution look to reduce the issue of speed and increase the requirement for inclusion of data beyond the execution price. Speed therefore is not of the essence!  

The general acceptance by the panel and presumably the audience (judged by the lack of challenging questions) was that low latency is a desired business objective and therefore equates to greater productivity through increased trade throughput and presumably higher profit! This certainly would be the case if each principle trade carried a guarantee of profit as in a bull market or obviously if based on commission. However a commercial gain in fast trading for the sake of it looks a wobbly conclusion if the trade is principal using bank money and where the market is falling.

There is a business rationale that says market share is an objective and those with a greater share of the market can win the largest corporate deals. It’s the primary deals that are the cream in the market and most keenly contested, where a juicy deal can ensure the banks bonuses and maintain their prestige in the market as they push for the next corporate deal based on its improving reputation.

The desire for low latency of market data is one that is mainly an issue for the wholesale banking industry and large dealing rooms which are loaded to the ceiling with expensive technology and operated by pony tailed geeks with degrees in physics and in bygone days would have been employed by NASA rather than Lehman Bros.

The point was made several times during the forum that the majority of the market is in the slow lane, impairing the latency targets of the great and the good. The inference was that the investment in technology by most buy side firms has not been in the overall interest of driving down market wide latency. This fact has little or no appreciation in the wholesale market and the vendors selling software where applications in the buy side are held up as being a cause of latency in large banking dealing rooms. The business cultures between buy and sell side are different as is the technology supporting them. The dealing room technology architectures are totally different in the dealing rooms of the average broker and asset manager to the firms like Lehman’s because the objectives are different and the targets for commercial success different again.

Speed of execution can hasten the loss in a bear market where the ability to manage a fall is a long lost art. In some International Markets there are artificial breaks to enable the speedy computer trading to fall in steps. This is extremely bad for the investor, where as like Arkwright the LSE is ‘open all hours’ offering the investor the protection they seek when they most need it. Low latency is a good thing in a rising market and a darned risk in a falling market.  

The panel session was preceded by a keynote speech by James Watson an Executive Director from Lehman Brothers responsible for their electronic trading sales team. He made a number of good points in the quest for latency, notably the valve that is the London Stock Exchange, allowing all participants to be offered equality in the low latency stakes.

David Lester is responsible for technology at the LSE and he gave a fine performance in presenting a bright future for the LSE despite the threatening rise of Turquoise and Boat, as MiFID impacts order and executions. These innovations may present an immediate problem for the LSE if the market perceives these initiatives as viable otherwise it looks like business as usual at the LSE and David Lester looked like a man in total control and with almost not a care in the world.

The biggest threat to the LSE of these new initiatives might be greatest in the depreciation of revenue as the costs of trading are going to plummet. Great news for financial services firms! However, if trade flows move away from the LSE because of new initiatives, we may have to expect the LSE to be less hurried in price reduction. An industry full of fragmentation is likely where best execution cannot be guaranteed (Despite the aims of MiFID) and the winners will be those with the biggest and the best and dare I say the fastest. Is this then the business rationale of low latency?

There is no doubt the securities markets are on the brink of huge changes that will be measured  historically by the ability of the financial services organisations to flourish and offer improved services at a reduce cost. I do not believe the push for low latency in the dealing room has much overall benefit to the success of industry objectives. The nerds might still want to compete to be the fastest gun in the west but an increasingly sceptical investor may not be impressed and feel the investment might be better served in other areas.

By Gary Wright