THE BASICS OF LOW-LATENCY OPTIMIZATION FOR TRADERS ED&F MAN CAPITAL MARKETS HOSTING AND INFRASTRUCTURE

THE BASICS OF LOW-LATENCY OPTIMIZATION FOR TRADERS ED&F MAN CAPITAL MARKETS HOSTING AND INFRASTRUCTURE

01 THIS BRIEF ARTICLE IS INTENDED AS A HIGH-LEVEL OVERVIEW OF SOME FACTORS THAT CAN IMPACT THE TIME IT TAKES FOR ORDER MESSAGES AND PRICE DATA TO MOVE IN-BETWEEN AN ELECTRONIC TRADING PLATFORM AND A FINANCIAL EXCHANGE S MATCHING ENGINE. In electronic trading, the value of latency is relative: how fast you are to the market only matters in relation to how fast everyone else is to the market. The rule is straightforward and really no different than it was before we all sat behind a wall of monitors: the first in line gets what he wants. There has always been a race to the market, and it has always been a matter of being ahead of the other parties. It just happens that today we are not staring across the trading floor, but rather down a path of electronics and fiber optics, and measure our distances in milli-, micro-, and nanoseconds. The path between an execution platform and an Exchange s matching engine is made up of many layers of hardware infrastructure and network connectivity. In order to understand how to make this path shorter, we need to look at each layer and ensure that we understand how to control it (if at all) and also how much it costs to optimize, both in terms of time and money. Our goal is to get as close to the market as possible by eliminating as many hops in the middle of the path as possible. The path between a trading platform and the Exchange is made up of six layers: Execution Platform Operating System Computer Hardware Local Network Infrastructure Wide Area Network Exchange Matching Engine Each one of these layers presents its own challenges and set of factors that need to be taken into account. Each requires a unique skillset to get right as well. Latency is often discussed in the context of how long it takes orders to get to the exchange, which is correct, but it is necessary to remember that there is another important impact of latency coming back in the other direction: how long it takes price messages to get to you from the Exchange. The longer the delay on that second piece the longer it takes to make a trading decision.

02 EXECUTION PLATFORM The top layer is your Trading Application. It could be off-the-shelf or it could be something that you build on your own. If you are running a platform built by a 3rd party, that vendor or your local trading support team will be the best resource to leverage in order to get your application settings and workspace optimised. If you built the application yourself, then you are probably familiar with the concepts in this article you will know the ins and outs of your proprietary platform better than anyone!

03 OPERATING SYSTEM (OS) This is the most basic piece of software on a workstation or server, and in most cases is going to be either Microsoft Windows or a flavor of Linux. The OS is the layer of the path that sits in-between the Execution Platform and the computer hardware. The approach to optimizing this layer for latency is to remove all of the bells and whistles that are not needed to get orders and prices in-between your Execution Platform and your Computer Hardware. A good Systems or Windows Administrator will be able to guide you in the right direction, and should pay particular focus to your network settings, which can wreak havoc when improperly configured for trading.

04 COMPUTER HARDWARE The gear that the previous two layers run on. Simple rules with this layer: Faster is better, and better is more expensive. The faster the CPU (Processor), Memory, and Disk are, the less time it takes for an order message to travel out and down to the next layer, and the less time it takes to get price data to get back to your execution platform. When thinking about what hardware to purchase, remember that this layer is a one-time cost, not a recurring cost. Work with a good Systems Administrator for advice on how to optimize your Computer Hardware, even if you are running an execution platform on the workstation under your desk. Energy-saving settings should be turned off, as they are designed to reduce performance in order to minimize power consumption.

05 PRICE DATA Trading Application Computer Hardware Operating System Wide Area Network Local Network Infrastructure Exchange Matching Engine ORDER TRAFFIC

06 LOCAL NETWORK INFRASTRUCTURE This is the layer over which your hardware sends and receives messages from other computers. While discussing this layer, it is important to clarify one of the most misunderstood and confusing concepts in computer networking: the concept of bandwidth vs. latency. Bandwidth is measured in bits per second, and is a measure of how much data volume we can pass over the network in a given amount of time. Latency however is measured in increments of time, small fractions of a second, and describes how long it takes for a bit of data to move from one end of a network to the other. There is a rough comparison to cars here: Bandwidth is our top speed, and latency is our acceleration. The concepts of Bandwidth and latency are intertwined, but they are not the same thing. When it comes to a LAN, the basic emphasis is on Bandwidth. The fastest local networks today range from 10 to 100 Gigabits-per-second (Gbps), and a standard local connection would be 1 Gbps. Work with a good Network Engineer to ensure that the path from your computer hardware to the next layer is optimized.

07 WIDE AREA NETWORK (WAN) This layer is the long-distance network connection that sits in-between your Local Network and the Exchange. If you have co-located your server in a data center to be closer to an exchange matching engine, you may or may not be passing over a WAN. There are two basic types of WAN connections. The first type is the most common one: the internet. Everyone today is familiar with the Internet and should understand why it is bad for trading: the internet is a network shared by everyone. The internet is fine for browsing the web or streaming video you are not trying to make money off of those things. Sometimes the internet is slow. Sometimes it just doesn t work. Avoid running your trade over the internet if you want to reduce latency. If your trade path runs on a private circuit, always ask if that path is the lowest latency path on the market. A common scenario is to co-locate a trading server in the same data center as Exchange Matching Engine A, and have a private WAN connection to another data center where Exchange Matching Engine B is located. In this case, the path between the trader s server and Exchange A is short, and the path to Exchange B routes over the WAN, and the trader has a lower-latency connection to Exchange A. The second, and more, exclusive type of WAN connection is a private circuit. A private circuit is a dedicated piece of wire that runs in-between two data centers. A private circuit is always better than the internet because 1) it is not shared by the world and 2) it runs a direct course between two points.

08 EXCHANGE MATCHING ENGINE This is the point at which your trade is matched and your order is filled, and is the generation point for the price messages that travel back up through all of the above layers. You want the distance between this point and your Execution Platform to be as short as possible. By optimizing each layer above this one, you help ensure that your trade messages travel the shortest path possible. As long as there has been a market, traders have fought to be the closest to the deal. The interface has changed, but the underlying race has not. And as always, there are no guarantees: optimizing for lower-latency does not guarantee a good trade, and some markets are more latency sensitive than others. That said, with some research, and by working with a good Information Technology team, it s possible to eliminate common bottlenecks, and that s good for any trade. A true end-to-end optimized path is a collaborative work between network administrators, server administrators, trading support, and most importantly the trader. design, server configuration and deployment, exchange interfaces, market data services, low-latency optimization and industry standard as well as proprietary trading platforms all backed by an enterprise level of IT and Trading support. By combining all of these elements in a single place, we enable our clients to harness all elements of the low-latency optimization path outlined in this article. Here we only scratch the surface to learn more, contact the ED&F Man Capital Markets Hosting & Infrastructure services team. The proximity hosting services provided by ED&F Man Capital Markets are backed by an experienced application support team with experts in network

09 Execution Platform Choice of a third party platform for low-latency trading depends widely on the structure and markets of a particular trade. Operating System Optimizing an operating system for maximum transaction speed involves removing all unnecessary functionality and interface detail, so as to allow the hardware to dedicate its speed to executing transactions. Hardware On a stripped down, barebones OS, the most successful traders typically use a hardware setup that consists of the most expensive processor on the market. Costs for a single server can easily reach more than 20,000 USD. Local Network Infrastructure Leading vendors such as Cisco and Arista provide the latest technology, which we use to ensure that our exchange connectivity is always provisioned at the highest possible speed. Wide Area Network Dedicated network connections between data center co-locations are the best way to ensure market executions you perform have the best possible latency. ED&F Man has co-located data facilities at seven exchange markets around the globe. In the time it takes a typical Internet connection to route an order to an exchange, a private circuit could have routed the same transaction several times over. With market price fluctuations happening continuously, having this speed advantage can be make or break in a trade being profitable or a loss. Exchange Matching Engine Although the speed at which information can be received and decisions made can be optimized, the distance that signals must travel can introduce significant delays, to which the only solution is to ensure that your servers are as close to the market exchange as possible.

ED&F Man Capital Markets 440 South LaSalle Suite 1850 Chicago, IL 60605 T +1 312-300-5330 www.edfmancapital.com/infrastructure/technology-services/ CLICK HERE to find out more about our hosted platforms solution.