Towards Zero Latency: Co-location and Connectivity Strategies

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Viewpoints on Latency Low-Latency.com Connectivity and Co-Location: Staying Ahead, Not Always By Being Fastest By Pete Harris, President of Americas & Editor-at-Large, A-Team Group Trading firms continue to invest significant sums in low-latency technologies, with connectivity and co-location being a big focus, and a large proportion of IT budgets. Reducing propagation latency from the trading chain - by going with the fastest network provider and installing systems in co-location data centres - remains for many the simplest approach to remaining in the lead of the latency race, though in itself it s not a universal panacea for business success. Speaking at A-Team s recent conference focused on The Business & Technology of Low-Latency Trading, John Jacobs, COO of Lime Brokerage, made the point that trading in the increasingly fragmented equities markets is not always about being the fastest. Brokerages are required to understand what the customers are trying to do, with respect to their trading strategies when determining co-lo and connectivity requirements. Simply leveraging those approaches and technologies gets a firm part of the way there but it doesn t take you the whole way there, he said. It is also Jacobs experience of late that trading firms are more carefully considering their investment in some technologies, weighing up their cost against the business benefits they bring. A case in point, he noted: Spread Networks dark fibre connectivity from the NYC metro area to Chicago. At a guaranteed 13.33 milliseconds roundtrip, it clocks in at more than a millisecond faster than alternative services. But its high in your face cost has caused some firms question whether they need that kind of advantage for their strategies. Indeed, Jacobs suggested that firms operating in the high frequency trading business are beginning to segment themselves into two categories, one operating at the cutting edge, where they will spend absolutely anything for speed and a second, where trading strategies can be optimised to deal with a certain level of latency, and so technology investment is more measured. For its part, recognising the different latency requirements of a diverse set of trading firms, Spread Networks has introduced a lit service to complement the dark connectivity. Operating at 14.75 milliseconds roundtrip, it is sold by a number of resellers Anova Technologies, CFN Services, Hibernia Atlantic, Hudson Fibre Network and Sidera Networks and is priced accordingly. Even for firms willing to spend whatever it takes to be the fastest, there are potential pitfalls to be aware of when making network choices. While Spread s network route is unlikely to be bettered anytime soon the company achieved its breakthrough latency by digging its own trenches and laying some 825 miles of cable in many cases network providers are continually reducing the latency of their routes, and so leapfrogging one another as the fastest. Thus, avoiding lock-in with a vendor as others overtake it in the latency race can be a real challenge. Anecdotes from industry executives suggest some trading firms are lobbying network providers to take drastic measures, such as eliminating slack coils used to provide resilience to cable breaks, in order to cut out just microseconds of latency. Also to be wary of is the continual need to accommodate new liquidity centres, as new markets come into trading vogue. Recent action includes the rise in prominence of markets in Toronto, and also increased interest in obtaining economic and other government news with the lowest latency from Washington, DC. Even where marketplaces are established, so connectivity requirements and latencies can change, as has been witnessed in recent months as NYSE Euronext brought its Marwah, NJ data centre on stream and moved its matching engines and co-lo facilities there. And the Chicago Mercantile Exchange s recent move to new data centre outside of the Windy City is another example of the continual challenges facing those whose trading strategies require the lowest latency. Within co-lo centres themselves, the focus continues to be on the footprint and power consumption of the servers and local networking equipment that support trading system applications. Since both space and power is at a premium in such centres, the price tag to run these systems can be significant. The recent introduction of multicore, multi-socket servers that can run several applications at once not only reduce latencies of transactions to just a few microseconds, but also cut down on space and power requirements. Likewise, market data handling and messaging appliance that incorporate hardware acceleration, such as FPGAs, deliver high performance with low power consumption. As a result, all of these technologies are likely to be increasingly adopted for co-lo environments. 2 Thought Leadership from Low-Latency.com May 2011 Issue 2

Low-Latency.com Viewpoints on Latency The Trade Product Profile on Exchange Hosting Nigel Harold, Head of Business Development within the London Stock Exchange technology group, highlights the benefits of co-location services for participants trading on the Group s markets Exchange Hosting is the London Stock Exchange s lowest latency connectivity option for firms looking to gain the fastest access to the Group s markets. Trading participants, information vendors and solution providers locate their servers physically within the Exchange s own data centre, providing ultra low microsecond access to our trading matching engines and real-time market data. Round-trip connectivity latency is as low as 30 microseconds for clients hosting at the Exchange, providing the ultimate in low latency connectivity. Key Benefits of Co-Locating for Trading Participants Exchange Hosting has been an instrumental component of the Exchange s strategy to increase the flow of liquidity onto its markets by reducing round trip latency times and increasing the likelihood of successful trading strategy execution. The service has enhanced and extended the Group s range of connectivity options, and gives flexibility to participants to connect to their hosting equipment through a choice of telecommunications providers. The introduction of Exchange Hosting has created a strong community of latency-sensitive trading firms and providers at the facility, including a number of key Prime Brokers who are able to facilitate client flow within the data halls. This enables non-members to receive the lowest possible latency realtime market data direct from the Exchange, and act upon the data by sending orders (via a short cross connect) to one or multiple Brokers who are located within the same data centre, for entering on to the order book, which is also located with in the same building. Key Benefits for Co-Locating for Vendors and Service Providers The Exchange Hosting service is available for vendors and service providers to provide low latency market data to external clients and to offer services and managed solutions to trading firms from within the co-location service. Access to Multiple Markets The London Stock Exchange s UK cash markets have relatively recently migrated to the new Millennium Exchange trading platform, making the exchange the fastest in Europe. Developed by London Stock Exchange Group s leading trading technology business Millennium IT, the new trading platform offers the Exchange s clients superior technical performance, consistently low-latency and enhanced functionality. Key benefits that clients of Exchange Hosting have identified as adding value to their business are: Hosting physically within the same data centre as a number of markets: o London Stock Exchange o Turquoise Cash Equity and Derivatives market (formally EDX London) o Borsa Italiana markets (MTA, MOT and ETFplus) that are currently on TradElect in London o Borsa Italiana access is provided remotely to the IDEM derivatives market based in Milan, and will be offered for other markets hosted in Milan o Oslo Børs Cash Equity and Derivatives markets Strategically located hosting facility within central London, well situated to achieve good average latency to multiple trading venues to the East and West and client sites in and around London. A flexible connectivity model providing access to a range of industry leading low latency carriers. One of the first in the world to offer new 10Gb cross connectivity to trading and information systems. Low latency access to a growing community of Prime Brokers to facilitate trading and other essential support services for non-members. Access to low latency consolidated market data and onward order routing to multiple external execution venues. Sponsored Access for London Stock Exchange and Turquoise The new Sponsored Access service for the London Stock Exchange and Turquoise cash equity markets enables non-members to directly connect to the respective trading systems with low latency exchangelevel pre-trade risk checks. This new service will further enhance the opportunities for clients wishing to participate in our markets from within the Exchange Hosting Service. Sponsored Access is provided based on a set of Exchange Level Risk Controls (order validation checks), which are applied to all orders submitted by Sponsored Users, in order to restrict and prevent May 2011 Issue 2 Thought Leadership from Low-Latency.com 3

Viewpoints on Latency Low-Latency.com trading beyond certain limits. These checks are: Price Band Validation prevents orders with an overly aggressive limit price from entering the order book and trading. Maximum Order Value prevents orders with uncommonly large values from entering the order book Maximum Order Quantity prevents orders with an uncommonly large order quantity from entering the order book Maximum Gross Consideration limit prevents Sponsored Users from trading beyond a financial limit set by the Sponsoring Firm. The Restricted Instrument List allows the Sponsoring Firm to restrict orders entered by a Sponsored User to a limited set of instruments. All orders submitted via sponsored access will pass through the low latency Exchange level Controls before reaching the electronic order book. This validation is specific to orders from Sponsored Users and is in addition to the standard checks in place on the Exchange, which are implemented and enforced for all Member Firms. New Milan Hosting Service As the globalisation of markets continues, hosting in key centers across the world has become increasingly important to the high frequency trading community as participants strive to reduce latency associated with geographical location. To facilitate this, the London Stock Exchange Group recently launched a Milan Hosting Service for firms looking to gain the fastest possible access to the Borsa Italiana s services in Milan. It currently allows market participants and information vendors to locate their servers within the data centre that hosts Borsa Italiana s IDEM Market and Data Dissemination Service (DDM+), providing low microsecond access to the Borsa Italiana s IDEM matching engines and market data feed gateways, as well as other Milan hosted markets. Added Value Services to Assist Clients to Trade Multiple Market Strategies Finally, the requirement for data across multiple venues has also significantly increased, with multiple trading venues. To ensure clients are able to trade multiple market strategies the Exchange Hosting Service, in partnership with QuantHouse, offers an ultra low latency Market Data and Order Routing Service to all major European and US execution venues for clients located in the Exchange s hosting facility. The Exchange has recently extended its offer to provide a free one month trial of these services. Join our Growing List of Hosting Clients If you are interested in hearing more about how your business and trading strategies can benefit from the fastest access to the Exchanges Group markets through hosting, please contact Andrew Bailey Hosting Product Manager - hosting@londonstockexchange.com or call +44 (0)207 797 4114. Alternatively, visit the Exchange s web site www.londonstockexchange. com/hosting for further details. World Leading Matching Engines and Market Data Systems Our world leading Millennium Exchange platform average 99 percentile latency round trip time is 113 microsecond for the London Stock Exchange Market and 100 microsecond for the Turquoise Cash Equity market. This provides traders with the ability to complete execution with immense speed, particularly when physically close to the platform itself. Latencies identified are 99 percentile averages accurate at time of print (June 2011) 4 Thought Leadership from Low-Latency.com May 2011 Issue 2

Low-Latency.com Viewpoints on Latency The Latest on Connectivity and Co-Location from Low-Latency.com Atrium Network Upgrades European Multicast Infrastructure Atrium Network, a provider of smart connectivity for the financial community, has announced the scale-up of its European multicast infrastructure in order to meet the on-going demands of the international trading community. Emmanuel Carjat, Chief Executive Officer of Atrium Network said, As we continue to see considerable growth in market data feeds and an increase in the speed with which these feeds are delivered it puts more pressure on data feeds. We are seeing more European Exchanges and MTFs adopting multicast for market data distribution. Upgrading our European multicast infrastructure now, allows us to easily support the growing demand for multicast feeds and gives us the capability to distribute them via our low-latency network. NYSE Technologies Expands Connectivity into China NYSE Technologies, the global commercial technology unit of NYSE Euronext, announced that Shanghai Stock Communications (STOCOM), a wholly owned subsidiary of the Shanghai Stock Exchange, will establish a connection to the NYSE Technologies Marketplace for FIX order routing services. Through this new connectivity service, NYSE Technologies will offer Chinese institutional clients access to Marketplace, where more than 1,200 global trading counterparties connect to one another via more than 10,000 fully managed FIX-based messaging channels. Verizon Chooses Fujitsu to Provide Ultra-Low Latency, Reliability, and Ease of Expansion Fujitsu, a leading provider of business, information technology, and communications solutions, announced that Verizon has selected the Fujitsu FLASHWAVE 7120 Micro Packet Optical Networking Platform (Packet ONP) as the foundation of a communications infrastructure that provides ultra low latency performance, reliability, and expansion capability. While performing benchmarking tests, Verizon used the Fujitsu NETSMART 1500 carrier-class management solution to provision and monitor the Fujitsu FLASHWAVE equipment dedicated to the customer. The software helps assure optimum performance and availability while delivering instantaneous alarm reports, performance data tracking and graphing, and bandwidth capacity reports. In addition to low-latency capabilities, Fujitsu platforms are easily upgradable, providing Verizon with a smooth migration path from its current gigabit speed to its planned 10 gigabit implementation. The FLASHWAVE 7120 Micro Packet ONP has also been shown to consume very little power important to Verizon and many of its customers that are committed to energy efficiency. London Metal Exchange Opens Access Point at Interxion Interxion announced that the London Metal Exchange (LME), the world s premier non-ferrous metals market, is opening an access point to their electronic trading platform, LMEselect, at Interxion s City of London data centre. The access point will also allow access to LMElive, the exchange s real-time price and data application. By colocating within the same data centre as the exchange, members of the LME will be able to take advantage of low-latency access to the LME as well as reduced complexity and connectivity costs of trading on the electronic trading platform. In addition, members can benefit from access to a range of other liquidity venues, real-time market data feeds, and a diverse ecosystem of leading financial service providers. Interxion also offers colocation to liquidity venues such as Burgundy, Equiduct, Quote MTF, Plus Markets and the Nordic Derivatives Exchange, and proximity hosting to NYSE Euronext, Bolsa de Madrid and SIX Swiss Exchange. May 2011 Issue 2 Thought Leadership from Low-Latency.com 5

Viewpoints on Latency Low-Latency.com Q&A: Nigel Harold, London Stock Exchange For metro and longhaul exchange connectivity, what technology advances are being leveraged to reduce latency, while addressing agility and reliability concerns? Carrier routes within the metro London area, continental Europe, transatlantic and through-out Asia continue to be developed to take the straightest route between key financial hubs. In parallel with this, the equipment used by carriers and clients to facilitate optical connectivity is also changing to become ultra-low latency. It is important for trading participants who are latency sensitive to have full resiliency within their technology estate ensuring the primary route is the fastest with any secondary route being as fast as possible while having full route and equipment diversity from both ends from the primary circuit. Faster equipment and network switches are continually being released and rolled out also, adding to the constant opportunity for latency improvement. When should a trading firm consider a dark fibre connectivity approach over a provider of lit connectivity? There are a couple of distinct advantages of using dark fibre over managed or lit connectivity services. Trading participants are able to separate different high capacity and high speed wavelengths (or connections) over the same physical link and so can ensure they are able to run multiple strategies without any contention on the wire between them reducing any impact from intra second spikes during times of high activity. The cost of dark fibre connectivity is typically much higher than managed services and so there is a trade off as to cost of ownership and the benefit the service provides. In addition, trading participants may wish to build in other services such as automated switch-over if a circuit is not available. Given the continuously changing international landscape for exchanges and market centres, how can a firm future-proof its connectivity strategy? There has been a significant amount of activity and interest in the latest round of potential consolidations among global Exchanges and trading venues. It is important for trading participants to remain agile to be able to react to any consolidation which may impact the chosen location for any trading venue. In addition, clients should determine the strategies they run today and in the medium term future, to ensure they understand which venues provide good choice with regards to competitive connectivity. Exchanges and venues that have good multi market access connectivity, and good links to others is one way that firms are able to future proof their strategies. Being colocated with multiple markets is also an advantage, and being central to other venues means that the connectivity strategy can be managed effectively. It is important to note that moving a market to an alternative location is a significant and costly activity for the trading venue to contemplate and so is likely to be completed with the interest of the market and participants as a whole. Why would a market centre offer/make use of both co-location and proximity facilities - what is the purpose and target customer for each? It is important for any successful trading venue to provide client choice with regards to cost, resiliency, level of service management and latency when connecting to its markets, in order to cater for a diverse set of existing clients and attract new participants to increase overall trading flow. For the Exchange, both Exchange Hosting co-location services and a Proximity Hosting service fits well within the Group s established product family which ranges from low latency, high resilience to lower cost non-hosting solutions. The Exchange Hosting co-location service is provided directly by the Exchange and is the fastest, lowest latency connectivity choice providing access from within the same physical location as our Trading venues. This service is targeted towards clients who are keen to increase certainty of execution and have confidence that they are receiving the lowest latency market data providing them with reduced risk and greater confidence in the execution of their strategies. The latency experienced by clients within the Exchange Hosting service is 30µs round trip time. The Exchange has also partnered with COLT to provide a Proximity Hosting service which is aimed towards clients who have trading strategies that are somewhat 6 Thought Leadership from Low-Latency.com May 2011 Issue 2

Low-Latency.com Viewpoints on Latency sensitive to latency but also have a requirement for the management of their equipment and connectivity, for example. Although the service is not as low latency as pure colocation, the managed aspect of the service appeals to clients with different drivers and requirements. What operational aspects should a trading firm consider when looking to deploy systems in a co-lo or proximity centre? Trading participants should be very diligent when determining the location in which they choose to host their low latency mission critical systems. It is important to ensure the co-location facility has high levels of resilience with mechanical and engineering items such as power redundancy and resiliency, including suitably sized UPS systems and sufficient back-up generators, and ensuring there is sufficient cooling with good redundancy to manage any potential failures or for routine maintenance. In addition, the data centre should have excellent levels of resilience and performance with regards to connecting to matching engines and other trading services including diverse network switches and cabling routes, diverse routes to Carriers and also a method of controlling any changes that take place within the facility. The facility should also have mechanical and engineering and IT operations staff on-site within the facility 24x7 to provide assistance to clients during their time on-site and to manage any issues that may arise quickly and efficiently. The relative latency for connecting to markets and multiple markets, the cost, and the ability to expand operations if client s cabinet demand grows, are all additional factors for consideration. As the Exchange owns and fully manages the data centre, we have the ability to operate a policy of client changes taking place within a defined window outside of our market hours something which is unlikely to happen within a shared datacenter facility. This ensures there are no physical activities which could endanger any single or multiple clients operation from within our space during these critical times. How does one employ connectivity, proximity and co-location in order to provide the best reach to several trading venues, to execute complex multi-asset strategies? The selection of geographical location and the availability of fast direct Carrier routes is important especially for regional markets such as London where MTF s and Exchange s are split geographically. A number of Trading Participants will locate in each of the co-location venues determining on a regular basis where to initiate each trade depending on volumes, competition, risk, and volatility. Many other Trading Participants make their decisions as to where to co-locate based on items such as where their key strategic focus is or on a cost/return basis. Many of these participants when seeking to trade UK venues choose a central city location so they achieve good access to the local financial hub while also having excellent low average latency between venues located in the East and West of London. Demand for central London data centre space is therefore something that we have seen to be important to our clients. What technology approaches might be deployed to make most efficient use of costly and in-demand co-lo and proximity space? We see a number of differing types of hardware being deployed within our facility to reduce latency and also to concentrate on making best use of space, power and cooling. The Trading Participants strategy itself will likely determine which servers and switches are important to host within the facility and which can be located at the Trading Participants own location or lower cost lower resilient venue. A good example of attaining good efficiency is to ensure network switches have sufficient functionality and port expandability to complete the needs off the technology estate as this will help avoid having to purchase, install and run more equipment than is ideally desired. Another key item to factor in to any physical co-location design, is ensuring there is sufficient power and space available when upgrading new hardware and reduce risk during the transition prior to removing the redundant equipment. What future innovation do you expect in the next 12-24 months in the connectivity and co-lo/proximity marketplace? There are a number of innovations and initiatives that we are investigating and delivering at this time to continue the development and enhancement of our co-location services. These cover all aspects of the service suite, ranging from optimising performance even further, to providing increased visibility and certainty of transactions through latency monitoring and statistical analysis. We are also looking to expand our facility further to ensure that clients are able to grow at the pace that their business demands. We are in a continuous development cycle, and speak regularly with clients of all types and sizes, to ensure that we jointly grow our businesses and community together through product development and innovation watch this space. You can download this Viewpoints on Latency Special Report from Low-Latency.com. May 2011 Issue 2 Thought Leadership from Low-Latency.com 7