The financial markets arms race

There is a veritable arms race underway in the financial markets, with technology vendors and service providers vying to offer the lowest possible latency in the delivery of market data and trade execution information

The growth in algorithmic trading, the proliferation of trading venues and the resulting fragmentation of liquidity, as well as regulatory requirements to demonstrate best execution are some of the trends driving an ever-increasing need for lower latency in asset classes such as equities. Despite some of the worst turmoil since the Great Crash of 1929, independent market analyst Datamonitor in the report Seeking Low Latency in Financial Markets, finds that the fundamental drivers persist and indeed, are potentially even accentuated by the present volatility.

Altered status

“There were five pure-play investment banks at the beginning of this year and now there are two, and even they have altered their status,” began Rik Turner, a senior analyst on Datamonitor's financial service technology team and author of the report. “However, other institutions such as Bank of America, JPMorgan and Barclays have stepped into the breech, and the current volatility in the markets actually makes low-latency infrastructure even more critical.”

The report surveys the technology vendor landscape in a range of components of such infrastructure, including market data delivery platforms, ticker plants, transaction messaging, complex event processing (CEP) engines and monitoring, as well as connectivity and proximity hosting services. It finds that there are a number of start-ups in each segment. Some larger players such as IBM, Oracle and NYSE have been buying up such specialist vendors to grab market share and Datamonitor expects this trend to continue.

Circumstances favour vendors?

The report also recognises that some market participants, particularly some of the larger entities on the sell side, have traditionally preferred to develop their own infrastructure rather than buy from third parties, but asks whether headcount reductions as well as smaller R&D budgets might not actually favour the technology vendors in the current market.

Turner concludes: “Low-latency infrastructure for asset classes such as equities, options, derivatives and FX is still something of a cottage industry and that is set to continue at least for the time being. Larger players have been engaging in M&A activity, however, and Datamonitor expects that trend to go on as well. As for the underlying requirement for the products and services offered by these companies, it only tends to increase.”

Notes

Datamonitor's report Seeking Low Latency in Financial Markets looks at the market issues and strategic implications of the technologies that have emerged in recent years to enable buy and sell side companies in the capital markets to operate at ever smaller levels of latency.