For platforms looking to differentiate on the speed of their technology the equation is measured in the scale of the challenge rather than the opportunity. As David Mercer, CEO of LMAX Exchange observes, “You can’t differentiate on speed, but you have to keep in line with the best in the market – and that means cost.”
Liquidity providers have to be able to update their prices as quickly as possible, and likewise, trading venues have to deliver price updates to their customers as efficiently as they can, to facilitate a fair trading environment. “Five years ago market data was being delivered at 100 milliseconds, then more recently it was at 5 milliseconds,” notes Mercer. “At LMAX Exchange we are live streaming and cancel and replace of orders is measured in microseconds, but already people are talking about nanoseconds – and that’s a challenge for us.”
Mercer highlights the real risk of some firms being left behind, especially in Asia when trading books are managed from Europe and the Americas, as well as regional banks faced with a potential too high technology bill to ensure they can compete. “We have people talking about clusters of satellites as opposed to microwave now, which will cost a huge amount and could lead to less competition at the top end of liquidity provision,” he says. “If the cost goes too high and the speed advantage for a few players is too great, some players will inevitably pull out as they won’t want to price in the same liquidity pool.”
While the challenge of speed undoubtedly exists, Mercer says one benefit to LMAX Exchange has been the lower cost of technology. “Even in the eight years we have been running LMAX Exchange the cost of running the technology has fallen 70%, so we can refresh our hardware at a fraction of the cost it was in 2012,” he says. “We re-write a third of our technology every year to stay up to speed and don’t end up with legacy technology, but with this comes power and a better product.”
For the full interview, which also discusses where speed advantages can still be eked out, as well as the value and risk of being an independent provider in an industry increasingly populated by post-merger behemoths, click above.