The Race to a Zero Latency Stock Exchange

Adam Burns. So Stanley, firstly, thank you very much indeed for joining me this week. As one of the hearts of the global financial services industry you must have been sorely exposed to the current crisis. There is after all less blood to pump around. What's been the effect for you?  What are the challenges, the immediate challenges you face and how are you looking to overcome these?
Stanley Young. Well with any financial crisis the key factor that we're facing everyday is the extreme volatility in our markets and volatility actually drives volume. So it's a surprising situation that we find ourselves in that where we were dealing with record volumes, our technologies were processing record number of transactions during a down market. So we were probably busier than we've ever been. My main challenge during that time was to insure that our systems coped with those extreme volumes, that the systems didn't slow down and that we provided the service that our customers have come to expect of us.

Absolutely. How do you deal with sort of immediate challenges of scalability like that?
Well we normally size our systems to two to three times what we would expect in a normal market day. So even in extreme conditions we can normally cover those fluctuations and high volatility conditions. We cover those fluctuations within those margins.

So in December 2008, and quite successfully by all accounts, you debuted the Universal Trading Platform with the migration of your European bond products. At the time you said, and I'll quote if I may, "This would significantly reduce costs and create IT synergies a few months down the line." Are these benefits being realized?
Yes, it has and UTP is very much a journey for us. The launch of the bond market in December 2008 as you quite rightly said was really the start of that journey, the first cut over of a market. Since then two weeks ago we cut over our core cash markets in Europe. So that's really the second implementation of the Universal Trading Platform in support of our markets. For every market we cut over we are seeing the synergy savings that we promised the market at the time of the merger of NYC and Euronext, but like all these things it's a journey and throughout 2009 into 2010 we continue on the journey, the program of cutting over our U.S. markets and then back to our derivatives market in Europe. So yes, we're on that journey. We haven't completed it but we didn't promise the market we would complete it until the end of 2010.

Do you feel that the UTP has also delivered real competitive advantage for your customers and I suppose you passing on the synergistic benefits for NYS to Euronext?
Very much so. In this context it's all about speed. No longer are we in a market condition or in a marketplace where we have 100 percent of our markets. So in the modern days of exchanges we're competing in a fragmented marketplace with lots of alternative trading venues where our clients can execute business based on criteria that they set whether it's speed, whether it's intimacy, whether it's pricing and so forth. So we have to balance all of those factors in how we develop our technology.

We know that a substantial part of our market and we probably put this at about 60 percent are driven by low latency, the need to be fast. So that was an underlying driver for the Universal Trading Platform. We needed to be fast. We needed to be quicker than the competitors. The fact is that with UTP and this has proven itself for the cash market that we launched two weeks ago we are now as good as if not better than the competition in terms of latency around our matching technology. That in itself is a value added proposition to us as an exchange operator because our clients are putting more business through that engine than they are with competitor engines. So it's helping them be more profitable and us - and obviously, this has been of benefit to us.

How long do you feel the competitive advantage will last? I know for example that Deutsche Bank has committed 1.35 billion Euros to their own development this year.
Unfortunately I'd like to say years and years and years because we've made the investment now and we can just sit back and enjoy it. Unfortunately it's like the proverbial hamster on the wheel. We're spinning ever and ever faster and this is - the competition we face is towards zero latency. So yes, we've launched UTP but we're constantly innovating and taking microseconds out of the latency of that infrastructure so every release will be faster. So it's rather than a destination in itself it's a continuous journey of improvement, innovation, development through the lifecycle of the technology. Gone are the days where you can just release a product and say, "Okay, we don't have to do anything for five years." Constant innovation is going to ensure that we stay ahead of the competition.

You talk then of continuous technological development being key to your business growth. Of course, this creates its own problems. Who decides your technology priorities?
We do that very much in corporation with our business. It's very strange that – and perhaps financial services is unlike any other business where really the competitive advantage of our markets is substantially related to the quality of our technology. It's an oxymoron to say that you are a world class market without world class technology. The world class markets go with world class technology. Same – two sides of the same coin.

So it's very much in partnership with our business that we sit down and look at their goals, their aspirations about what they believe they need to do to be competitive in terms of their products and we try and match that with a technology capability that we know either we've got today or that we need to deliver in a short time frame to allow them to keep innovating, keep ahead of the competition. As such that's great news from a CIO's perspective. I don't have a struggle with my business constituents, getting them to a table to talk about this. They want to know what I'm going to do for them tomorrow to enable them to remain competitive. So it's a very healthy and open dialogue.

But the other sort of side of that is that innovation tends to or can be very sort of short term. It's a very high impact, "We need this now," sort of relationship. How do you manage the long term sustainability of the IT infrastructure?
I go back to my previous answer. I think that this constant dialogue with the business. It doesn't happen once a year and we sit down and say, "What are you – how do you want to innovate this year?" It's a constant dialogue looking at what's happening in the marketplace, looking at new technologies that are coming out in the marketplace and I think that is one of the reasons we set up NYC Technologies. NYC Technologies, changing ourself from supporting just an IT cost if you want to call it that, supporting our markets. We're actually now commercializing our technology and that has tremendous benefits. Not only does it act as in a way as a subsidizing our internal technology cost but it puts us in the way of innovation as technologists.

So we're in the marketplace providing solutions for clients who are expecting us to be at the cutting edge of technology. So we're constantly in that place where we need to understand what the latest low latency chip that Intel is working on or AMD is working on, what HP or IBM are working on in terms of hardware. We have our own product sets that are world leaders in middle ware and message processing and that requires us to have an R&D facility that we collaborate with our vendor partners and so forth. So innovation is really – it underpins everything we do. It's not a once a year occurrence on an offsite with our business. It is a philosophy of how we run our technology.

Do you see it then very much as your responsibility – you talk about looking for innovative products. Is it your responsibility to look outside the walls of typically kind of finance derived products or finance aimed products to things that Facebook might be doing or that Apple might be doing with their interfaces?
Absolutely. If we just thought in financial services and put ourselves in that silo we would be cutting ourselves off from a huge level of innovation that's taking place in industries not related to ours. You gave some very good examples there. If you look at the way Amazon and Google are now using enterprise compute to offer services to businesses, compute on demand using their capabilities of running very high performance networks of computing systems and so forth it is remarkable the advancements that some of those companies are making. So yes, we're constantly talking to those companies. We're constantly talking to the providers of technology to those companies about how we can use those concepts; use those ideas back into financial services.

Maybe going back five or ten years you would find a technologist that only knew financial services and they were – I wouldn't say they were stuck in a rut but they were – their world was defined by either capital markets or financial services. These days our technologists are coming from all backgrounds. In fact the young technologists coming through are bringing with them that sort of innovation, the way they think about and use technology themselves whether it be through the Facebooks or the Googles or all these community networks that the – it's just a different way of interacting and we have to use all of that to enable us to remain competitive.

So you talked about NYSC Technologies earlier. I'm wondering who do you think would benefit from your technologies?
We already have a very well established client base and I think this is one of the myths I'm having to dispel as we talk about NYC Technologies because there is a view that we're taking an IT department and turning it into a commercial technology service provider. In fact the opposite is true. What NYC Euronext did was acquire technology assets that were commercial entities in their own right whether it be transact tools, Wombat or even AMS which was the outsource company that we had with a joint venture with Outhouse Origin. So we've accumulated a set of commercial technology assets.

What we're now doing is actually creating synergies between those assets where one plus one equals three as we look at how those assets work together to create an ecosystem that we can sell into the marketplace as almost a turnkey solution for low latency trading. So there are – so we start with an established client base and the opportunity for us now is to take those clients that may have taken one product or only seen one part of the portfolio and explaining the whole portfolio to them to enable them to pick and choose products and assets that meet their requirements. So there's a fabulous opportunity here whether it be network services or trade management services or execution matching engines to really enhance the value proposition for those existing clients.

Customer satisfaction, clearly very important for NYSC Euronext. How do you know when your strategies are working?
It's actually quite simple. Because we're in a highly competitive marketplace if we're not providing services, if we're not meeting the needs of those clients they go elsewhere. The days of I would say – use the word loyalty, of participants in the marketplace about sending their business our way it's all about competitiveness and the very quickly they can route order flow to other markets almost instantaneously. So product innovation, the way we price our services, the quality of those services all are key components to satisfying that client base. As I say it's the switching costs, if I can call them those in traditional sense aren't negligible for these people.

Once they've got that smart infrastructure in place they can decide at the turn of a switch almost to route orders to a different market. We notice that instantly because our market share drops and clearly if that happens we're doing something wrong. We need investigate it. Is our pricing wrong? Is our products wrong or are they dissatisfied with the technology? So it's almost instantaneous feedback.

What metrics are you using to measure that?
I think from an external client perspective it's a little less formal than that. We measure customer satisfaction by surveying them. It's not as instantaneous as we would like it to be because we tend to get fairly instantaneous feedback. So at the end of the day, for example, we know who's trading on our market, what the volumes that traded that day, so what market – percentage market share, has that changed substantially from previous days. Very quickly we'll say, "Oh that particular firm is not trading with us. We need to find out." 

We have relationship managers whose job it is to manage day to day those client relationships. They would very quickly get on the phone to those clients and say, "What has changed? Is there something wrong? We're not seeing that volume." So it works in a slightly informal – we don't necessarily have the dashboard for that but we have the metrics that enable us to spot inconsistencies or changes in people's behavior very quickly.

So effectively the whole company becomes a dashboard?
It's very much so because we are seeing those transactions. We know if that particular market participant is trading more that day and that may just be normal market conditions but if they're trading – if let's say they trade 1 percent of the market and the next day they're only trading .5 percent of the market why has that changed? We would investigate that. Normally the feedback works both ways as well. If they're dissatisfied they're on the phone. It's instantaneous. "We're not feeding orders to you today because of X, Y and Zed," and they're not shy in coming forward with their reasons why.

My last question then really is sort of as a tech guy all of the huge advances that we've made in visualization and metrics would appear to be tailor made in fact for times like these and yet all the management dashboards, advanced forecasting and BI didn't say financial services. What do you think is missing?

I'm not sure that's a technology issue. I think what we've – and what we read and what I've seen and this is a personal view is that the regulators, the businesses themselves didn't have those metrics in place that allowed them to manage the risk exposure to their businesses of trading. To us a transaction is a transaction. It's up to the participants who are trading to recognize whether that is something, an asset they wish to trade or they wish to hold that asset on their book or where they wish to hold that asset for their client against the portfolio requirements or the wishes of that client in terms of what they expect to traded on their portfolio. So I'm not sure in terms of an exchange that's our role to police that. We just have to provide a very deep, liquid market that enables people to buy and sell securities or buy and sell instruments when they wish to trade. That's our role. I think the brokers need to look at their own risk systems in terms of what assets they're actually trading on their books on behalf of their clients.
 
Stanley Young is CEO for NYSE Technologies, the world's leading provider of end-to-end electronic trading solutions. NYSE Technologies' flexible and scalable products deliver robust and integrated solutions, from single trading positions to complete exchange platforms. Stanley Young is also Co-Global CIO of NYSE Euronext and works with Steve Rubinow (Co-Global CIO) to combine and leverage NYSE Euronext's technology across North America and Europe as a result of the recent insourcing of Atos Euronext Market Solutions (AEMS). Stanley Young and Mr. Rubinow are jointly responsible for delivering the group's strategies to implement the universal trading platform (UTP) and managing the technology unit of NYSE Euronext.