Trading places

By Huw Thomas, Editor

NASDAQ OMX and NYSE Euronext are battling for the business of the world’s biggest companies. FST hears how technology is the main weapon in the fight for supremacy.

“The information-intensive nature of both NYSE and NASDAQ's business means that the way data is handled is of paramount importance”
-Brian Clark

Separated by just a couple of city blocks in downtown Manhattan lie the headquarters of two major business rivals. As the leading listing and trade companies in the world, the venerable NYSE Euronext and upstart NASDAQ OMX, have been engaged in a turf war for years. The recent news that Charles Schwab Corp is moving its listing from the NASDAQ to the NYSE, reversing the move it made back in 2005, is just the latest development in an ongoing conflict.

Brian Clark is VP and Chief Architect at NYSE. He acknowledges that the rivalry between his organization and its near neighbor is a driving factor in technology development. "In our business in the trading complex where we compete with the NASDAQ and Direct Edge, it continues to be about extreme performance," he says. "It's about being able to attract order flow by having turnarounds of under a millisecond to five seconds these days and also being able to stabilize it so it's predictive, there's no outliers. We're always going to try to engineer that and eliminate any points of failure or points of degradation of performance."

NASDAQ OMX Head of Globalized Services Carl Magnus Hallberg agrees that operating in the US' financial capital is a challenging proposition. "New York is probably the area where we have the toughest and meanest market in terms of ourselves engaged there versus the open competition from the major exchanges in the New York area," he says. Just as at NYSE, technology is the driving factor in the battle for supremacy. "For us the key thing has and will continue to be to ensure that we drive our technology innovation so that we can provide the market with the best execution in terms of pricing and performance requirements when it comes to latency and throughput of our systems," he continues. The figures behind this performance are striking. Hallberg estimates that NASDAQ handles around one million messages a second with an average latency of just 250 microseconds, a speed that marks out NASDAQ as the fastest rating system in the world.

High-speed data

The information-intensive nature of both NYSE and NASDAQ's business means that the way data is handled is of paramount importance. However, each organization approaches the issue in slightly different ways. "We do not own our own data centers," Hallberg explains. "We work with partners to provide us with those services where we base to our operations. Verizon provides us with a primary data center in New York.  They also provide us with the primary data center capability in northern Europe."

By contrast NYSE are currently building two new data centers, one in the north east of the US and one in Europe. "It allows us to optimize some of our server farms and bring in a leading edge network," says Clark. "We joined with Juniper and kind of positioned ourselves for data center fabric. Also, half of our data centers will be occupied by our customers who want to co-locate with us so they're close to our trading platforms and they get the high speed out of it. That's pretty mission critical for us, and we have hard end dates to make that happen."

Such is the demand for lightning fast response times from the exchanges, that this tendency for client companies to get up close and personal is mirrored at NASDAQ. "The introduction of high frequency algorithmic trading that requires very low latency, high throughput requirements, we can't have their trading systems connected to us via a network," says Hallberg. "They have to be co-located within our data centers.  So really the cooperation with Verizon around data center and data center growth provides us with the data centers and also the capability to grow in those.  Our co-location business in the United States where member firms come in and place their equipment in our data centers has grown tremendously during the last year, so we have actually had to continuously build out that capacity that we have required."

The aforementioned data center development at NYSE is of central importance to the companies operations. In addition to handling the exchange's trading environment, it also comes into play post-trade in the integration and aggregation of data along with inventory and billing functions. "Because of our global network, we're also looking to potentially hang services off of that," says Clark. "That would reside in the network.  We could say it's a cloud, but it's like software is a service or infrastructure is a service where we're able to provide managed services for small hedge funds, small broker dealers, private equity firms that don't want to have to manage that environment themselves."

Crisis lessons

The recent financial crisis illustrated provided a powerful object lesson of the need for processing speed and power in the exchange space. The turmoil that the market was thrown into resulted in vastly inflated volumes of trade. Ensuring that the technology is in place to cope with spikes like this is absolutely critical. Latency needs to be trimmed to the bone, so that as volumes swell, speed is not negatively affected. "When the financial crisis started to hit what happened in the actual trading industry was that the velocity really went through the roof," says Hallberg. "That meant that trading volumes increased tremendously over a very, very short period of time. From an IT perspective it has been a continuous race to ensure that we can live up to the volume requirements put on to us, and remembering now that we are kind of fighting in real time for business. If we cannot cope with the requirements, the order flow will go to another trading venue."

The challenge around preparing for such events is precisely their rarity. Until a financial tsunami strikes, it is incredibly difficult to predict its severity. More recently, traders had to cope with the collapse of the Dubai property market in late 2009, which once again sent shockwaves through the market. Lessons learned from earlier problems came in useful in this situation. "The trick has really been to ensure that it is possible to trade even during quite extraordinary situations in terms of volume growth," says Hallberg. "It should always be possible to trade, even during turmoil situations that hit us with higher trading volumes and we need to ensure that we can live up to expectations."

The trading requirements of an overloaded market are daunting, even by the standards of an industry that has been getting progressively faster throughout the digital age. During a period of particularly high traffic, huge spikes can come at one to two millisecond intervals, rendering them virtually continuous. Unfortunately, there is now way to slow the system down, so it is simply a case of fly or die. Despite the challenges that it has faced, Hallberg is bullish that NASDAQ possesses the capability to cope with just about anything the market throws at it. "Honestly we haven't found a faster computer system than we have in any industry in the world right now," he says. "That maybe says something about the extreme performance requirements we have. We have to work with the absolute latest technology in our systems to ensure we live up to the requirements and I guess what can be difficult is to ensure that you're always pushing that new technology."

The emphasis placed on speed and bleeding edge technology is not the only consideration however. The way in which organizations interact with their customers also has a major impact. Getting a clear view of this interaction can pose problems for an entity like NYSE.  "One of the challenges with the exchange is knowing exactly our customer is," says Clark. "We have listings companies, people we want to service on the market and issuing front; we have our members and people that trade with us, and you can even argue that some of our customers are the regulatory agencies, the FCC and there's a lot of demands from each one of these constituents. We have adopted salesforce.com; we have another product, but I believe we're going to be merging to one. That's kind of how we can get a holistic view. It's those kinds of more relationship management things we have to get better at." To this end, NYSE have been engaged in leadership forums, centered around the theme of managing relationships with clients.

A changing world

If the events of recent years have taught us anything, it is that the business environment can alter very quickly. The ability to cope with change at a global level is therefore of paramount importance going forward for both NYSE and NASDAQ. "For us moving forward the priority is to continue to build the global footprint with new exchanges and new offerings in the various regions we are already in and where we will become active," says Hallberg. "We also have quite interesting new business we have started to develop in terms of new services that we provide to public listed companies.  We have a means there to ease the public company's life basically in the public world to be able to ensure that they can do their board work sufficiently, that they can distribute press lists of information and be in contact with the investor community. In addition to developing trading venues and making them more attractive and to build our global footprint we also have better services that we can provide to these companies."

For Clark the process of change is something that has to be approached with a great deal of deliberation. New decisions about major transformation or technology change start with small proof of concepts. "For example, we've adopted a framework for our post trade which is completely different from the technologies that people use today," he explains. "We brought it in and started to train people up on it. Frankly, some people adopt it right away, and they're ready to go, and some people don't.  The people that adopt it tend to stay and the ones that don't often end up leaving. There's a saying if you're making a major change like that, 20 percent of the people get behind you right away, 60 percent wait and see what happens and 20 percent would rather go to hell than follow you. That's kind of been the model we see." In order to get around resistance to change, the process has to be managed carefully.

"We typically have a number of people that want to adopt it," Clark continues. "We do have to do kind of a marketing and sales campaign to the business when we make these changes because sometimes they don't understand the value in IT-driven developments. We also need to do sales and marketing when we're changing the underlying processes that we use today."

What is clear from both Clark and Hallberg is that, the pursuit of ever faster and more refined technology will remain the battleground between NASDAQ OMX and NYSE Euronext as they vie for position in an ever more competitive business environment. The ability to serve clients with the speed and accuracy that they require will continue to be the key differentiator as we go forward. It doesn't look as if either organization will be landing a knockout blow anytime soon, but the contest for domination should prove fascinating.

Mapped out

Brian Clark outlines the importance of having a clear idea where you're going.

About two years ago we launched our global architecture council. It's a virtual organization and it includes people globally from different disciplines, whether it's security data, communications infrastructure or application architecture. Together as a team we engage with vendors. We're always looking out 18 to 24 months at what new technology can we adopt.  What kind of roadmaps do we have?  So, we have regularly scheduled meetings with all the businesses we have across the globe and talk about what technologies we're looking at and what the priorities are for the business. That kind of dialogue has really just started over the last year. We were very focused on getting some technology deployed over the first year, but this is a form and a mechanism to make sure we have the alignment we need with the business.

If you look at our business lines, we have our listings business, we have our trading business, but we have multiple trading venues. We have them in Europe with equities.  We have US equities and derivatives, and each one has their own priorities and their own demands for their client. What we've been trying to do is get them to prioritize what we should be looking at in terms of business functionality but also bringing technology to the table where we can collapse the typical silos we see. We've had some experience with that in the post trade area where we deal with a lot of data management. We're a little bit ahead of the business in terms of collapsing these silos and operating as one team.

In touch

Carl Magnus Hallberg on the importance of a close relationship with tech providers.

We work extremely close with our technology partners. We literally sleep in their R&D lab, so we work with companies like Intel, like Cisco, and a few others to ensure we have the latest technology. When we look upon the networking side we bring in companies like Verizon to ensure that the volume growth can be transported out through our global community. The trading traffic is only one thing. We also have all the information distribution that has to go out to all the millions of users around the globe that consumes real time trading information, but by sitting in the R&D labs literally day by day with our architects and being able to decide very quickly when we have new technologies that we can use, and to make that decision and to quickly bring it in without any disruptions in the market. 

Even though that you never see or very seldom see outages in exchanges, there is quite a lot of technology exchanged underneath all the time, and if you look in Europe right now Verizon is undertaking a huge shift in our old network as without affecting anyone or anything in the trading traffic. We're doing that to prepare for the volume growth we also have in Europe, so you need to have a very close cooperation with your partners. So it's not the kind of cycle where you can spend six months just evaluating technology. Working out what we need for our next trading systems has to be a part of our ongoing, everyday work.