The speed at which a share trading exchange can complete a trade has been the biggest differentiator in recent years, as exchanges attempt to cater for traders using computers to trade automatically at high frequencies. But speed is becoming a commodity and exchanges will have to look at other ways to stand out from the crowd.
Stock Exchanges have reduced the time it takes to complete a trade from milliseconds to microseconds in the last few years. The London Stock Exchange is a case in point.
The London Stock Exchange (LSE) had to replace its technology platform when it realised it was unable to keep pace with other major exchanges. Even secondary exchanges were coming to market with faster and more flexible systems. The previous system, known as Tradelect, managed to get its trading speed down to 3 milliseconds but competitors were looking at breaking the millisecond barrier.
Concerned it would lose ground, the LSE acquired an entire trading software supplier, MillenniumIT, for £18m, to give it a new trading system and the technology resources to keep the systems effective. Today it completes a trade in an average time of 100 microseconds (microsecond is millionth of a second).
But Tony Weeresinghe, who heads up MillenniumIT, says speed is no longer the most important factor. He is saying this from the strong position of having the fastest system out there: The London Stock Exchange's Turquoise multi-trading facility and the main exchange now complete trades in 103 microseconds and 115 microseconds respectively. It also expects to reduce this to 75 microseconds in the near future.
"Speed is very important but it will be a commodity very soon. Everybody is as fast as each other now," says Tony Weeresinghe. "You can only get to a certain point. It was the main differentiator a few years ago but not now." He said exchanges will have to look at offering different kinds of services to differentiate.
Rik Turner, financial services technology analyst at Ovum, says speed is no longer the ultimate differentiator and as a result of this and increased competition, trading venues are looking at new services. "These include different types of trading as well as post-trade services such as clearing."
Hiranda Misra - CEO at trading technology supplier Algo Technologies who was once COO at trading venue Chi-X - agrees. He says the argument for and against a trading venue is moving away from just speed. "Technology is just a piece of technology - it is what you do with it that counts. It is about building a business model around it."
But the LSE will continue to shave milliseconds off trading times. Weeresinghe says that, now that MillenniumIT is part of the LSE, it has a better understanding of how exchanges and their trading customers work. As a result it has been able to fine tune its systems in line with the way customers use them.
PJ Di Giammarino, CEO at financial services think tank JWG-IT, believes the race to speed is not what it was, but is still on. "The investment banks still want the fastest trading speeds and there will always be one formula one leader that gets most the business because it is the fastest."
Investment companies that connect to the stock exchanges will also have opportunities to speed things up at their end. They will maximise network connections and are also working on increasing speed through hardware. This technique sees software burnt directly onto chips so calculations are made instantly.