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Matt Levine, DealBreaker, Deutsche Bank Had A Profitable Interest Rate Trading Business In 2008, here.
Again, though, I come at it the opposite way: if your business is based on manipulating rates, why are you running a matched book? There’s an intuitive plausibility to the Journal‘s basic tale of (1) bank put on big bets, (2) risk managers fretted, (3) they were reassured by traders saying “well we’ll just manipulate Libor so this bet pays off for us.” But if that was really the thinking, why not do it all the time? Why go through the effort of laying off 98% of your interest rate risk, building a mostly balanced book of long and short swaps, instead of just leaning really hard into bets on Libor going up, say, and then working the phones hard to push it up?
Advanced Trading, Deutsche Bank Shaves Trade Latency Down to 1.25 Microseconds, 15 mar 2011, here. They report:
“This is a bit of a revolution, since it’s breaking a barrier from previously doing a couple of hundreds of microseconds and then 80 microseconds which is the normal software-based Ultra products’ latency,” said Roth. “That is the market standard and now we’re getting into the low-single digit microseconds. That has never been done before,” he said.
Deutsche Bank deployed the patent-pending card in its lab in the first quarter. As of Monday, the first client was ready to begin testing it. “The trade comes into the card, the card does the protocol translation and risk checks” explained Roth. “We’re bypassing the PC and doing everything in hardware,” explained Roth, who runs the global product development team for equity trading.
The Ultra solution will appeal to the bank’s sponsored access clients who are facing new market access regulations from the Securities and Exchange Commission (SEC) to ban naked access by requiring pre-trade risk checks. Right now, the product is live in Nasdaq’s data center in Cartaret, New Jersey, and it will soon rollout to Direct Edge, Bats and then NYSE Arca. When it gets to Europe, the London Stock Exchange, NYSE Euronext and Xetra will be the main ones where latency really matters, said Roth.
Though other Wall Street firms are working with hardware-based solutions, and in some cases, they are working with vendors in the space, Roth believes that Deutsche Bank has the competitive edge. “Our solution is so far the lowest latency we are aware of that works close to 1 microsecond because we work with standard hardware components,” said Roth.
“If you look at the time horizon, we think we have an edge,” says Roth. “Our vision is that hardware will proliferate in this space over the next 15 to 24 months,” said Roth. “This is going to be the standard in low latency trading and more speed is going to be adopted in algorithms,” he predicted.
However, latency has become such a marketing buzzword in the electronic trading industry, that the concept can vary based on how it’s measured. Deutsche Bank measures the latency from wire-to-wire, when the message hits the card and when the message leaves the card,” said Roth, adding, “There is no ambiguity.” In this type of work, the bank uses a high resolution, oscilloscope that connects to the chip.
But 1.25 is just the start, he said, adding, “Getting the latency below one, is actually a tuning exercise.” Roth said he’s “confident” that the bank can get the latency below one microsecond. “This is about engineering. You can do these things if you are really focused and have the right engineering skills available,” he said. “It’s also about applying new techniques to the financial markets,” he continued. While a lot of proprietary trading firms and hedge funds are excited about this, Deutsche Bank is also one of the first firms to use low latency access in algorithms for the buy side, he said.
1) The SEC’s 15c3-5 Market Access Rule and CFTC’s advisory recommendations for DMA will rekindle the latency wars.
Just around the corner looms the SEC’s Market Access Rule to ban naked access. No longer will participating firms have unfettered direct market access while broker’s (virtually) look the other way as orders flow into the market with little or no checks or balances. I’m sure it was a profitable enterprise for the broker community to allow this direct channel for those willing to pay a little extra.
Brokers compete on the range of services they offer. They attract client’s order flow by offering better fill rates, better prices, increased liquidity, etc. The SEC’s rule 15c3-5 which mandates pre-trade risk checks does not really inhibit the level of service brokers can provide, but it does ensure everyone pay a latency tax for checking credit limits, and order constraints (quantity and price) brokers must enforce.
As a result, a groundswell is occurring. Pre-trade risk is fast becoming the next latency battleground. While some are scrambling, others such as Morgan Stanley are announcing achievements of microsecond latency. I am sure others will follow with revamped pre-trade risk modules as they leverage multi-core hardware to achieve parallelism in their architecture. A renewed emphasis onFPGA, hardware acceleration has also surfaced. FPGA technology has been readily available for a number of years, it’s success has primarily been in appliance oriented technology for ticker plants and messaging such as Exegy and Solace where it’s an embedded component. An Aite report on Capital Markets Technology spending puts FPGA low on the list of IT spend for infrastructure investments. I think this is primarily due to the fear, uncertainty and doubt surrounding the direct use of non-commodity hardware. From an IT manager’s viewpoint, a series of difficult questions arises regarding FPGA… “complex, non-standard development, handling long-term maintenance, support, diagnosing failures” and lack of experienced talent to hire. Challenging questions and likely the reason for its lackluster success.
Low-Latency.com, FPGA Momentum Accelerates!, 9 Aug 2011, here. They report:
The answer is: quite a lot, judging by various news releases coming my way of late. Here are some highlights:
- Deutsche Bank’s Autobahn equities electronic trading business recently expanded its μltra FPGA products to the US, to provide pre-trade compliance and risk checks in its co-located trading apps at NYSE, NYSE Arca, Nasdaq, Direct Edge and Bats. The claimed performance of the risk checks are 1.35 microseconds for OUCH messages and 1.75 microseconds for FIX messages.
- Nomura extended its NXT execution platform to Direct Edge’s co-lo centre at Equinix in Secaucus, NJ. And it’s claiming latencies of under 1.8 microseconds for fixed-length exchange protocols and 2.8 microseconds for FIX.
- Fixnetix introduced its iX-eCute trading gateway, offering latencies as low as 740 nanoseconds wire-to-wire, with 20+ pre-trade risk checks in less than 100 nanoseconds.
- Burstream rolled out its managed market data service at Nasdaq’s co-lo and Telx’s proximity centre in Chicago, leveraging data feed handling and order book generation technology from NovaSparks.
- TS Associates updated its Application Tap precision time card to make more use of FPGAs for transferring data to host memory, reducing its performance overhead.
- Impulse Accelerated Technologies introduced an FPGA development kit for 10gE ITCH/OUCH protocol handling, allowing CPU/kernel bypass to application memory space.
- Maxeler introduced MaxNode10G, a platform designed for wire-speed processing of multiple 10 gigabit network data streams.
Wallstreetandtech.com, Capital Markets Outlook 2012, here. They report:
Bank of America Merrill Lynch recently announced BofAML Express, an ultralow-latency market access and risk control platform for U.S. equities that provides embedded risk controls with sub-10 microseconds of wire-to-wire latency. Morgan Stanley is using software to shave latency from its compliant direct-market-access platform, Speedway 3.0, which is live with at least five exchanges, including NYSE, ARCA, Nasdaq, BATS and the two Direct Edge exchange platforms.
And Deutsche Bank is employing field-programmable gate array (FPGA)-based devices to lower latency for its risk checks. The platform, known as ultra FPGA, runs from Deutsche Bank’s cabinets at exchange data centers. Latency-monitoring service Correlix RaceTeam recently measured ultra FPGA’s pre-trade risk management gateway latency at 1.35 microseconds for messages sent to Nasdaq and at 1.75 microseconds for FIX messages.
Nomura, which went live in July 2010 with its ultralow-latency market access product, NXT Direct, also has turned to FPGA technology for its pre-trade compliance and risk checks. The bank says the platform offers risk-filtered, wire-to-wire direct connectivity in less than 1.8 microseconds for fixed-length exchange protocols and less than 2.8 microseconds for FIX protocols.
Industry Leaders: Deutsche Bank, Morgan Stanley, Bank of America Merrill Lynch and Lime Brokerage have adopted aggressive strategies to provide low-latency pre-trade risk controls and market access.
Technology Providers: High-performance cloud infrastructure providers include BT Radianz, Thesys Technologies, SunGard Capital Markets, NYSE Technologies, Equinix, EMC, Options IT and VMware. FPGA providers include ACTIVFinancial, Impulse Accelerated Technologies, Altera, Xilinx and Novasparks.
Algo-Logic sells an FPGA system to parse ArcaDirect messages at the 10GB link rate 60-70ns processing time for orders and a wire-to wire latency of 1.3 microseconds, here. Sounds kind of like the DB Aug 2011 press release, here, see what you think:
“Algo-Logic Systems builds low-latency FPGA-based hardware solutions for financial applications. We provide dedicated design services and support to address each of our customers’ unique problems.
Our Low-Latency Gateware Library supports financial protocols (OUCH, XPRS, ArcaDirect, FIX) in hardware for multiple U.S. exchanges. Pre-built IPs accelerate the development process.
- Latency < 1 µs (wire-to-wire)
- 10Gbps line rate processing
- Custom field parsing
- Field upgrades for new protocols
We have implemented solutions that run on the NetFPGA 10Gplatform and other hardware platforms. Alternatively, we provide estimates for other hardware platforms comparing factors such as cost, time-to-market, and development effort.
Some of the projects we delivered include:
- Pre Trade Risk Checks
- Market data processing for ArcaBook”