New software by start-up company ALGO Technologies offers to cut trade execution time to levels close to the speed of light, giving exchange clients an edge in the high-frequency trading arms race.
The system takes 16 microseconds, or millionths of a second, per round-trip for a trade from outside an exchange's firewall, compared with 250 microseconds on Nasdaq OMX, 270 microseconds on BATS Europe and 400 microseconds on Chi-X Europe, according to measurements by independent firm Corvil, based on volumes of 300,000 messages per second.
The speed required to execute a trade is known as latency. Increasing demand for high-speed trading is driving Europe's exchanges and stock trading platforms to invest in reducing latency and those which cannot keep up may fall by the wayside.
We believe that we have killed the latency debate, because the physical limit of the speed of light means that no competitor could produce a system significantly faster, said Hirander Misra, ALGO chief executive and co-founder.
Misra is a former chief operating officer of Chi-X Europe, which within three years grew to be the third largest pan-European cash equity trading platform.
He said ALGO expected to sign its first licensing contract with a European exchange in early June and would follow up this year with a second exchange, which has already tested the system, and with a large full-service brokerage.
Next year he expected to add three additional clients.
Tradititional stock exchanges have lost market share to new trading platforms such as Chi-X and BATS over the past two years, partly because they could offer lower latency to high-frequency traders and other players.
Now there is the potential for a second wave, like the 'Empire Strikes Back' by exchanges, which can use the ALGO system to recapture market share, Misra said.
Herbie Skeete, managing director of research firm Mondo Visione, did not necessarily agree ALGO will end the latency debate, even acknowledging the laws of physics.
How far can reducing latency go? ... So long as there is money to be made through temporal arbitrage, there will be a continuous battle to be the fastest platform in the North, East, South and West, Skeete said.
But Skeete did see the advantages of the new software.
ALGO Technologies ... has set the benchmark which other trading technology providers will be seeking to surpass, he said.
Misra said ALGO was able to achieve much lower latency, because even the fastest systems in use today are based on design principles dating to 1997, which have since been bandaided and plastered over the years in ways that slows the engine down.
The company went back to scratch to develop software code to be as efficient as possible and paired that with the best hardware available.
ALGO is willing to provide clients with full access to the software code after ensuring it had intellectual property protections, Misra said.
(Editing by David Holmes)