Getting the Message: Middleware Matters
The race towards zero latency-no delays-in the trading cycle has generated countless breakthroughs in technology. Time gets measured in microseconds. The impact of complex events get calculated before trades are made. Market data are filtered and redistributed to applications that use them in real time.
Now, as trading firms seek to squeeze every last bit of latency from the trading cycle, they are increasingly focusing more attention on middleware, which represents the critical set of applications that must be seamlessly knit together to send and receive market data, reference data, trade/position data, and so forth.
"Messaging is in fact one of the most critical dimensions of the architecture within capital markets," said Scott Reed, an executive with Accenture's trading and risk management practice. "We can talk about the front end and how traders trade, we can talk about how databases are used to extract and store data, but the messaging that moves components around from trading applications down to risk applications and vice versa... that is the area we believe will continue to see a huge upward tick and adoption."
For Silicon Valley-based middleware provider Real-Time Innovations (RTI), the need for speed and lower latency-that the firm has addressed in other industries-is fueling the firm's growth in the capital markets sector.
Currently, RTI's biggest client group is the U.S. government, with applications in almost every Navy program, said RTI CEO Stan Schneider. Other clients include PIMCO, Lockheed Martin, Nikon and Raytheon and the largest single power producer in the U.S., the Grand Coulee Dam in Washington state, which signed on with RTI last October. Unlike trading floors-which can shut down at midnight-the Grand Coulee has a requirement to never, ever shut down, noted Schneider.
"We have applications in many industries-medical devices, automotive systems, flight simulators, car simulators," said Schneider. "The things they all have in common is that they have a requirement to have very reliable delivery."
This requirement can easily be applied to the financial services sector, which RTI has been targeting since it opened an office in downtown New York in September 2008. Schneider, who has a PhD in electrical engineering and computer science, said the financial industry was a natural sector for RTI to expand into.
"It was pretty obvious we had technology that we had a technology that could really help in this market," he said. Last June, RTI unveiled the financial services edition of its Data Distribution Service at the SIFMA Technology Management Conference in New York.
Earlier this month, RTI announced that the global equities division of Citigroup deployed RTI Data Distribution Service in its new automated trading systems in Manhattan and Carteret, N.J. RTI had previously worked with Automated Desk Solutions (ATD), the South Carolina electronic equity trading platform provider Citigroup had acquired in 2007. This recent deployment by Citi is "significant larger," Schneider noted, declining to go into further detail.
Without commenting on its relationships with vendors, Carlos O'Ryan, a managing director in equities technology at Citi, noted that "using the right middleware can help you beat latency, or, simultaneously, using the wrong middleware can introduce a significant amount of latency in your system."
In addition, middleware frees up time, helping users deal with the complexity of a network and simplifying its architecture. This allows software developers to spend more time creating business logic than dealing with intricacies and complexities of how networks work, noted O'Ryan.
"The trick is to find the middleware that helps you put products in the market quicker and, at the same time, keep your latency under control," said O'Ryan.
Every little competitive advantage that can be achieved in speed does matter. Schneider quotes an admiral who had been working on a self-defense system for aircraft carriers. "He said, 'I can't define 'real time' but I can define 'not real time.' 'Not real time' is when they fire 24 missiles at you and you shoot down 23.'"
A Competitive Edge
In a study released earlier this month, "U.S. Equity Technology 2010: The Sell Side Perspective," Tabb Group senior analyst Kevin McPartland noted that all bulge bracket firms are "currently either using some form of hardware acceleration or are investigating its use."
"Third-party middleware products have reached a level of sophistication that the cost required to build a better, faster solution in-house are often hard to justify," McPartland told Securities Industry News. "However, legacy platforms that were born before the current crop of middleware products, and systems based on paradigms different than those used to create traditional messaging middleware do and will continue to exist."
When it comes to handling the intricacy of trading, middleware can deliver differences in speed that gives one player a leg up on another. "Middleware, especially in the form of contemporary messaging, is being used to a competitive advantage by those firms who are able to maintain the geometrically increasing flow of data across applications with minimal latency and maximum reliability," said Accenture's Reed.
"Big profits accrue to firms that are able to beat out others in finding liquidity and executing orders at optimal price and order quantities," he said. "In the past, firms that tried to build reusable applications flexibly within service-oriented architectures have typically been penalized because SOA platforms are not engineered for speed. However, in the wake of the latest middleware advances, firms are now able to maintain that flexibility while ratcheting up messaging velocity."
"If you can handle volumes, you can play in the [algo trading] game, but you need to be able to handle latency and volume to win the game," said Sumeet Shendrikar, director of technology, financial services, at RTI.
Trading systems are becoming distributed because a single node can no longer cope with the message volumes and performance requirements, Shendrikar explained. "So each part of the system-the feed handler, the algo engine, the order management, the execution management, the crossing & matching engine-requires dedicated hardware resources."
Large financial firms can save a lot of power as well as hardware, Schneider contends. "They get to eliminate a whole bank of servers," he said. "There are hundreds and hundreds of machines in this typical application and a third of them might be servers. [They are] able to use their space and power budgets to do more trading instead of more serving data."
For a global financial trading platform, this can mean the elimination of hundreds of servers.
Some middleware solutions have a "hub and spoke," or central servers in the network that distribute the data, and those solutions tend to scale poorly as the market data volumes and system capacity increases, explained Citi's O'Ryan. "You have to buy more and more servers to keep up with the market data increases over time," he said. "If you have a middleware solution that does not require centralized servers then you can achieve significant savings by doing so."
About 90 percent of RTI's customers have an in-house solution or an older competitive solution in place when RTI first walks in the door, said Schenider. "Commercial technology has gotten way ahead of what the in-house solutions have done, [therefore], in-house middleware solutions are looking much less attractive to people when they upgrade," he said.
What is of interest to clients, Reed noted, is trying to figure out how they take an unwieldy, old style, legacy architecture and fine-tune it to drive speed while driving out latency. "Firms like RTI and 29West are doing that by trying to write software programs that allow for a very fast messaging while being able to be flexible enough to work with the existing application," he said.
As a result of economic constraints, firms have gone for some time of time without replacing their information systems. "What we've seen over the past couple of years is that a lot of folks have deferred the middleware transition," said Barry Thompson, CTO of middleware provider Tervela. "Middleware... becomes the highway for market data, and with application needs going up, with market data increasing the time sensitivity, the problem hasn't gone away. What we're starting to see over the past six months is a big uptake in the need for interconnecting systems and the revisiting of middleware."
Middleware messaging provider 29West, which serves Direct Edge (See case study, Direct Edge Picks Up Where ISE Left Off ), the Chicago Stock Exchange and Chi-Tech, announced record revenue and earnings for 2009, effectively doubling its 2008 financial performance. In the fourth quarter, 29West said it added nine major new customers and nearly doubled its revenue achieved in the third quarter, which had been a record.
"Ten years ago, everybody doing this was writing their own messaging middleware," said Matt Meinel, global director of business development at 29West.
This article can also be found at SecuritiesIndustry.com.