Monday, November 27, 2006

Looking for Mr Chips

Having commented ad nauseam last week about the spate of new high speed trading execution venues emerging in Europe to challenge the traditional stock exchanges, on Monday evening I found myself seated in front of a panel, which included some of the protagonists involved in the unravelling of Europe's trading landscape post-MiFID (Markets in Financial Instruments Directive).

Representatives from leading investment banks Credit Suisse (one of the seven banks behind the announced pan-European MTF otherwise known as Project Turquoise), Lehman Brothers, the London Stock Exchange, AtosEuronext, Reuters and BT Radianz, had assembled on the top floor of The Gherkin (architect Norman Foster's homage to the pickled vegetable) in London's CBD as part of Intel's Faster City launch to celebrate the release of its Quad-Core Xeon Processor 5300 series.

Intel delivered the Quad-Core Xeon processors earlier than anticipated having recently launched its Dual-Core Xeon Processor. With customers such as investment banks and market data providers requiring even faster processing speeds and computational capabilities, Richard Curran, vice president, European operations, Intel, told attendees that Intel planned to reduce the number of man years it took to launch the next generation of its micro-architecture, which is scheduled for 2008.

Intel was obviously keen to enlighten the assembled investment bankers and exchanges as to how Quad-Core and Dual-Core Xeon Processors could help them reduce latency through faster processing speeds (4.5 times performance gain), whilst not hitting firms where it hurts the most in terms of reduced power consumption (from 110W to 80W) and maximising the use of scarce real estate for housing server farms.

In an effort perhaps to demonstrate the point, parked outside The Gherkin were a series of four or five scooters trailing Intel billboards that read something like, 'Good things come in small packages'. Perhaps a racing car would have been more appropriate though as the theme of the evening was 'the need for speed'.

Peter Moss, global head, enterprise solutions, Reuters, chipped in that a year ago when it was benchmarking microprocessors in its labs, AMD chips were faster than Intel's. But recent studies at its Securities Technology Analysis Centre of the Linux version of Reuters' Market Data System running on a HP server using Dual-Core Intel Xeon processors, found that Intel had the edge.

The evening's host, Nigel Woodward, head, financial services, Intel, led a panel debate about the 'need for speed' amongst investment banks, exchanges and market data providers in the City of London. He joked that he did not want to turn the discussion into a debate on MiFID, but he may as well have as the list of panellists he had assembled (investment banks, exchanges, market data providers) meant it was difficult to ignore the heightened competition that is rapidly emerging amongst all of them.

Credit Suisse and Lehman Brothers are already competitors, but if they become systematic internalisers under MiFID or band together to form rival execution venues, which at least one of them has done, then they pose a serious competitive threat to the LSE, Deutsche Bourse and Euronext who will also be competing with one another for business under MiFID.

The question is will Intel Quad-Core Xeon processors be an essential part of each firms' armoury in the new competitive landscape that beckons? Kevin Covington, head, new product development, global network provider, BT Radianz, likened the quest for speed spurred on by the rise of algorithmic trading, which is only likely to increase under MiFID, to an "arms race".

Whilst the issue of latency dominated the debate, the panellists tippy-toed around the real implications of faster trading and execution times. Ultimately it is about customers wanting trades to be executed more quickly and cheaply, but the upshot of all that is a new competitive landscape where the exchanges will be seriously challenged by supposedly higher speed and cheaper alternative execution venues. Broker-dealers will also have to constantly prove that they are faster and better than the next guy.

PJ DiGiammarino, CEO of JWG-IT alluded to the scale of change likely to occur under MiFID when he said he expected 2007 - the year of MiFID - to be the most "memorable of our lives". "Costs have got to come down," he said. John Goodie, global head, exchange business unit, AtosEuronext, didn't beat around the bush saying that exchange consolidation and price wars were definitely on the cards.

Not surprisingly perhaps, the LSE's representative, CTO Robin Paine played his cards close to his chest hinting at the new competitive landscape that was emerging in the form of Project Turquoise. "The ability to continue to innovate and deliver consistency and predictability in terms of latency," are the challenges ahead for the LSE, he said. But surely it is difficult for any 'monopoly' to innovate to the extent that may be required?

One thing perhaps that we can be certain of is that post-MiFID, don't be surprised if you look under the hood of trading engines that you find Intel Quad-Core Xeon processors ticking over.

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