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Latency Wars – The Empire Strikes Back

Few can have missed the announcement this week that the LSE’s new low latency platform, Millennium Exchange, will be up and running in September. This comes just months after its acquisition of the Sri Lankan firm, Millennium IT, which supplies the technology and is testimony to the new thinking now taking place at the LSE. The same news item also mentions that the LSE has adopted a “self certification procedure” for the transition which will place the onus on the trading community to ready itself for the new platform. This is a canny move by the LSE as it enables them to regain the initiative and, at the same time, set the agenda for its members and technology partners. This is because both will need to focus on ensuring an orderly transition to the new platform between now and the go-live date.

Jeremy Grant’s article on FT Trading Room earlier this week highlights what all the fuss is about: latency and the growing number of High Frequency Traders who supply more and more of the liquidity in today’s markets. Whilst we can all debate whether the HFT phenomenon is a good or a bad thing, they are most definitely here to stay and have been a fundamental force in fragmenting liquidity both in the US and in Europe. Now that Tokyo has joined the low latency debate with the TSE’s new arrowhead platform it will be interesting to see if this ignites the fragmentation fuse in Asia too.

This headlong rush to low latency must of course be accompanied by due consideration for resilience and failover. Most technologists agree that there is a basic trade-off between speed and resilience – the faster you go the harder it is to put the car back on the track if something goes wrong. In the US, this is much less of an issue as the rest of the market provides resilience in the event of a glitch at any one venue. As we have seen in Europe, however, the lack of a consolidated tape and other factors mean that trading seems to simply stop in the event of an outage at a primary exchange.

On this point, it was interesting to see the results of our own poll on how best to solve the current issues surrounding the lack of a European consolidated tape. 60% favoured a collaborative approach as opposed to more regulation. With the stakes so high, and so many vested interests, it will be a great achievement if we can solve these issues ourselves without more “help” from the regulators.

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