Advantage Futures

Ten Years of Technology

By Tom Guinan, Chief Technology Officer, Advantage Futures and Ambaj Sharma, Senior Vice President, Technology, Advantage Futures

November 2013

Wow, what a decade it has been! Futures trading volume was transitioning from open outcry to electronic screens when Advantage Futures opened for business in June 2003. Technology and connectivity options were evolving from T1s exchanges used to transport market data and order entry in 2003 to the multi Gigabit infrastructure in place today. In the ten years since Advantage started, exchanges, service providers and end users have all become much more technology savvy. Each group of participants is driven by the demand for state-of-the-art technology and the fastest available solution. Traders insatiable desire for faster access to market data and order entry has fueled exchanges and service providers to evolve and offer innovative solutions. As a firm that offers – among other services – technology support, Advantage has devoted significant resources to provide a fast, redundant and reliable trading network. As screen-based trading took off, the markets decentralized, new audiences were drawn to futures trading and volumes exploded.

Back in 2003 when about 80% of traders were still trading in pits on the trading floor Advantage Futures made the decision to invest in significant IT infrastructure. We realized that creating a network with the fastest core devices to handle as much messaging as possible would help attract traders transitioning from open outcry to screen trading. We knew focusing on developing the technology of the firm for electronic trading would give us an advantage as more and more trading shifted to screens. Electronic trading now represents about 95% of trading volume versus 20% when Advantage began. The turn-key solution Advantage offered as an FCM that could clear trades as well as guide and support a client’s technology needs fueled our growth.

Over a decade ago, some traders would have custom made shoes with very thick soles to make them taller so they would stand out in a crowd, and they stood in close proximity to each other yelling and flashing hand signals around a trading pit. A transition of great magnitude in our industry took place as custom shoes and trading pits were replaced with custom programs run on very powerful colocated servers in close proximity to the exchange’s matching engine. Instead of using thick soles to make them taller, this new breed of trader configures their powerful servers with fiber network cards which send and receive data at the speed of light. The sharp, quick-thinking floor local trader crowding the trading pits has been replaced by technologically sophisticated traders who hail from all over the globe.

As the volume transitioned from floors to screens, access to market data became widely available to a much larger

audience. Volumes skyrocketed. Fueling this tremendous growth were new participants and innovative technologies that enabled traders around the globe to trade any market at almost any time. Many floor traders transitioned well and translated their trading ideas into algorithms on the electronic screen; however, not everyone was a winner. Some open outcry participants failed to successfully transition to electronic trading. The creative destruction of the transition led to an explosive increase in volume as displaced floor traders were replaced by tech savvy new participants.

As technology evolved, some of the world’s largest exchanges built their own data centers. For many participants and

service providers, exchanges creating their own data centers translated into significantly higher costs. For example, if you trade products on Exchange A and Exchange B and both exchanges are in a third party data center, you need to connect and colocate at this third party data center. Now if Exchange A builds its own data center to do the same trades you must connect to two data centers. The cost of connecting the two data centers involves increased monthly recurring costs. There must also be some buildout in the new data center to house network gear and your server. The network you must maintain becomes more complex with the added node, hardware and redundant lines to connect the data centers. You must staff to support the new devices and lines. These new costs are required to support the same trade and volume as you had before and yield no new revenue.

What lies ahead for our industry over the next ten years and beyond is anybody’s guess. When Advantage Futures began in 2003, most of our electronic trading volume was from Chicago-based traders. In the past few years, Advantage has held educational seminars in New York, London, Frankfurt and Dubai. Last December, we were invited to speak at the Chinese Futures Association Conference in Shenzhen, China. These international events highlight how global the market place has become. This trend will continue as access from international participants continues to become more efficient and the ever-increasing reach of technology continues to expand the market place.

In the last ten years, we have seen trade latencies and matching engine times drop from seconds to nano seconds. Instead of using electrons to send data, today we use photons. Looking back, it is tough to digest all the changes we have experienced in our market place. What the next ten years brings is impossible to predict; but as the race toward zero latency continues, there are diminishing returns as most of the fat has already been squeezed out of the system. It will be exciting to participate in the next ten years and meet the challenges of the future as they unfold.

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