Why speed is important on a modern exchange and how to overtake competitors: 3 practical ways
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Participants in exchange trading at all times sought to overtake competitors in order to conclude the most profitable deal faster than anyone. Today we will talk about what methods today's traders use in order to achieve maximum speed.
Note : the text will focus on investments on the Moscow Exchange. Exchange investments are associated with risks - this must be remembered. In addition, for transactions you need a brokerage account - you can open it for free online .
Start: how traders overtook competitors in the 19th century
In the 19th century, the heart of the exchange was the so-called pit - a special place where traders gathered who shouted their proposals for buying and selling.
The first stock pit was patented by Ruben Jennings in 1878 - he designed the pit so that traders can see and hear other traders in the best way. Therefore, there were several steps in the pit - a trader who was at the highest step had the best view and it was easier for him to see and hear colleagues. All this made it possible to carry out transactions faster. That is, in those days, to reduce delays in trade, it was necessary to be above all. Therefore, former basketball players often went to traders, and the use of high-heeled shoes was widespread.
Ruben Jennings Pit Device
Those traders who were most successful in reducing trade delays made money on the inefficiencies of the then existing system, in which growth and a higher position in the trading pit gave a big advantage. More than a hundred years have passed since then, but there are things that do not change - speed is still extremely important for trading on the exchange.
And here are the ways in which traders today are trying to overtake their competitors.
Direct access to the exchange
The standard scheme for gaining access to exchange trading looks like this: an investor concludes an agreement with a brokerage company, receives a login and password to enter the company's trading system, and makes transactions through it. The important point here is that first the user sends an application to the broker's trading system, after which it is already sent directly to the core of the exchange's trading system.
If we remove the brokerage system from this scheme and make the request from the trader immediately go to the “engine” of the exchange, this will significantly speed up trading, including due to the fact that the trader (or, rather, his trading robot) will receive information about bidding a little faster than the rest. Therefore, the service of direct access to the exchange (DMA, direct market access) appeared.
There are trading strategies for which successful work requires an extremely high speed of access to data and passing trade orders - without DMA they turn out to be unprofitable, therefore the popularity of this service is constantly growing. With a direct connection, the application processing time is reduced to 1.5 milliseconds on the stock and currency markets of the Moscow Exchange and does not exceed 700 microseconds on the FORTS derivatives market.
Faster application processing time
The lead time for a trade order consists of several factors. One of them is the time spent by the broker to verify the compliance of the application with various parameters (for example, trading limits).
If you optimize the process of passing such checks, it can also reduce the time it takes to execute a trade order. Therefore, we at ITI Capital developed the SMARTGate service - a special limiting proxy server that is installed between the direct connection trading robot and the exchange gateway.
This technology allows customers to trade from a single account through a direct connection, save on collateral, and, most importantly, achieve a higher speed - the time for checking a client order when working through SMARTGate is up to 10 microseconds lower in the stock and currency markets.
Infrastructure Placement
Direct access to the exchange allows you to logically “bring” the trading system closer to the core of the exchange, but physical proximity to the core also allows you to gain time. Therefore, often exchanges provide the service of equipment colocation in their data centers . As a result, it turns out that the server with the trading program is located almost in the next rack with equipment on which the core of the exchange system itself works.
There are various ways to get closer to the exchange core:
- rent a virtual server located in the exchange colocation zone (that is, in the same place as its core);
- server placement in a free zone - in this case, hardware, the resources of which will be used by only one program, will be placed in the same data center, but not in the room where the exchange servers are located;
- placement in the colocation zone - in this case, the investor’s server will fall into almost the next rack with the equipment of the exchange.
As you might guess, the third option will be the fastest.
Conclusion
In this article, we have described far from the whole arsenal of methods for accelerating exchange trading. Like a hundred years ago, traders try to overtake competitors in every possible way, for example, using the fastest hardware, special cables to connect it, and creating specialized software that works in conjunction with FPGA. In our next articles we will talk more about these methods.
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