An excerpt from The Harrington Starr’s, The Financial Technologist Q2 Edition – Blockchain Special:
Lower Latency and Lower cost: Having your Cake and Eating it too
Written by Stephane Tyc
For years now we have heard about how banks are under increasing pressure to cut costs. In the post-crisis era, a large proportion of spending has had to be earmarked for upgrading systems to meet regulatory requirements. With the latest annual cost of compliance survey from Thomson Reuters showing that 70% of firms expected regulators to publish more regulatory information concerning requirements (with more than a quarter of firms expecting “significantly” more), it’s little wonder that banks have been putting much of their focus on compliance-related spending rather than performance-related investment.
Although this means proportionally less money is going into technology that could enhance performance, such as via lower latency networks, there is an upside to this situation, which is that banks are increasingly open to innovative solutions that both maximize the return on investment and minimize the total cost of ownership.
What if someone said you could dramatically reduce your latency and save money at the same time? Suddenly investment decisions could become a lot easier. That possibility is finally becoming real as new networking solutions that combine traditional fibre-based traffic with cutting edge microwave technology come on stream.
When it comes to latency, banks have had to strike a delicate balance. They need to be fast – to serve latency sensitive clients and for their own risk management – and they need to be reliable. But banks also have plenty of clients for whom shaving microseconds doesn’t matter so much. So how can they stay competitive in latency terms without spending a fortune on latency reduction investments that some of their customers may not deem essential? Given the spending restraints they’re already under due to regulatory requirements, this question becomes even more difficult to answer.
There could be a way. The technology is actually not that new but it was given renewed attention thanks to microwave networks. Microwave bandwidth is so scarce that market data providers have developed very efficient compression algorithms to distribute even a limited subset of the data. Now those investments in better compression and more efficient distribution can be ported to fibre. Today, a host of microwave networks are in place that can be leveraged in a way that can give banks access to much lower-latency networks without sacrificing reliability, security or limiting the ability to move large amounts of data over great distances. The icing on the cake is that once you combine the speed of microwave with the reliability of fibre, firms will actually be able to lower their market data distribution costs.
Since service providers such as McKay Brothers are already running ultralow latency networks that can meet the requirements of the most demanding customers, making that technology available to a wider client base is not that great a leap. The hard work already done for these ultralow latency customers means the technology can be extended without the service provider taking on a great deal of extra cost.
The obstacle has always been that while latency-based trading firms can design their trading strategies to minimise the amount of data that crosses a network, banking firms don’t always have that option. Often significant amounts of data need to criss-cross the globe. Cloud technology, improving data storage and data mining capabilities and increased regulatory risk management requirements are just some of the factors behind the exponential rise of data traffic. Think of it as a cost of doing business.
The solution comes from combining microwave networks with fibre. By combining these technologies, banks can get the most relevant information by microwave and receive a full feed of all the data via fibre.
The first microwave networks, developed half a decade ago, linked the futures markets of Chicago with the cash equity markets of New York. Since then, numerous networks have sprung up that shave milliseconds off of transit times between a host of major financial centres, including London and Frankfurt. The companies that demand the lowest latency possible were the earliest adapters. Demonstrating the value of these ultra-fast networks within a bank’s infrastructure is a natural extension.
Marrying the robustness of fibre with the sheer speed of microwave is a work in progress. But it’s happening. Banks are already exploring the benefits that this marriage can offer. For those that do, the marriage is not actually about technology. It’s about strategy and prioritizing the most important data for client service and risk management. It’s about combining best-in-class performance with IT savings.
In the hard-nosed world of finance, no one puts much stock in fairy tales. But the combination of fibre and microwave may just be one of those happily-ever-after marriages you occasionally hear about. Watch this space.
For the full article: http://www.harringtonstarr.com/download-financial-technologist-q2-edition-blockchain-special/