By Markus Löw, Head of Monitoring, Vassilis Vergotis, EVP & Head of Americas and Fabian Rijlaarsdam, Monitoring Analyst at Eurex Exchange.
Technology is one of the most important cornerstones of electronic markets and, more broadly, of today’s global markets. As technology allows for increasingly complex systems from a design standpoint, it is essential to get a clear view on each step inside a system to understand outcomes. Gathering data at discrete points and understanding the outcomes within such systems is a practical way to break down the complexity and deliver digestible information. Within the area of financial market technology, especially in the case of exchanges and alternative trading platforms, transparency is essential for monitoring the fairness and market structure of financial markets:
- Data analysis on latency is important in this matter, as it provides insight into the technical infrastructure.
- Latency statistics are essential to provide users, operators and supervisory authorities detailed information on the performance and stability of technical infrastructure.
Despite the common perception that these statistics are valuable and important in understanding developments in market structure, two problems exist:
- Data analysis on latency is important in this matter, as it provides insight into the technical infrastructure.
- Secondly, and perhaps more important, is that many people do not fully understand the data that is available. The reason for this is the deep dependency on in-depth knowledge of the technical infrastructure that is used.
This article aims to increase understanding of latency statistics by expressing our view on latency, using Eurex Exchange’s latency statistics as an example. Our latency monitoring tools are helping our Participants to optimize and adapt their trading strategies to the market and infrastructure available. Eurex Exchange’s latency, transparency as well as the detailed monitoring capabilities have been well-received by Trading Participants across the board and have helped the Exchange and its Participants to collaboratively solve problems. Most recently, these figures have proven that our new T7 trading architecture has drastically reduced latency and increased consistency in our technology.
Since the introduction of Eurex Exchange’s T7, latency statistics have demonstrated that T7 is significantly faster than the Exchange’s previous trading system. Average (request to- response) round-trip latency has been reduced from approximately 3 milliseconds on the previous trading system, to approximately 250 microseconds on Eurex Exchange’s T7. According to a number of sources, including Automated Trader’s extensive 2013 Global Trading Trends Survey Report, many Participants in the market have taken the decision to withdraw from the “latency arms race”, judging incremental improvements in round-trip times to be just too costly. Against this backdrop, the consistency improvements triggered by Eurex Exchange’s T7 are more important to a wide range of market participants that deploy less latency-sensitive investment strategies.
Achieving a common definition of latency
As a starting point, we refer to latency as the time between the arrival of a message on our application space ’gateway’ and the send-time of the respective message-response, which is commonly known as the (exchange-) round-trip time. Graph 1 represents the distribution of these exchange-round-trip times on Eurex Exchange’s T7. The graph depicts transaction latencies in microseconds. The probability density function of round-trip latencies is shown on the left Y-axis and the cumulated probability is shown on the right Y-axis. When analyzing the graph, one can look at a number of variables: the mean, median, standard deviation or tail (i.e. higher percentiles of the distribution).
When looking at data, the average is an easy figure to grasp – and therefore often used. However, it can be rendered imprecise if the measurement cited is an average collected from a number of different products and/or time frames. Therefore, in the remainder of this article, we will mainly look at the tail of the latency distribution shown in graph 1, as these are the cases in which Participants run the highest risks due to being uninformed of the status of their transactions.
There are several plausible explanations with regards to the occurrence of such a tail:
- On the one hand, a technical issue delays transactions coming in, causing Participants to unnecessarily run higher risks.
- On the other hand, if a certain market situation, e.g. a scheduled news event, causes Participants to behave in a correlated manner, the delays still imply extra risk for Participants, but this risk is introduced by the physical limits of the exchange system: the better the system, the less risk Participants run.
Either way, latency figures or other data analysis on transaction traffic help both Participants and us to understand the robustness of latency in the system. From the graph we can see that, on an average day, over 90% of the transactions in Eurex Exchange’s T7 have a round-trip time latency of less than 400 microseconds.
Monitoring tools at Eurex Exchange
Eurex Exchange supports the goal of promoting system transparency in the industry. Our wide range of monitoring tools is designed to give users extremely granular and detailed timestamp information. Furthermore, Exchange Participants do not only receive their own data, they also have access to the “best in class” data values for each measuring point in order to benchmark their performance. Within the round-trip measurement discussed earlier in this article we implemented a series of smaller measurements on numerous points within our hardware and software, in order to provide as many independent measuring points as possible and practical. By doing so, we provide our users access to more data to enhance their own performance analysis.
Transparency promotes trust as well as cooperation
Wolfgang Eholzer, Head of Trading IT, explains that offering latency monitoring tools has benefitted market participants and their introduction has been immensely positive for Eurex Exchange. He says: “When we first introduced our monitoring tools, we quickly learned that empowering our Participants to monitor their own latency, was an immensely productive step. Our Trading Participants’ IT staffs proactively contacted us with questions and observations and some helpful constructive criticism. As a result of our openness, we were able to work together to solve both perceived and actual problems and optimize our respective networks in an extremely efficient manner. This teamwork continues today.”
A call to action for the industry
Eurex Exchange believes that developments both in the industry and in technology will encourage a greater number of systems providers also to introduce more transparency into their systems. Eholzer opines that more openness from the industry is a forward thinking move. He states, “Sharing system data on latency is a practical step that many systems providers can take to enhance their customer relationships and do their part to create a more stable market infrastructure.” That trend will benefit the market place as “two eyes are better than one” in terms of identifying and correcting potential system issues.
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www.eurexchange.com
