As a pioneer in electronic trading, Nasdaq OMX Group has been a technology leader as U.S. stock exchange action has shifted from bourse floors to data centers. The explosive growth of high frequency trading has now sparked a technology arms race on Wall Street, in which technology platforms have become the crown jewels in a flurry of mergers and acquisitions. As trading titans seek to assemble global platforms, Nasdaq is working on several fronts to retain a leadership position.
In the boardroom, Nasdaq is contemplating a hostile takeover bid for NYSE Euronext, according to reports this morning in the New York Times and Wall Street Journal. The bid is aimed at averting a planned merger between the NYSE and Deutsche Borse that would merge leading U.S. and European platforms. According to reports, the bid would rely upon Nasdaq OMX's ability to borrow $5 billion and work out a deal with InterContinental Exchange (ICE) to buy some NYSE Euronext assets.
In the data center, Nasdaq has been constantly working to provide technology to support faster and cheaper trades for the hedge funds and traders using its high speed trading platform, according to Robert Waghorne, Senior Vice President of European Markets Technology at NASDAQ OMX Group, who discussed the company's operations last week at the DataCenterDynamics New York conference.
Technology as the Core Business Engine
"We really are a technology company," said Waghorne. "It’s the core engine for all of our business. We can trade anything, anywhere on the planet."
In addition to its familiar NASDAQ electronic exchange in the U.S., the company's technology and software powers 70 exchanges in 50 countries around the world, including everything from electricity markets in the UK to stock exchanges in Australia.
In the U.S. Waghorne says the Nasdaq platform can handle more than 1 million messages a second at an average speed under 100 microseconds. "The exchanges need to be as fast as possible," said Waghorne. "It’s a baseline to be in this industry."
The need for speed is a key element in the growth of high speed trading, in which traders use algorithms to identify and capture opportunities for profitable trades. This approach relies upon speed in both directions - obtaining price information and executing trades. The growth of competing electronic platforms and exchanges has placed a premium on transaction cost as well as execution speed.
Cost Pressures Drive Efficiency, Consolidation
"The cost pressures on exchanges are enormous, so we need to be hyper-efficient," said Waghorne. "The (transaction) costs that customers are expecting are decreasing, so you need massive scale to make this work. This is what is driving consolidation in the industry. Technology is a major factor in exchange consolidation."
In seeking to reduce transaction costs, Nasdaq has looked to its IT department to deliver savings. "Data center consolidation and platform consolidation has been central for us," said Waghorne. "We’ve definitely been pushing into multi-core (processors and servers), and we’ve made some significant moves with virtualization that have driven cost reductions.We have reduced technology costs 40 percent from 2006 to 2010 while increasing capacity. In 2006, it took about a millisecond to conduct a transaction. Now it’s under 100 microseconds."
All the while, volume has been surging. In 2006 Nasdaq's systems handled 53,000 messages per second. Today it manages more than 500,000 messages per second, on average. "Our throughput requirements have gone through the roof," said Waghorne.
Active Colocation Business
That has made Nasdaq's data centers an appealing environment for proximity trading, "We have been a pioneer in offering colocation services allowing our users to put servers in our data centers," said Waghorne. "Not only are we selling the data center space, but we’re now offering a more significant suite of tools. It’s a growth area for us."
Nasdaq doesn't own any data centers, but leases a number of facilities. The primary data center for Nasdaq OMX Group (NDAQ) is housed in a Verizon Business facility in New Jersey, while its backup facility is operated out of a Verizon Business site in northern Virginia. In Dec. 2009 NASDAQ OMX expanded its colocation agreement with Verizon Business to offer additional colocation space to trading firms engaged in high-frequency trading.
Waghorne says that the surge in electronic trading has underscored the wisdom of Nasdaq's approach to its business. "We look at ourselves as a pioneer in electronic trading," he said. "We’ve always been an electronic exchange."