Fast just got faster

01 November 2011 | Richard Irving


Ten years ago, it took around 20 seconds for a trader to buy or sell shares on the New York Stock Exchange (NYSE). Last month, Sidera announced a partnership arrangement that will enable bankers to execute anything up to 40,000 back-to-back deals in the blinking of an eye. Richard Irving reports.

Under the terms of the 20-year contract, Sidera will lease up to 250Gbps of capacity from Spread Networks, the ultra low latency bandwidth specialist, on a new high-speed link between Chicago and New York.

So fast is the connection that computer-driven buy and sell orders will course from New York to Chicago and back again in as little as 15.9 milliseconds, facilitating trades between, among others, America’s largest derivatives market, the Chicago Mercantile Exchange, and the NYSE, the world’s biggest equities market.

For metro providers such as Sidera, looking to carve a niche in the financial services sector, every millisecond counts.

In a market where a single millisecond advantage can attract an additional $100 million in buy and sell orders, the need for speed is all encompassing and banks are willing to pay anything up to double the rates that other enterprise customers can afford for ultra low latency connectivity.

As Colby Synesael, a director of Cowen & Co, the New York-based investment banking boutique explains, the economics of the ultra low latency market are compelling for metros: “The sort of trading strategies that we are talking about here generate profits running into hundreds of millions of dollars a year for those banks involved, so they are unlikely to flinch at the costs of their bandwidth connectivity. If you are a metro with a decent footprint in any of the major financial centres, then you absolutely should be trying to capitalise on that.”

But this drive to sign up premium customers comes at a cost. When AboveNet sliced 23 miles off its fibre route to Chicago’s western suburbs earlier this year, it effectively redrew a map that might ultimately preclude some customers on the old route from accessing the very highest connection speeds.

The question, Colby argues, is whether the ultra low latency market is set to remain a niche product for metros, or an attractive offering that can be rolled out to other businesses such as healthcare providers or the education sector. “I don’t think it will ever be much more than a niche product for most metro players, but ultra low latency connectivity is here to stay. It’s a tough market – as soon as a rival slices a few milliseconds off your latency, you’re faced with a stark choice – invest in a new, faster route, or cut your prices and hope that second best is good enough.”

Maura Mahoney, Sidera’s vice president in charge of marketing and business development disagrees: “Sidera has nearly 20 years worth of experience working with the financial services industry and through this experience we have gained a keen understanding of the specific requirements of this particular vertical. We will continue to drive latency lower on all our key routes and we will continue to add new locations within our existing footprint, as well as expanding south and further west.”

Moreover, colleges, universities and healthcare facilities may not be quite so latency-sensitive, she believes, but they still want scalability, reliability and security and that plays very much to the strengths of the network that Sidera is building. “Our expertise lies in finding the natural aggregation points for an enterprise vertical and then purpose-building a network to support them.”

Metro providers are hard-wired to do well in the ultra low latency arena, she adds, because they tend to be very customer-focussed and nimble enough to exploit opportunities as they arise. “The deal with Spread Networks is a case in point,” she says.

Other metro players will certainly keep an eye on the partnership, the first such deal that Spread Networks has struck on its new route. Amid mounting evidence of flagging mergers and acquisitions activity, some will doubtless point to signs that metros are shifting from the buy model towards a more pragmatic build-your-own approach.

But Mahoney is quick to dispel such suggestions: “Provided the price is right, Sidera is always open to acquisition. But when it comes to network expansion, we tend to look at a number of ways to achieve our goals.”

And who knows how this particular relationship might end – it is not uncommon for arrangements such as these to ultimately lead to an acquisition once both parties work out how they might differentiate their capability.