Direct Edge Picks Up Where ISE Left Off
January 25, 2010
Upon its acquisitionof the ISE Stock Exchange from the International Securities Exchange in December 2008, Jersey City, N.J.-based Direct Edge found it had inherited the answer to a question faced by almost all trading venues today:
How to transform your firm's technology infrastructure in order to handle unprecedented growth in the amount of market data that has to be handled in the support of electronic trading-and reduce latency, at the same time?
The answer was already in place for Direct Edge, which operates the EDGA and EDGX trading venues as well.
Several months earlier, the ISE Stock Exchange had installed software to filter and distribute incoming messages to trading applications from 29West, a Chicago-based provider of messaging systems. The firm also currently serves Chi-X Global Technology (the technology services unit of Instinet subsidiary Chi-X Global) and the Chicago Stock Exchange.
ISE replaced a broker-based messaging product with 29West's Ultra Messaging for the Enterprise (UME) software. This created a messaging backbone that allows communication between applications spanning the front end ordering systems, order-matching engines and back-end compliance systems, according to 29West. The applications would subscribe to the data feeds needed and then messages would automatically be published to them. "Pub/sub" communication-or as it's referred to in the industry, "pub/sub messaging infrastructure-is when publishers publish a message to a given topic. 29West claims it ensures the fastest delivery of that message to all subscribers interested in that topic.
That meant electronic stock market operator Direct Edge could follow in ISE's footsteps when it came to upgrading its enterprise-wide systems. Direct Edge has applied to the Securities and Exchange Commission to establish its two main electronic trading networks, EDGA and EDGX, as stock exchanges.
As part of the transition to exchange status, both platforms will be relaunched at Equinix's NY4 data center in Secaucus, N.J.
Last January, Direct Edge announced that it had agreed to use Equinix's NY4 facility in Secaucus, N.J. as the primary data center for its next-generation trading system, pending regulatory approval of its two exchange applications. Last year, Steve Bonnano, the chief technology officer of Direct Edge, explained that company's biggest concern had been finding "a mission-critical infrastructure that basically would support our new exchange platforms." When the EDGA and EDGX exchanges are ready to launch, Direct Edge said it plans to simultaneously retire the current electronic infrastructure of ISE Stock Exchange, EDGA and EDGX.
"DirectEdge has been in a hyper-growth mode-we've experienced 48 percent growth year over year from 2008 to 2009," Bonnano told Securities Industry News this month. "We needed to find a couple partners, one of which became 29West, to help us handle this growth, and we went through a significant bakeoff process to determine who would be the best partner for us to handle that growth and continued projected growth in the future."
The 29West messaging middleware will be utilized by Direct Edge's EDGA and EDGX trading platforms. Direct Edge is still currently using a legacy platform, Tibco RendezVous.
While it awaits SEC response on its application to turn EDGA and EDGX into exchanges, DirectEdge is using ISE Stock Exchange for trade-through protection and to display quotes to buyers and sellers.
Between them, ISE Stock Exchange, and the EDGA and EDGX electronic networks account for enough trading volume to rank as the third largest trading platform in equities, behind the New York Stock Exchange and Nasdaq.
"Once we got into the realm where we became the third largest market center and it became apparent to us that we needed to make sure we chose the right partner for this component of our system, the hurdle was dealing with all of that hyper-growth while making the necessary changes," said Bonnano, who has over a dozen years of experience in overseeing the development and operating efficiency of financial market technology, having held positions at The Nasdaq Stock Market, Inc., Brut, LLC, MarketXT, Inc. and Instinet.
Before the UME system was available, according to a 29West white paper, Direct Edge and ISE-SX system architects had three options:
* Limit themselves to messaging products with very few features, thus forcing the development of non-optimal designs.
* Use multiple messaging products with different programming interfaces, to meet the specific needs for portions of the design. But this could substantially increase complexity and cost.
* Invest in a messaging system developed internally.
Direct Edge evaluated a number of different products, including hardware appliances and broker-based systems, as well as peer-to-peer systems, which tie message publishing components directly to subscribing components without any intermediary software processes or devices, explained John Ryan, chief architect at Direct Edge. Ryan had been chief architect at the International Securities Exchange, responsible for overall technology architecture and a key contributor to the ISE trading systems.
"What made 29West stand out is it is a peer-to-peer solution, and it was the solution that would give us the best possible latency," explained Ryan. "In addition to that it also provides a layer of persistence, and the way that they implemented the persistence, which is required for recovery. [Therefore,] if we have a failure and we need to recover on another machine, the persistence is what allows us to recover."
"Persistence" refers to storing messages on disks or another medium where the contents can't be lost in the event of a power interruption or system outage. This ensures trade or order information "persists" and can be readily recovered.
When the ISE Stock Exchange implemented the UME, the exchange reduced the physical footprint of its messaging system by more than 50 percent through the removal of messaging servers and networking gear. The move also reduced the number of software licenses needed, according to a white paper provided by 29West.
"In the case of our legacy platform, we were able to eliminate outliers that were caused specifically by existing middleware architecture, but with the implementation of 29West, we no longer experienced those outliers during the higher volume trading days," explained Bonnano.
These "outliers" are abnormalities that affect how reliably instructions can be handled, explained Jitesh Ghai, global director of systems engineering and alliances at 29West. "Before 29West, the broker-based system was inconsistent in how quickly it could perform the messaging function, varying from a millisecond to several hundred milliseconds," said Ghai. "With 29West, DE was able to achieve consistent end-to-end microsecond latencies to process client orders."
Bonnano said Direct Edge is now able to handle 40 percent more total transactions throughout the system. "For our next generation system, we are already seeing response times sustaining over 200,000 messages per second."
Ghai noted that his firm has worked with a number of exchanges on their execution infrastructure to varying degrees, some for their market data distribution, others for their order flow distribution.
"Direct Edge is an example of an exchange customer where they have standardized across all of their applications for a variety of services, providing reliable messaging for order flow and market data distribution as well as guaranteed messaging for trade execution," Ghai said.
29West's UME system works on standard commodity servers without the need for any proprietary or esoteric hardware. That made it easy to fit into Direct Edge's system architecture and for its development team to deploy the product and integrate it with existing applications, explained Ghai.
The International Securities Exchange has an interest in making sure that the combination of its ISE Stock Exchange and Direct Edge's EDGA and EDGX stock markets succeed.
Direct Edge may own the ISE Stock Exchange now. But, under the acquisition agreement, ISE, which operates an electronic options market took a 31.54 percent stake in Direct Edge.
In turn, ISE is a subsidiary of Eurex, co-owned by the Deutsche Borse and the SIX Swiss Exchange.
