FIELD REPORT Uncaged: Direct Edge Bares its Exchanges
July 20, 2010
In 2,500 square feet of space, you can house a typical Radio Shack store, with hundreds of electronic products, ranging from smart phones to car security systems to MP3 players to weather radios to cables and batteries.
Or, in roughly the same amount of space, you can house a stock exchange. Or two.
Such is the case with EDGA and EDGX, the two newly approved stock exchanges owned by Direct Edge, which formally debut Wednesday in Secaucus, N.J. As competition in securities trading venues goes up, so does the drive for speed and “scalability,’’ the ability to expand rapidly and reliably.
Because Direct Edge, like other venue operators before it, takes its approval to operate full-fledged exchanges as a sign that it is here to stay, competing on the same fields as the New York Stock Exchange, Nasdaq Stock Market and BATS Exchange. And, concomitant with that, Direct Edge wants to prove that it can.
“What Direct Edge is trying to do is build a company that can be an enduring part of the exchange community for a long time,’’ said chairman and chief executive William O’Brien. “And that transition to exchange status is part of that evolution.’’
The economic benefits (see “Benefits, and Costs, in the Life of an Exchange”) and the prestige may be big factors. And the transformation of its alternative venues into full-fledged exchanges and the technology transformation that has gone with it may just be the price of keeping up with rivals.
“It’s a hypercompetitive environment,’’ said Sang Lee, managing partner of the Aite Group, a Boston industry consulting firm. “You’re literally gouging each other’s eyes out for a sort of single-digit market share” in the Unite States.
The changeover of its venues into exchanges and the near-complete makeover of its technology are necessary steps for Direct Edge “ to continue to grow,’’ Lee said on the eve of the launch of both.
But Direct Edge’s stage is not large. It does not have to be.
NO FLAG
Unlike the New York Stock Exchange, you won’t see a monster-sized flag draped over where Direct Edge operates the new trading platforms that will power EDGA and EDGX. The two exchanges sit side by side, in a black wire cage inside a nondescript industrial building that could just as easily hide a distribution warehouse.
Inside the cage are 80 racks of Hewlett-Packard ProLiant servers and related memory storage units. Anywhere from two to 14 servers sit in each rack. About 200 servers, per exchange. By H-P’s estimate, this generation of “convergent” servers -- which include processing capacity, mem ory storage, networking features and energy efficiency – puts the same amount of computing power in a single box as was found in 21 boxes four years ago.
