The technology function has always focused on delivering robust, reliable and cost efficient solutions. Today, however, technology is also expected to drive growth and revenue. For exchanges, that means having the ability to process large transaction volumes at lightning speed under extreme conditions. Markets must always function smoothly with the ability to monitor and measure liquidity and counterparty risk in real time. Exchanges are also measured by their capacity for innovation and ability to build new products and services. Technology is the key enabler.
 

To gain insight into how exchanges leverage technology to execute their business strategies, we have formed a panel of experts:

Jitendra Puri Personal details Current position: Vice President of Technology at Bolsa de Valores de Colombia (BVC) University: University of Warwick Business School MBA Personal interests: Horse riding, snooker, golf Recommended reading: Anything by Jeffrey Archer

Jeff Olsson Personal details Current position: Group Executive, Technology at Australian Securities Exchange (ASX) University: B Chem Eng (University of Newcastle) Personal interests: Family, friends, golf, keeping fit, trekking, traveling Recommended reading: Anything by Harry Levinson

Anna Ewing Personal details Current position: Executive Vice President & Chief Information Officer at NASDAQ OMX University: York University Schulich School of Business MBA Personal interests: Exploring the wine regions of the world Recommended reading: The Millennium Trilogy by Stieg Larsson

Moderated by Sherree DeCovny. A journalist specializing in financial services and technology. She is the author of several books and has written for leading trade journals.

SD: Let’s begin by talking about the major technology challenges facing exchanges today.

Olsson: Exchanges are undergoing more challenges than at any time in history. As competition becomes more pervasive, traditional IT departments are challenged to quickly adapt technology to meet specific business needs.
 

Toward that end, technology teams must be integrated with the business. Technologists often become  aptivated with particular technologies, but today we have to focus on delivering business solutions that may or may not include a technology element. We have to understand business needs and organizational strategy. I no longer view myself as a technology executive but rather as a business executive who understands and can use technology.
 

Puri: For a small exchange, we have invested significantly in technology, but we now need a critical mass of volume to achieve a positive return. The number of orders per second is increasing, but not all orders are turning into trades.
 

Our derivatives market has not taken off as we had hoped because investors don’t yet understand the value of these products. We are now focused on delivering education programs that will facilitate future market growth.
 

BVC is involved in a cross-border initiative to integrate the exchanges of Peru, Chile and Colombia into one virtual market. To do so, we must link the exchanges and migrate our brokers to a common screen so they can trade any equity product listed on all three exchanges.
 

We need cost efficient technology to help us continue along that path.

Ewing: Facing more competition, exchanges are under intense pressure to increase capacity and latency and deliver cost effective technology solutions. We must be able to handle higher volumes at greater speeds and to lower transaction costs. As Jitendra pointed out, the order to trade ratio is much wider nowadays – with hundreds of orders often resulting in only one trade and, thus, reducing efficiency.
 

Technology remains at the heart of any exchange function. We must continue to invest in new technologies, but also to focus on cost efficiency. These factors are putting new demands on IT.
 

SD: Anna Ewing referred to competition. How will competition affect ASX, and how can technology help you gain an advantage?

Olsson: My view is that consolidation of liquidity is good for markets, but in the near future competition will change the face of business in Australia. Fortunately, we have learned from other jurisdictions’ experiences.
 

Reliability becomes more important in a competitive environment. Outages are a great way of handing liquidity to your competitors. Low latency is an imperative, and as order size diminishes and transactions increase, trading system capacity must keep up.

To meet these challenges, ASX has deployed technology from NASDAQ OMX, which is among the fastest available. Our trading system was the first consolidated equities and derivatives platform in the world. We have had 100% up time since we went live in August 2006, which has enabled us to keep ahead of increased capacity demands. At the same time, it has helped us to contain costs. The implementation was risky, but we often have been the global leaders in new exchange technologies. Overall, our customers have been pleased.
 

Time to market is extremely important, so we have to provide technology solutions faster than ever. We are reliant on third-party vendors, and we have to ensure they deliver high quality solutions and fast turnaround. In fact, we spend a lot of time fine-tuning our processes, which has resulted in a much higher rate of delivering projects on time and on budget. Integrating technology with the business is embedded in our culture.
 

SD: We’re hearing buzz around cloud computing. How can this technology be leveraged in an exchange environment?

Ewing: Cloud computing can lower the total cost of ownership and improve efficiency, and NASDAQ OMX has been an early adopter of this technology. We don’t think it’s suitable for use with low latency, high-speed  services, but it can be leveraged to provide generic business services, especially in the post-trade arena.
 

For example, we store market data in an Amazon cloud for our innovative Market Replay service. We also use cloud technology for QFolio, our popular iPhone app for investors. QFolio is interesting because we brought existing services into a fresh distribution channel and delivered our technology to new and existing customers in ways they prefer.

Olsson: Cloud computing has great potential, but I would be concerned about using it for critical applications. The reliability and performance might not be what we have come to expect. For now I plan to use it in some non-critical areas.

Puri: Cloud computing is relevant for companies that have large, dynamic, internal testing and development environments. Most exchanges are unlikely to use public clouds until security concerns are resolved. But private clouds provide an opportunity to reduce costs and make resources available to IT project teams and units as needed. I see tremendous value in that.
 

BVC has not used private clouds yet, but we have taken advantage of public ones after determining that our risk would be limited. We needed some Linux servers and realized that it would take too long to free up the resources to buy them. Instead, for $20/month, we now access the servers at the click of a button. We are in the middle of a pilot to see what other applications are adaptable to the cloud environment.
 

SD: Cost reduction is often a reason for taking advantage of newer technologies. What  technologies have you adopted that have improved the bottom line?

Puri: Virtualization has had a big effect on cost. Our entire non-production infrastructure is virtualized, allowing us to turn one machine into many machines as well as enabling better resource allocation and the ability to deploy on demand. We have reduced our costs because we buy fewer servers. At the same time, we save space and energy in the data center.
 

Service Oriented Architecture (SOA) and open source technology are also important. BVC is among the first exchanges in Latin America to adopt SOA. Our internal and external linkages – including connections to the central counterparty clearing operation – are all based on SOA. We now write, develop and test a service only once, then deploy it to as many users as necessary.
 

Another technology we have embraced is open source, basically because it is a great way to reduce costs. Linux supports our core business applications and SOA infrastructure, and we use MySQL as our internal database. I encourage our IT team to test, try and experiment, and if it works, embrace it.

Olsson: We have found similar benefits at ASX. Virtualization has enabled us to have multiple test and development environments, which has significantly reduced the number of physical servers needed, thus  reducing our overall costs. We also use SOA extensively. It has improved our legacy business models and is important as we drive to Straight-through-Processing.  

We have realized some good operational and financial benefits from open source technology, particularly in systems management. We have been successful using a tool called Nagious. Open VMS has also been critical to ASX’s success. It just sits behind the scene.

Ewing: I would say that virtualization is best-of-breed for any organization with heavy data center usage. It enables us to use computer power more efficiently, compress business applications into a smaller footprint, reduce power usage in the data center, and lower the total cost of ownership.
 

SOA is practical. It supports a web-based architecture so different applications can share the same data and all systems can be accessed with a  single security sign on. It streamlines systems, improves communications and provides a single view of data.
 

Open source technology is driving down the cost for generic software and is an important component of our technology architecture.
 

To echo a point Jeff made, the key to realizing the full potential of any technology is to integrate it firmly in a business context. We are constantly reinventing our business, and technology provides both the efficiencies and the tools to reduce costs and drive growth and profitability.

SD: Let’s talk about two other technologies. Complex Event Processing (CEP) enables  organizations to analyze data in real time, and co-location lowers latency.

Ewing: We find CEP to be useful for surveillance – reviewing all market data events and finding patterns. Many participants use this technology to view handling patterns and build rule models for program trading.
 

Co-location is critical in attracting low-latency, algorithmic traders. Of all the technologies we’ve discussed, co-location stands out as strategically important from a business point of view. We can develop new offerings for co-location clients, such as additional market data services, and tools for measuring service quality. In the U.S., we are working with the SEC and other exchanges to ensure that co-location is regulated properly and operated fairly.

Olsson: I agree with Anna. Colocation has generated new business for ASX, and through co-location, we have reduced order latency in our trading system by a factor of 10. I see co-location growing as ASX tries to attract algorithmic traders from overseas. Faster speed will be a source of competitive advantage. The people on our communication team make this possible. They are the unsung heroes.
 

CEP complements SOA, and is useful for risk management and business process automation. 

Puri: At this point, we are still studying how to best implement CEP at BVC, although we see our brokers exploiting that technology. We also see tremendous potential for co-location, but that is in the future for Colombia. We are standardizing on FIX now, and we will move to co-location as customer need
dictates.

SD: One last question: What drawbacks are there to these technologies?

Olsson: We’ve had experience with most, and some have provided real benefits to ASX. However, I’m wary of new technologies that are touted as being a panacea for the industry. My job is to cut through the hype and ensure we understand the benefits and risks.
 

With any new technology, there are associated costs in training and skills transfer. For example, we are moving toward Linux and the use of open source, but our skill base has not traditionally been in that area.

Puri: I agree with Jeff that rapidly changing technology has an impact on human resources. I’m constantly challenged to keep my team up to speed so that skills are not a limiting factor. Exchanges serving smaller markets are also challenged to maintain the rhythm of capital expense necessary to maintain the most modern infrastructure.

Ewing: I agree that technology advances put more demands on the technical and business skills of the IT staff. But NASDAQ OMX is at its core a technology company. As such, it’s our job to continually innovate which can only be accomplished by understanding the benefits of new technologies and integrating these technologies into our overall business strategy.

Illustration: Lena Sjöberg