Nasdaq Goes to Light Speed With Treasuries TradingMatthew Leising
Nasdaq OMX Group Inc. is revving the engine of its ESpeed U.S. Treasuries platform.
Bond dealers that use ESpeed are gaining access to a microwave network connecting Nasdaq’s data center near New York City to a CME Group Inc. facility just outside Chicago, permitting almost light-speed buying and selling of U.S. debt. Nasdaq will also acknowledge receipt of traders’ orders more than 25 percent faster, and the exchange operator will speed up delivery of market data by more than 100 microseconds, or 100 millionths of a second, according to a statement today.
The decision to accelerate ESpeed comes amid a debate, intensified by Michael Lewis’s critique of the U.S. stock market in “Flash Boys,” over whether faster trading does harm. A new research paper from VU University Amsterdam’s Albert Menkveld argues that when exchanges make their systems faster, they risk making it harder for most investors to get the best prices.
Nasdaq, which bought the bond-trading division last year, is targeting arbitragers seeking to profit off differences between Treasury prices on ESpeed and prices for Treasury futures on CME Group’s Chicago-based market, said Joe Noviello, head of Nasdaq OMX ESpeed. “People have always been moving that toward the zero-latency profile,” he said during a phone interview yesterday.
The speed of light dictates how long -- roughly 4,000 microseconds -- it takes information to travel between Chicago and New York, the two major U.S. trading centers. Trading firms seeking an edge on their competitors have for years tried to get closer to that limit, fueling the creation between those two cities of Spread Networks LLC’s fiber-optic line, which was documented in Lewis’s book.
Microwave towers are even faster than fiber lines, and last year Nasdaq and CME Group started beaming data between their data centers in Carteret, New Jersey, and Aurora, Illinois. The network transmits data in less than 4,250 microseconds between those facilities.
While Nasdaq’s ESpeed handles trading in Treasuries, CME Group specializes in futures on the debt. When prices diverge between those markets, an arbitrage opportunity is created. The faster ESpeed customers learn of such price gaps, the faster they can attempt to profit off them.
Electronic trading of U.S. Treasuries is nothing new, though the pace of buying and selling has accelerated in recent years. ESpeed competitor BrokerTec, owned by ICAP Plc, said in a 2012 statement that it had reduced the average time it takes to execute a trade to less than 200 microseconds from 10,000 microseconds. ICAP uses a version of Nasdaq’s software to run that system, it said at the time.
Nasdaq bought ESpeed from BGC Partners Inc. in July for $750 million in cash plus as much as $484 million of stock. ESpeed, founded by Cantor Fitzgerald LP in 1996, is used by banks worldwide to trade bonds and currencies.
In the coming months, ESpeed plans to add electronic trading of Treasury bills, off-the-run Treasury bonds and Treasury swaps, Noviello said yesterday. Merging the ESpeed trading system into Nasdaq’s data center in Carteret eases the introduction of new electronic contracts that have historically been traded by phone or in hybrid voice-electronic systems, he said.