During the past five years, electronic trading volume at the world's largest exchanges, global banks and other platforms has grown at an unprecedented rate. The rapid migration to electronic trading in equities, options, commodities and many other markets has brought with it considerable advances in efficiency, transparency and volume capacity. While these have been a boon to the financial community, the trend also poses significant network challenges - challenges that remain surprisingly under the radar given the stakes involved. Simply stated: The traditional financial extranets that are relied on today cannot support these levels of expansion.

Electronic trading driving the need for speed and scalability

According to a recent report by the TABB Group, electronically routed buy-side orders will increase from 1.2 billion shares a day in 2004 to more than 3.1 billion shares in 2007. The TABB Group estimates that electronically communicated institutional U.S. equity order flow will grow from 69 percent today to nearly 80 percent by 2007.

Options exchange volume and the size of market data feeds continue to grow aggressively as well. Matt Simpson, associate director of the electronic trading architecture of the Chicago Mercantile Exchange (CME), recently reported the Options Price Reporting Authority (OPRA), which consolidates feeds from the six major equity options markets, projects highs of 173,000 messages per second (MPS) by July 2006, compared to peaks of 130,000 MPS in January 2006. Bandwidth requirements for the OPRA feed are expected to reach 98.6 megabits per second (Mbps) - far exceeding the capabilities of traditional shared network financial extranet providers.

With hundreds of thousands of trades per second communicated electronically, one millisecond of network delay can determine whether an order is filled or not, making speed and scalability absolutely critical.

Issues with current extranets

The entire financial community relies on private, secure "extranet" connections to carry pricing quotes, trading information and other vital data that cannot stop for even a fraction of a second. These extranets tie the financial community together to permit effective and efficient global commerce. Unfortunately, traditional established extranets simply do not provide the speed, scalability and flexibility to support the increasing demands of electronic trading.

Traditional extranet providers deliver shared-network services to interconnect exchanges, banks, brokerages and trading platforms. Initially developed more than 20 years ago, these networks typically serve bandwidth needs between 56 kilobits per second and 3 Mbps. Beyond this range, extranets become prohibitively expensive for both the customer and the network provider. In fact, many providers simply do not offer services that extend beyond 45 Mbps.

While some smaller financial trading feeds require less than 1.5 Mbps, a number of feeds are much larger. For example, the primary OPRA feed requires 61 Mbps of bandwidth. Large banks and brokerages often require multiple OPRA feeds. The CME saw its market data peak rates more than double from 3 Mbps at the end of 2004 to 8 Mbps by October 2005.

Furthermore, most extranets do not guarantee key network performance metrics such as latency, packet delivery and jitter. Without such basic guarantees, end users do not have the assurance that the network will meet their trading application requirements.

Next-Generation extranet networks

A new generation of Ethernet-based extranets has emerged, providing the speed, scalability and flexibility required to meet the growth requirements of electronic trading.

Ethernet, in use by more than 98 percent of all networks, is well-known, easy to administer and cost-effective to operate given its decades of performance in Local Area Networks (LAN). Ethernet's use as a wide area network service (Carrier Ethernet service) and the platform for financial extranets is growing rapidly. The global Ethernet services market - the fastest-growing in telecommunications - is expected to increase to $20 billion by 2008. In addition to its simplicity, Ethernet is a more cost-effective solution. According to a recent study by Network Computing, Carrier Ethernet service is approximately 30 percent less expensive than a conventional VPN.

While cost is important, gaining scalable high-speed access to financial trading data will always take priority. As data latency decreases, trading volume goes up. For any exchange, electronic communications network (ECN), clearing house or broker-dealer, the ability to provide a robust network solution that matches the growth of the industry will increase trading volume, foster growth of the liquidity pool and create a unique offering in the marketplace.

As the role of floor trading continues to evolve and the growth of electronic trading skyrockets, a robust network solution to interconnect exchanges, ECNs, trading platforms, clearing houses, brokerages, and traders will be more critical than ever before. Traditional financial extranets simply cannot scale at an appropriate pace.

Close consideration should be given to Ethernet-based extranet solutions as a path to more scalable and flexible networks that support the rapid growth of financial trading, both domestically and abroad.

S. Keao Caindec (email: kcaindec@yipes.com) is the Chief Marketing Officer at Yipes Enterprise Services, Inc. (www.yipes.com).

Winner of the MEF 2005 Service Provider of the Year Award for Outstanding Innovation, Yipes Enterprise Services, Inc. is the leading global provider of managed, end-to-end Ethernet solutions for enterprise customers. Yipes FinancialConnect! is the first Ethernet-based extranet connecting hundreds of Providers and Members together with guaranteed performance.