Keeping clients and keeping in compliance are becoming one and the same with the rise of algorithmic trading and the implementation of Regulation NMS. The most sophisticated broker dealers are gearing up to offer advanced trading strategies under a new regulatory environment. Here's a brief look at how market data powers quantitative trading strategies and placates compliance officers.

First Things First - Pre-trade Analytics

Pre-trade analytics tightly integrate market data with decision-making tools, incorporating the execution decision process with real-time market information. Used in conjunction with real-time data, analytics provide insight into short-term price movement and market conditions. Not only can trading patterns for single stocks be identified, but also relationships between pairs and other combinations of stocks, which can be helpful in developing additional hedging strategies. While exponentially more complex, these concepts and their application to trading baskets and multi-instrument portfolios are likely subjects for the next wave of algorithm development.

Low Latency - The Shortest Distance between Order and Execution

For trading strategies that depend on getting an execution at the exact time and price that the model dictates, there is no time to lose. The speed of market data is so critical that some algorithm providers who consider low-latency market data to be a competitive advantage have "co-located" their data servers and algorithm engines in close proximity to the original data source (e.g. exchange). This may shave milliseconds from the data distribution trip, but efficiency of internal APIs and processing software remains paramount, even with this approach.

The dramatic growth of market data is continually being monitored by firms and the industry. As of February 2006, the Financial Information Forum's FIF Market Data Capacity Planning Committee (www.fif.com) reported that one minute Options Price Reporting Authority (OPRA) traffic increased 83% in the last year and current one second peaks are at 120,025 messages per second (mps). In an effort to address capacity concerns, a new data compression standard, the FAST protocol (also known as FIX Adapted for STreaming) was launched at the end of 2005. Early adopters of this new standard are the exchanges that face increasing demands of their market participants to improve latency and performance under peak conditions. FAST is an enabling technology that can be used in the infrastructure between market venues and market participants to achieve response times measured in milliseconds. Even with compression techniques, dealing with the bandwidth requirements of market data feeds requires careful planning to maintain enough excess capacity to eliminate bandwidth-induced latency while still keeping control of operational and technology costs.

New Regulatory Environment = New Role for Market Data

Firms that want to take control of their orders in terms of execution time and venue need to address compliance with the Regulation NMS Order Protection Rule. If you haven't been following Reg NMS closely, the impact on trading technology is significant for any firm in the business of best price routing, market making, or block trading. Broker-dealers that want to make their own order routing decisions will need to sweep the markets to wipe out top-of-book quotes that are at a better price.

Prior to routing an order, applications must first review the best bids and offers in the marketplace and then capture this market data with the order for later review by internal or external auditors. In addition to the data storage requirements of snapping quote data and maintaining it for internal audit trail, the SEC has stated that latency monitoring is a critical component of the reasonable data handling policies and procedures.

The only way for market centers to protect their quotes and profit from market data is for them to become automated trading centers. NYSE Hybrid and AMEX AEMI are both expected to be implemented prior to the soon to be extended Regulation NMS compliant date. As a result of automated listed trading, we can expect that the listed markets will start to resemble the OTC equity market - more trading, higher volatility and, of course... more high-speed market data.

Thomas J. Jordan is President & CEO of Jordan & Jordan (www.jandj.com). Manisha Kulkarni is Executive Director of the Financial Information Forum (www.fif.com). Tom may be reached at 212-422-8567 or tjjordan@jandj.com. Manisha may be reached at 312-953-9228 or kulkarni@fif.com.