Day trading is so passe. Today’s sharp traders make their cash by trading milliseconds ahead of the other guy. To do that you need really fast stock exchanges, which is where Linux comes in.
The Deutsche Borse Group manages the International Securities Exchange, an equity options exchange in New York, as well as the Eurex and Deutsche Borse’s own Xetra cash exchange. The Xetra stock exchange platform is also used by the Irish Stock Exchange, the European Energy Exchange, and the Shanghai Stock Exchange among others. It has long used Linux as the basis of these high-speed stock exchanges. Later this year, it is launching a next generation. The new trading infrastructure will use IBM WebSphere MQ Low Latency Messaging and Linux to make it the fastest stock exchange software on the planet.
How fast is it? A Deutsche Borse representative claimed that their Linux-powered exchange software can "easily execute more than a million trades per second, dwarfing even the mighty NY Stock Exchange."
This isn’t speed just for the sake of speed. The Deutsche Borse spokesperson told me, "As the financial markets continue their recovery efforts, the world’s stock exchanges — 161 in all — are in a fierce battle to win and keep clients by delivering what customers want most: the fastest, most secure and highest reliability trading possible. This has led to a technology ‘arms race’ among the exchanges who are using computerized algorithms to bundle hundreds of thousands of stocks into single, split-second transactions."
He continued, "Speed, or ‘low-latency,’ is everything for these exchanges. A fraction of a second can mean mega gains or losses to investors. Transactions that once took minutes and seconds to complete are now processed in thousandths and millionths of a second, with the fastest trading engines reaping the biggest benefits."
He’s not making that up to puff up his company. As the New York Times recently reported, this new high-frequency trading "enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense."
The flip side of being plugged into a high-speed exchange is you can make billions. The NYT quoted Joseph M. Mecane of the New York Stock Exchange Euronext, another Linux-based exchange, who said it best: "It’s become a technological arms race, and what separates winners and losers is how fast they can move."
If you fall behind this race, you’re at a competitive disadvantage. It’s like running a race with one foot in a bucket. As the Deutsche Borse spokesperson pointed out, "for exchanges who lose the latency race, failure can be disastrous, as the London Stock Exchange learned last September when a much-publicized glitch in its Windows-based system shut down trading for a full seven hours, leading to enormous losses for listed companies, investors and the exchange itself."
What’s true for exchanges is also true for investors. If you’re not invested for the long-term and you’re trying to day-trade or invest in the short run, you’re quickly falling behind investors who use high-frequency methods on the high-speed, aka Linux-based, exchanges.
The London Stock Exchange (LSE) is leaving Windows behind. The exchange hasn’t announced yet what it will be moving to. If I might suggest that if Linux is good enough for the Deutsche Borse, the NYSE, and the Chicago Mercantile Exchange, it’s good enough for the LSE.
Deutsche Borse’s new system will become the backbone for all the Xetra-based exchanges. The International Securities Exchange will be the first to make the switch. The others will then quickly follow.
The system itself is built primarily on RHEL (Red Hat Enterprise Linux). IBM’s MQ Low Latency Messaging is also an important part of the package. Indeed, according to Dr. Michael Kuhn, CIO of Deutsche Borse. Version 2.2 of this low-latency, high-speed messaging protocol includes new features designed specifically for the demands of high-frequency traders.
Don’t blink, but Linux, the "free" software darling, is what is powering the meteoric rise of the new world of capitalism. We’re in for some interesting, and very fast, times ahead.