Milliseconds are focus in algorithmic trades

By Jonathan Keehner

NEW YORK (Reuters) - Algorithmic trading, in which computers execute orders at lightning speeds, has financial exchanges relocating computer systems to shave milliseconds off execution times, executives said this week at the Reuters Exchanges and Trading Summit.

Transaction decisions are measured in fractions of a second in algorithmic trading in which computers are modeled to execute orders based on criteria like price or timing.

One-fifth of global equity trading last year was algorithmically driven, up from 14 percent in 2003, according to financial consultant Celent.

When speed is a priority, as it is for hedge funds or other momentum investors that use algorithmic trading strategies, the amount of time it takes bits of data to travel from one city to another can make all the difference, executives said.

"Algorithmic engines are now near our data center, and the broker-dealer firm would control the logic and running of those models," said Nasdaq Stock Market Inc. (NDAQ.O: Quote, Profile, Research, Stock Buzz) Chief Executive Robert Greifeld. "In a real sense, you are reconstituting the floor, except this is a computer floor."

Proximity to data centers has become so crucial that Greifeld said renting space near his servers is a growth business for Nasdaq, which is the top U.S. electronic stock exchange.

"For some customers it matters, and those are actually the customers that add a lot of liquidity to the system," said Dave Cummings, CEO of electronic trading platform BATS Trading, of millisecond latency. "If you satisfy them, you have liquidity, and that's why the longer-term participants come in the market."

"The standard now is sub-one millisecond," said Philadelphia Stock Exchange CEO Sandy Frucher. "If you get faster than sub-one millisecond you are trading ahead."  Continued...