What The World Of High Speed Trading Can Teach CIOs

by drjim on June 6, 2018

High speed trading is all about having a very fast IT infrastructure

High speed trading is all about having a very fast IT infrastructure
Image Credit: Epic Fireworks

At most firms, the person with the CIO job plays a supporting role to the rest of the company. The company makes its blue widgets and the CIO is responsible for creating and maintaining all of the systems that allow blue widgets to be manufactured and sold. However, there are some businesses in which the importance of information technology is recognized and where the role of the CIO is very different. One such example exists in the world of high speed trading. Here CIOs are gods…

Challenges When It Comes To Trading Very Fast

So just exactly what is high-speed trading? High-speed trading firms use lots and lots of computers to buy and sell stocks, bonds, and many other financial assets very fast – in fractions of a second. One of the things that high-speed trading firms do is to “make markets”. When they do this they buy and sell in large volumes and collect a small profit from the difference between prices.

This type of trading is a critical part of the market that high-speed trading firms operate in. So much of this type of trading occurs that it accounts for over half of the trading that happens in the U.S. stock market each day. This is not the only way that high-speed trading firms make money. Using their computers, they can also exploit fleeting disconnects between two markets that are related to each other. An example of this would be exchange-traded funds and futures contracts that both track the S&P 500.

In order for strategies like this to be successful, the market has to play along. The more volatile the market is, the more money the high-speed trading firms will make. Big price swings provide traders with more opportunities to capture profits. In order to play in this market you have to have expensive technology. In the 1990s, everyone had to have fiber optic connections in order to have the fastest connection between cities. However, the arrival of microwave and millimeter wave systems allowed for even faster connections. The challenge was that all of this technology is very expensive.

Issues That High Speed Trading CIOs Are Facing

The world of high-speed trading is undergoing some changes and this is affecting the person who has the CIO position. High-speed trading used to be a very lucrative business to be involved in. However, now things are different. The market conditions that the firms need in order to generate the largest profits don’t currently exist. Brutal competition has arrived and firms are no longer guaranteed of being a success just by adverting that they are a high-speed trading firm. Finally, all of this technology comes at a cost and that cost keeps on rising.

The amount of money that high-speed trading firms earned last year is estimated to be US$1.1 billion. However, in 2009 the industry made US$7.2 billion so you can see what all of that competition is doing to the CIOs who operate in this market. Some of the increasing costs that these firms are seeing are coming from rising costs of data that the firms have to buy from the major exchanges. Additionally, in order to complete their trades as quickly as possible, the firms like to collocate their servers close to the exchange’s servers. However, that is very expensive to do.

As the market conditions become tougher and tougher for these firms, working closely with their CIOs they have had to make changes. One of the changes that has been made is that the firms have redirected what markets they are going after. The firms have now diversified across multiple asset classes. The result of this change is that it is now easier for a high-speed trading firm to make it through periods of time when there is low volatility in one market.

What All Of This Means For You

All CIOs want to be appreciated. At most firms, the CIO is simply part of the support system for the rest of the company. However, at high-speed trading firms because of the fact that the company has been built on the backs of sophisticated computer networks, the CIO is a very important person. However, there is a lot of change going on in this market right now.

The high-speed trading business is undergoing a number of significant changes. The markets are not cooperating and so it is becoming harder to make money from the markets. Competition has been increasing as more and more firms are attracted to this highly lucrative business. Finally, high-speed trading is very much like an arms race waged with technology and it continues to become more and more expensive to compete in this market.

CIOs in the high-speed trading industry are key players in the firm’s success. They create and maintain the systems that allow the firm to stay in business. However, the significant changes that are rocking this industry are going to make it harder and harder to create the IT systems that the company is going to need in order to remain competitive. Clearly now is the time for these CIOs to stand up and show the rest of the company what they are made of!

– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World IT Department Leadership Skills™

Question For You: How do you think that a high-speed trading CIO can help his or her company remain competitive?

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