Message Rates Warning for 2005

Market data message rates more than doubled last year and are expected to continue to grow this year, according to the Financial Information Forum, an industry body based in New York.

Peak message rates leapt from 23,102 messages per second in 2003 to 52,178 mps at the end of 2004. This is due partly to the inclusion of data from the Archipelago Exchange in the 2004 figures, but the bulk of the rise is attributed to the growth of options data—from 15,699 mps in 2003 to more than 38,000 mps in 2004. Data from the Options Price Reporting Authority now accounts for 70 percent of total message traffic. Moreover, OPRA expects message rates to hit 88,000 mps this month, 110,000 in July, and 130,000 by January next year.

The increased use of auto-quote mechanisms, more competitive quoting of instruments by multiple market makers, and the cross-listing of products are also proving to be factors. The OPRA quote-to-trade ratio leapt nearly 200 percent from 688 in January 2004 to more than 2,000 quotes for every trade in January 2005. Robert Schroeder, program director at the FIF, says this is expected to rise further this year, even though trading revenue is not rising accordingly.

Other developments may further increase traffic. For example, Archipelago’s purchase of the Pacific Exchange is expected to increase the use of smart routing and auto-quoting technology (Dealing with Technology, Jan. 10).

Schroeder suggests that the increases may require major infrastructure investment on the part of end-users, exchanges and vendors. He says that broker dealers that may have found T1 lines sufficient until now will not have enough network capacity to handle the expected increases.

"The March to July increases will eclipse T3 levels. The next bandwidth delivery would be an OC3 line," Schroeder says, which can handle 155.5 million bits of data per second. In comparison, a T1 line can carry 1.5 million bits, while a T3 line can carry 44.6 million bits.

Schroeder also points out that if the markets become more volatile and underlying securities move more often, market makers will have to adjust their quotes for derivatives on those securities more frequently, potentially leading to even greater increases in traffic.