Speed is Money: High Frequency Trading and its implications for the ad exchange industry

A few weeks ago, the New York Times insert of the Süddeutsche Zeitung ran a set of features under the theme “Exploiting the Deluge of Data” – naturally a headline that caught our attention. Of particular interest to me was an article by Graham Bowley called “Speed is Money As Cyber Muscle Overruns Markets,” which explores the growth of high frequency trading in stock exchanges around the world.

“In many of the world’s markets, nearly all stock trading is now conducted by computers talking to other computers at high speeds,” Bowley writes. Sound familiar? Though he’s talking about stocks, much of the article’s content has direct overlap with the current ad exchange climate, where the trend towards real-time bidding (RTB) has grown up in the shadow of the finance world’s shift to high frequency trading (HFT). According to Kevin McPartland of TABB Group, HFT now accounts for 56% of total stock market trading today. Similarly, according to the Commodity Futures Trading Commission, HFT now accounts for nearly one third of all domestic futures exchanges.

Was Google’s 2015 prediction for real-time traded display inventory based on these finance industry numbers? Could be. In any case, the trend is upward. Last week’s Forrester report commissioned by Admeld predictes a $823 million U.S. market for RTB in 2011 — approximately 8% of total display spend, more than double the RTB spend for 2010.

Just like in ad exchange world, high-tech startups have swooped into the finance industry to consume market share in the midst of the HFT boom. While five years ago the New York Stock Exchange handled 70 percent of the trades 98it listed, today it handles only 36 percent – the rest is divvied up between Nasdaq and the new players such as a New Jersey company called Direct Edge, which now handles 10 percent of stock market trading volume in the U.S. today.

What’s perhaps most interesting about this more mature exchange environment is the very heart of the HFT methodology – the speed. Though the ad exchange industry has chosen the term “real-time” to describe our trading, Nasdaq says its round-trip orders take 98 microseconds (i.e., 98 millionths of a second) – 1000 times faster than the fastest ad exchanges and real-time ad platforms are claiming they can deliver.

In the race to scrape milliseconds off of trade times, some stock exchanges are investing in fiber-optic connections between cities to shorten latencies even more. In October, one company announced plans to connect Nova Scotia to England via fiber optic link, an upgrade “that will send shares from London to New York and back in 60 milliseconds.”

Is this a glimpse of what’s to come for the ad exchanges and the ecosystem that surrounds them?

“The exchanges have gone warp speed because the trades haves demanded it,” Bowley reports. “Even mainstream banks and old-fashioned mutual funds have embraced the change.” As more top-brand advertisers and premium publishers get on board the RTB express in 2011, they too will realize that “speed is money,” and demand lower latencies for bigger data sets from their tech vendors.

We’re ready for the races.