senate inquiry my submission re cdu, page-9

Where millions of dollars come down to milliseconds


There are no signs on the building. Heavy-metal doors guard the entrance. You need an iris scan to gain entry. Underground, a 100,000 litre diesel tank will provide emergency power in case of an electricity outage.

Welcome to the building that now houses the engine room of the Australian sharemarket.

In a nondescript business park in Artarmon, north-west of Sydney’s CBD, the Australian Securities Exchange’s “Liquidity Centre” is about as far away from the old chalk boards that once characterised the stockmarket as you can get.

Eighteen months after it first opened, the ASX lifted the CIA-like security screen surrounding the facility to give media a first-hand look on Tuesday.

While the ASX still has its old headquarters on Bridge Street in the centre of Sydney, the $36 million Liquidity Centre is the beating heart of the new sharemarket – where speed and technology come to the fore.

Inside, more than 80 investment banks, brokers, market makers and financial data vendors have taken up residence. Or more precisely, their computer trading systems have been “co-located” to the facility so they can be as close as possible to the ASX’s trading engine.

SHORT WIRES
In the new world of high-speed trading, where milliseconds matter, the smaller the distance information has to travel down a wire to reach the ASX the better in terms of the potential profitability of a trade.

With so much sensitive data at stake, not to mention the core infrastructure of the stockmarket, security is obviously taken seriously. Through a series of locked doors where access is restricted to those who can pass an eye scan, an industrial-looking room is filled with the noise of technology humming. drowning out most conversation.

At its centre, a “cabinet” (no bigger than the average wardrobe) houses the entire sharemarket – or at least the trading system that runs it.

All around it, brokers, investment banks and other market players have their own cabinets, with wires linking their technology to the ASX’s system.

NO UNFAIR ADVANTAGES
In the interests of fairness, all wires connecting to the ASX’s engine are of the same length, to ensure no one in the room has an unfair advantage.

All this doesn’t come cheap. Traders pay $2000 a month for each cabinet and many have multiple bits of furniture within the facility.

But that’s only the start of it, as there are additional fees depending on which trading engines or data feeds you want to connect to.

Of course, in a market where high-speed computer systems account for around a quarter of trades in Australia, the price of not being there could be greater.

It is estimated that trades executed from outside are 1 to 10 milliseconds slower than those that run through the ASX Liquidity Centre.

That’s a fraction of the blink of an eye in most people’s reckoning but an eternity for high-frequency traders.

In the United States in June for instance, important economic data was mistakenly released to traders 15-milliseconds before it was due. In that barely perceptible period of time, high-speed market players got away with $US28 million worth of trades based on the information