A new partnership between Google and CME Group could shake up the technology industry by making traders’ investments less risky. The deal will enable market participants to build their own trading applications on top of Google’s cloud platform, which includes a public data feed for all global futures contracts.
CME is a futures exchange that specializes in trading agricultural, energy, precious metals and other financial commodities. The partnership with Google could upend the tech investments that are made by traders.
According to industry observers, CME Group Inc.’s intention to shift key trading systems to Google Cloud may upend hundreds of millions of dollars in communications and data center expenditures by traders.
According to Larry Tabb, director of market-structure research at Bloomberg Intelligence, high-frequency traders and other CME users have spent years developing their own state-of-the-art systems suited for very time-sensitive markets. Latency, or the time it takes for these systems to respond, is measured in millionths of a second or less.
Until recently, it was assumed that the cloud would be unsuitable for high-frequency trading. Companies rent access to shared computer infrastructure in the cloud, which may be accessed from many places. The cloud is often used for less time-critical corporate operations like surfing, email, streaming video, and even supply-chain management. High-performance business applications seldom need the same level of performance as high-frequency trading.
CME and Google, a subsidiary of Alphabet Inc., signed a 10-year deal on Nov. 4 to shift CME applications to the cloud. The apps will be moved to the cloud in stages, with the main trading systems being the first to go. CME and Google will have to replicate in the cloud systems that match the very low-latency performance of specialized trading infrastructure before that can happen.
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“This is a more difficult cloud migration than typical,” said Philip Moyer, Google Cloud’s vice president of strategic industries.
A cloud-enabled exchange, if successful, may cut operational expenses and lead to the establishment of new revenue-generating data goods and services, according to Mr. Tabb.
The agreement will help CME to bring on new customers quicker, improve operations, and create new tools using Google technology, such as artificial intelligence software for monitoring market risks, according to the company.
Moving key trading systems to the cloud, according to Mr. Tabb, would “upend the persons who heavily leveraged the CME data center, who include active traders in futures markets, their brokers, and technology suppliers, as well as active stock traders who depend on high-speed data from the CME.”
Customers of CME will have to rebuild their systems to work in the new environment if the exchange’s trading infrastructure is shifted to the cloud, according to Mr. Tabb.
However, Nasdaq Inc.’s chief technology and information officer, Brad Peterson, believes the cloud offers benefits for exchanges.
Google Cloud headquarters are located in Sunnyvale, California.
REUTERS/Paresh Dave photo
“The worldwide pandemic has strengthened our perspective of the advantages of our cloud transition,” he added, citing greater elasticity, scalability, and speedier innovation while retaining market robustness and integrity.
According to CIO Journal last year, Nasdaq intends to shift its markets to the public cloud over the next decade.
“These are early days since our announcement,” a CME spokesman stated, “and we don’t have any specifics for you beyond the release at this moment.”
Google Cloud said, “We are thrilled to collaborate with CME to overcome these difficulties.” It refused to elaborate on the challenges of moving to the cloud.
According to David Lariviere, a professor affiliated with the University of Illinois at Urbana-colleges Champaign’s of engineering and business, larger trading firms frequently rely on proprietary software that works with customizable hardware, giving them control over the speed and consistency of their trading algorithms. He estimates that reworking the gear for a cloud-based system would take a significant amount of time.
High-frequency trading businesses frequently “co-locate” their servers with the exchanges in the same physical data center. According to Michael Persico, CEO of Anova Financial Networks, a technology provider that runs communications networks used by high-frequency trading firms, the traders’ technology infrastructure is connected to the exchange using as close to equal lengths of cable as possible so that all traders communicate with the exchanges with equal delay.
The Wall Street Journal said that Google Cloud Chief Executive Thomas Kurian and his colleagues were working with CME engineers to verify that the exchange’s new cloud-based infrastructure met the latency requirements of trading businesses.
In a 2020 webcast, Thomas Kurian, chief executive officer of Google cloud services.
Photo courtesy of Akio Kon/Bloomberg News.
To maintain the fair operation of markets, trading businesses also require that they obtain market data from exchanges as near to precisely the same time as feasible, according to Mr. Lariviere. This is accomplished through a multicast mechanism, in which an exchange provides market data to trading businesses and data suppliers, who then spread it to distant trading servers. Historically, he added, the cloud hasn’t supported IP multicast multicast protocols.
Amazon Web Services, the cloud computing branch of Amazon.com Inc., is aiming to offer multicast capabilities. Last year, the business said that it had completed a test of such a system with Singapore Exchange Ltd. and Aquis Exchange, a European market operator.
Requests for comment were not returned by Amazon.
Mr. Tabb believes that if CME and Google Cloud succeed in transferring their trading engines to the cloud, it would put pressure on specialized firms that support the exchanges.
Communications firms, such as Anova Financial Networks, as well as companies that supply trading software and other services to traders and brokers, help traders.
Mr. Tabb believes that if the exchange industry shifts to the cloud, some of these enterprises may become obsolete. Others may need to re-engineer their platforms and connections to accommodate the cloud.
Mr. Persico of Anova Financial Networks views it as an opportunity. “Well-run businesses with brilliant employees and a track record of innovation will do OK,” he added.
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