Flash trading leads to a new business option for semiconductor vendors

One of the profound changes in the global financial markets in the last few years—aside from some minor transients in market value and liquidity—has been the emergence of algorithmic electronic trading, popularly known as flash trading, though experts use this term in a more restrictive sense. In these systems, computer programs on servers farms take feeds of trading data from automated financial exchanges and scrape the Web for data relevant to the securities or commodities they are trading. The programs feed the data into trading algorithms and generate orders to the automated exchanges, committing transactions in a matter of milliseconds, or even microseconds.

The huge amounts of money involved and the razor-thin margins mean that the latency between when new information appears on an exchange or Web server somewhere in the universe and when the system can execute a trading order has direct impact on the financial institution’s income statement. That means there’s a huge amount of money suddenly very interested in every source of latency between the servers in their data centers and the servers in the exchange trading systems.

This unusual situation arises as data center networks—within and outside the financial industry—are already in transition. Specialized data-center networks such as Infiniband and Fibre Channel, as well as proprietary variants of Ethernet, are giving way to 10 Gbit Ethernet, which has simply become fast enough to serve as a unified data-center network. But for the financial customers, latency is an over-riding issue. And legacy Infiniband, with latencies as low as about a microsecond and a half, has held an order of magnitude advantage in latency. That may be why Larry Ellison, now the proud owner of Sun, reportedly gave a ringing endorsement to Sun’s Exadata platform—which still uses Infiniband—in a recent Oracle earnings call. It is not incidental that the financial community is one of Sun’s biggest surviving markets.

But 10 GE is challenging Infiniband on latency. Solarflare Communications has been touting the low latency of their 10 GE silicon as under 5 microseconds, using the company’s OpenOnload software under either TCP or UDP.

Perhaps the clearest indication of how much the financial community’s latency quest is influencing the market is that Solarflare is changing their business model to respond. As a fabless semi company, Solarflare pitches their dual-channel 10 GE SoCs to network interface card (NIC) vendors, and to a few large server and switch vendors. This sales effort naturally includes creation of fully-functional reference designs, including all the necessary software and essentially production-ready board designs.

This morning, the company announced that it has itself taken a version of its reference design into production, and is now selling the resulting NIC directly to users as the SFN5122F, using the company’s SoC. Solraflare also announced that the have "hardened"—in the words of vice president of marketing for corporate and financial-services markets Bruce Tolley—the popular OpenOnload application accelerator software, originally created at Level-5 Networks. The new version is productized as Enterprise OpenOnload.

The intense competition among investment institutions to lower their network latencies creates an unusual situation in a specific market. But Solarflare’s response may not be unique for long. Today setting up a contract manufacturing relationship is not a huge barrier. In cases where a semiconductor product has a differential advantage of direct significance to end-users, converting a reference design into an end-user product may make a lot of sense. Supporting the resulting end-user product may not be significantly more expensive than supporting the OEMs who integrate the product today. In the unending struggle to recapture more of the value they create, more semiconductor vendors may choose to become systems vendors using their own chips.