Dax Rodriguez recently joined Victory Networks, a market data and high-speed connectivity provider, as head of business development. An industry veteran in the fin-tech space, he has served as president of Livevol and worked at Deutsche Borse, Chicago Board of Trade, Ballista Securities and E*Trade Securities. We sat down with him to discuss his latest move, as well as recent developments in the technology space, what microstructure, how firms are cutting tech costs, plus compliance and transparency issues.
Q: How long has Victory Networks been around and how did you come to join?
A: Victory Networks has been around for more than 10 years, but in 2013 it merged with SailFish Systems and the SailFish team took leadership positions.
We’ve been around for a long time providing colocation and exchange hosting services and data, and now we’ve expanded. The company went from 30 customers to 60 in a little over a year. They needed help handling the growth and making sure we continue the momentum and they brought me along to help with that.
Until recently, we were only focused on derivatives trading firms and exchanges in the U.S., but now our footprint has expanded internationally. We will start providing CME data, and we’re co-locating in Aurora to provide co-location services and data feeds for all the U.S. exchanges as well.
In addition to co-location and direct exchange connectivity services, Victory Networks provides managed services such as private lines, VPN connectivity and Internet.
We also provide a wide breadth of data products, including data feeds. Victory has data feed handlers for our raw feeds, and we provide an API for our consolidated feeds. Victory provides a lot of value and flexibility for firms, and that’s something I think was missing from the industry for a long time.
Some large firms make you sign 2- to 3-year agreements and they hold you to that contract, even if you want to scale up or down. In the current environment firms need to be flexible, so if you can’t help your customers stay fit and nimble you do them a disservice.
This firm is headed by ex-traders who didn’t like how they were treated by vendors, so they started their own firm and incorporated their philosophy into the way we treat customers and handle contracts. Everyone always wants to have a long term contract, but sometimes it’s too difficult. And if we help them out they will stick with us. And if they grow we will as well. A lot of people say they are flexible, but the policies don’t reflect that.
Some of the newer firms are disrupting the industry because of their flexible policies. Resilience is very important to the industry, especially for trading firms. There is a lot of talk about how brokerages and exchanges are constantly down because of legacy technologies. Victory is built on state of the art, spine leaf network infrastructure that helps us scale and adapt to constantly evolving technology.
We have always talked about microstructure and how that has affected the industry. Smarter guys who understand microstructure do a lot better because they can get more edge trading. Whether its latency processes or just better technology, knowing how the microstructure works is crucial.
Q: What is microstructure and how does your company deal with it?
A: Boiled down, trading firms have to know where is the best place to execute your trades and where it is more cost efficient to do a certain strategy… Do you know, for example, that many firms are moving away from the Weehawken data center in New Jersey and towards NY4 in Secaucus? If you are latency-sensitive, you want to be in NY4. BATS co-location is moving from Weehawken to NY4, for example. And in the equity options market some exchanges are better for trading certain strategies than others because of the exchange rules and fees.
Our firm caters to people who can’t afford the technology they need to keep up with other firms. We provide the technology to them because things they could buy on their own would cost $30,000, whereas if they get it from us it will cost them $5,000. The firms we provide tech to are smart but not big enough to go directly to an exchange and buy a direct connection, get all the data, pay the exchange fee, do all the reporting. So we handle that for them.
The old vendors in the industry got so big and so complacent they became used to charging high prices, but firms can’t afford that anymore. They can’t make that much money because the markets are so tight. Starting with the financial crisis in 2008, everything got tighter.
What I see in the industry is that bigger firms are looking to cut costs – banks, larger trading groups. It’s interesting to see that not a lot of these firms source their own data. You would think the biggest firms in the world would have their own data teams. Some of them do, but it’s not cost-efficient. They are looking at their bottom lines and finding different ways to make sure they are complying with regulations, and if they don’t have the technology they’re going to outsource that. They came to the industry to run their brokerage firm or trading firm, not to run a whole technology group to support their firm. So they focus on what they’re good at and outsource the technology to those who are good at that.
Q: I saw a quote in a recent article that said, “The arms race for ultra-low latency technology is largely coming to an end.” What’s your opinion on that?
A: We now say that the discussion about latency is ‘kind of 2010.’ Strategies now are not as latency-sensitive. The firms we cater to don’t need a microwave tower to execute a trade because they don’t want to compete with the high frequency traders. They just want to be fast enough so they can successfully execute their strategy. Co-location, cross connections are usually required for many firms — many of our customers measure latency in microseconds. But they don’t need microwave towers.
Q: What compliance issues are most troublesome for firms at the moment?
A: I think the reporting. There are some new reports and tags that need to be generated now, and some people don’t understand that you could be fined if you don’t have that in place.
FINRA, the NFA, all the regulatory bodies and exchanges, they are looking at firms more deeply. Before it would be guys just coming in and checking off things on their list. Now they take a deeper dive into your firm and making sure things are in place — Rule 15c3-5 for the equity and options space, for example, is really important.* No one is trying to circumvent the rules, they just don’t understand them. It’s the job of firms like ours to explain them.
A lot of people won’t invest in cloud technology because it’s too expensive, and they don’t think it’s a requirement, but backing up and disaster recovery is a requirement for a lot of broker-dealers. And if you’re not doing it now it’s going to get more expensive later.
People in the past never really invested in compliance and operations technology. Now that’s changing. I see a lot of growth in firms on the compliance side – Thomson Reuters, McGladrey, KPMG, for example, are all growing their compliance side of the business.
Q: What are some of the issues with transparency in the marketplace and how do you address them?
We always work with in-house developers versus our network, and we always have the complication of whether to blame the software or the network. We like to be very transparent with our customers. We will say, “Hey, we don’t think it’s us, but you can look in our network and see if it’s in here, but we think it’s in your software.” If they think there’s something wrong, we open our network up to them to investigate.
I think there has been a big change in our industry since I started. It seems there is very little organic growth. Victory Networks is an exception – we are growing organically.
People are not making as much money as before, and you have to be competitive now. People will ask around in the industry, “Did you have a bad experience with these guys?”
Firms really appreciate honesty, saying what you can and can’t deliver. I think there is going to be a big change, people getting back to the roots of how they do business. You can see that in the food industry, getting farm-to-table stuff instead of going to a big chain store. I think you see that in our industry now.
*Rule 15c3-5 is an SEC rule adopted in 2010 that required brokers and dealers to have risk controls in connection with their market access. It effectively eliminated “unfiltered” or “naked” access to an exchange or an ATS.