The cautious buy side has taken a long and winding road to a license-free, cost-effective operating system.
The Linux operating system has uprooted many IT providers and competing proprietary systems as the open source software changed the landscape for trading firms over the past decade. The buy side has been tenuous in its embrace of Linux but the Great Recession caused firms to value the bottom-line benefits of a movement that shows no signs of slowing down.
At first glance, Linux strongly resembles the Unix open operating system, but Linux’s development depends on an open source community committed to further developing the software. In 1991, Linus Torvalds developed and then shared the Linux kernel, which guarantees the ongoing evolution of the operating system. Along the way, Linux, like the flavors of Unix, challenged proprietary operating systems and incumbent forms of Unix.
Since its inception, Linux has moved beyond low-end desktop systems to high-end servers, mainframe computers and supercomputers. Its wide appeal has even spread to mobile phones, tablets and network routers. In fact, Torvalds’ just released Linux kernel, version 3.3, embraces the Google-led, Linux-based development effort for the Android operating system.
For 2011, the overall demand for Linux-based servers appears to have been positively affected by the need for high performance computing (HPC) and cloud infrastructure deployments, according to the International Data Corporation’s (IDC) Worldwide Quarterly Server Tracker.
For the last quarter of 2011, Linux-based hardware revenue grew 2.2% year over year to $2.6 billion. Linux servers constitute 18.4% of all server revenue, up 1.7 points when compared with the fourth quarter of 2010, say IDC researchers. The Linux segment of the server market was one of the few high points for the worldwide server market, which decreased 7.2% year over year to $14.2 billion in the fourth quarter of 2011. IDC researchers say that for all of 2011, worldwide server revenue was up 5.8% to $52.3 billion compared to 2010, while worldwide unit shipments increased 4.2% to 8.3 million units.
“After 2008, hedge funds turned to more cost efficient ways to start up. They brought Linux into their firms out of necessity but veterans realized they can build a solid platform for a fraction of the cost. In addition to direct adoption, Linux is proliferating across vendors. It’s embedded in network equipment, network storage servers, and virtualization systems. Firms are adopting Linux whether they know it or not.”
—John-Peter Lee, CTO at Touradji Capital Management
Lean or Fat?
For trading firms, the romance with Linux began with servers, a phenomenon that took hold by 2002 when major sell-side firms could not resist the cost-savings and new control that Linux gave them. By contrast, buy-side firms have been cautious about embracing Linux even though many hedge funds that rely on prime brokerage services have most likely been the beneficiaries of Linux deployments.
The hesitancy toward Linux among hedge funds has begun to fade, following the Great Recession, says John-Peter Lee, chief technology officer (CTO) at Touradji Capital Management, based in New York.
“After 2008, hedge funds turned to more cost efficient ways to start up,” Lee says. “They brought Linux into their firms out of necessity but veterans realized they can build a solid platform for a fraction of the cost. In addition to direct adoption, Linux is proliferating across vendors. It’s embedded in network equipment, network storage servers, and virtualization systems. Firms are adopting Linux whether they know it or not.” The IT talent pool for Linux has also been building since the downturn.
Linux also plays a key role in helping hedge funds become either a lean company or a fat firm, Lee says.
“The fat firm spends money on commercial software that works together out of the box,” Lee says. The fat firms spend money to harness, maintain and upgrade the software. “Customization is expensive if available. But everything just works, and if it doesn’t, there’s a hotline to call.”
A lean hedge fund will leverage Linux and open source computing as much as possible, Lee says. “However, this comes at a cost of instability. Not all the third-party pieces of their infrastructures are developed together. On the contrary, very few pieces are. The company needs a full-time, open source expert to ensure everything is working in harmony.”
A single, open source library release can break the link in the chain and a Linux expert needs to fully test every link of the chain, carefully removing and adding links before putting the new release into production. “This leads to more careful planning of upgrades and patch rollouts,” Lee says. “This dictates the workflow and process. It also demands a culture for people who are patient and diligent.”
For now, the hedge fund industry is “a good mix” of fat firms and lean companies, Lee says.
“In the nine years I’ve been in the industry, there is honestly very little bias one way or the other,” Lee says. “It comes down to talent. A lean company often turns into a fat firm because they grow beyond the infrastructure that a simple open source platform provides. The lean company doesn’t see an upgrade path, so they resort to the ways of the fat firm. It’s unfortunate because Linux and open source software are at the cutting edge of innovation for big data, complex event processing (CEP), group collaboration, social networking, and cloud computing.”
More Pressing Matters
Yet before firms embrace the cutting-edge they will need to sort out more pressing matters such as centralizing financial messaging and vendors such as Arkelis and Sterci have recently joined the Linux parade to help firms do so.
“We’ve been talking to a lot of customers and prospective customers and Red Hat was the most common denominator. … I must say that the push for Linux mainly comes from the buy side.”
—Valerie Morel, Head of Marketing, for Arkelis
Red Hat, a Raleigh, NC-based provider of the Linux open source operating system, and Arkelis announced in early February that they have combined efforts in a non-exclusive agreement to port Arkelis’ multi-network Advanced Messaging Hub (AMH) to the Red Hat Enterprise Linux environment. AMH helps firms centralize incoming and outgoing messaging traffic.
Arkelis’ key customers are major financial institutions that have volume processing demands and server infrastructures that need to support 1 million or more messages per day, says Valerie Morel, head of marketing for Arkelis, the subsidiary of the financial messaging services provider SWIFT. Most of the requests for the Linux version of AMH came from the buy side, Morel says. The Mechelen, Belgium-based Arkelis has a staff of approximately 80 people with offices in New York, Zurich and Frankfurt.
“We wanted to be proactive,” says Morel, who adds that the there was a “strong demand” from their clients to move to Linux as they realign their architectures and platform choices. Arkelis wanted to show customers that it can be flexible in meeting their needs for new functions, she says. “We want to be ahead of the market. We have customers who have given us the impression that they want to migrate to the Linux version for the next upgrade of hardware.”
Firms will use the Linux variation to support messaging for payments, securities, funds, reporting purposes and applications. Red Hat will directly license the operating system to customers, if they do not already have such contracts in place, Morel says.
Arkelis reviewed the Linux offerings of several providers.
“We’ve been talking to a lot of customers and prospective customers and Red Hat was the most common denominator,” Morel says. The vendor is in talks with many buy-side players that want to deploy the new version. “I cannot share the names yet. I must say that the push for Linux mainly comes from the buy side.”
Ultimately, supporting Linux will make it easier for firms to move messaging to the clouds, Morel says. Until then, a major driver for buy-side firms is the cost savings they hope to achieve via Linux-based servers and systems.
Another provider for the buy side, Sterci announced this past June that it has signed a global partnership with Hewlett-Packard (HP) to implement Sterci’s Financial Messaging Solutions on HP’s Intel-based servers running Redhat Linux.
The joint effort is intended to help financial institutions combat increasingly demanding financial messaging infrastructures and to cut total cost of ownership (TCO), according to a statement from Etienne Savatier, director of international sales and partner channels at Sterci. The vendor offers a component-based messaging architecture to support for multiple networks including SWIFT messages and the FIX protocol.
No More Shackles?
While Linux-based systems are often more cost-effective, many buy-side firms are prone to embrace it if a valued application or system is using it, cautions Adam Honoré, research director for Boston-based market research firm Aite Group.
“It depends on what they need. If the solutions they’re buying are Linux-based, then of course, they’ll use it,” Honoré says. “The buy side is a little more Microsoft-centric and the sell side has been pushing Linux and open source.” The open source nature of Linux allows sell-side firms to customize and speed up the operating system for profitable front-office activities such as high frequency and quant trading.
“I still see a lot of the buy-side back office on Tandems and the old stuff,” Honoré says, referring to legacy fault tolerant systems from Tandem Computers, now part of HP.
What might finally win the day for Linux is a big reward for putting in the extra effort required for a Linux-dependent infrastructure, Lee says.
Firms will be “free from the shackles of pay-for-play features,” Lee says. “Everyone’s a first-class citizen in this world. The field is level whether you have money or not. Because there are so many choices for each part of the infrastructure, making the right choices can give you a custom fit. The right choices will yield scalability, efficiency, and speed.”
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