With so many investors eyeing the equity options market these days, Morningstar, Inc., a major provider of investment research, is now enthusiastically embracing a Windows-driven equity options data feed.

“Equity options are increasingly popular with the people we serve,” says Philip Guziec, derivatives specialist at Chicago, IL-based Morningstar. “We have 120 researchers here who analyze investment value and risk. So we need high-quality equity options data for them to evaluate.”

“Due to a number of factors, including rapidly increasing activity and regulatory changes, there’s been dramatic growth in the rate of messages coming out of OPRA,” says Activ’s Frank Piasecki.

But despite skyrocketing demand across the investment business, well-packaged data of this sort is tough – if not impossible – to find according to Guziec. “In fact, equity options data can be a real handful. Generally speaking, industry-wide, the data hasn’t been of very good caliber.”

Morningstar, however, has finally found an answer to its data dilemma in Activ Financial Systems’ options feed, which is being delivered from Windows servers in Activ’s data center – also in Chicago – to Morningstar’s Windows-based infrastructure.

“Options constitute a very difficult data set,” agrees Frank Piasecki, president of Activ Financial. “Due to a number of factors, including rapidly increasing activity and regulatory changes, there’s been dramatic growth in the rate of messages coming out of OPRA. The traffic volume is very high.”

At this point, Morningstar is also sharing lots of analysis of options data on its investment Web site for individual investors. New offerings on Morningstar.com also include a family of proprietary option volatility indexes, derived from Activ’s options data feed. Beyond its analysis services for individual and institutional investors, Morningstar provides a variety of other offerings, including asset management services for financial advisors and retirement planning programs.

In adopting the options feed, Morningstar becomes an Activ customer for the first time. But Activ also operates a number of other data feeds, both high-speed and low-speed. These feeds are used by customers that include brokerages, hedge funds, financial advisors, exchanges, and other financial publishers, Piasecki says.

So what, precisely, is Activ’s role in supporting Morningstar’s emerging options analysis services? Essentially, Activ takes raw OPRA and SIAC data, streaming in from exchanges in New York City, and then adds value to the data through its options feed, Piasecki says.

Upon receiving the native exchange data from New York, Activ’s Windows servers normalize, cache, and compress the information.

“We use a layer of deep compression, so that 350 megabits (MB) of OPRA output becomes 48 MB of compressed data. Morningstar then taps into that 48 MB,” explains Piasecki.

“Compressing the exchange data greatly reduces customers’ bandwidth requirements for data feeds,” points out Shawn Kaplan, Activ’s director of marketing.

Piasecki says that Activ also uses its Windows data center for instituting a 20-second delay in data distribution on low-speed feeds, thereby sparing customers any exchange fees for real-time data.

“A lot of customers like to avoid paying these exchange fees unless they truly need real-time data,” he adds.

Activ’s data feed infrastructure also includes downstream content servers outfitted with specialized databases and quantification engines.

“These content servers can be located just about anywhere – at customer sites, at Activ’s data center, or at global exchanges,” according to Kaplan.

Despite skyrocketing demand for it, “equity options data can be a real handful,” says Morningstar’s Philip Guziec.

Moreover, Activ performs three sets of services – remote database administration, operations support, and developer support – for Morningstar and other customers.

“Our customers don’t really even need to touch anything, because all of it can be fully managed,” according to Piasecki.

Activ has traditionally operated all of its feeds on the Microsoft Windows operating system. “Most customers are using 64-bit Windows, but some are using 32-bit,” Piasecki says.

But a few of Activ’s data feeds are now migrating to an ultra-fast, hardware-based HPC (high-speed computing) platform known as ActivFeed MPU (Market Data Processing Unit), first unveiled in April of this year. This fall, Activ has released new C# and C++ APIs (application programming interfaces) for connecting from Windows servers to ActivFeed MPU. Activ also provides various other APIs to customers, and these act as developers’ interfaces to the vendor’s technology. Other key ingredients in Activ’s traditional line-up include ActivFeed Direct, “standard” ActivFeed; ActivWorkstation, a .NET-based display application; and ActivMiddleware, according to Piasecki.

ActivFeed Direct is aimed at supplying “the lowest possible latency,” while also saving customers the costs of maintaining feed handlers and aggregating support data.

On the other hand, the low-speed options data feed in use at Morningstar is one of Activ’s “standard” ActivFeed products, he says. Essentially, the new ActivFeed MPU belongs within the ActivFeed Direct category, in Piasecki’s view. But with ActivFeed MPU, Activ is porting its software ticker plant technology – which uses a commoditized chip to run a software OS such as Windows – on to silicon, so as to provide hardware acceleration for certain types of data feeds.

The new MPU platform runs on a specialized co-processor called a FPGA (Field Programmable Gate Array), which is closely coupled with AMD 64 Opteron microprocessors. Activ has been collaborating with AMD and other vendors on an HPC project from AMD dubbed Torrenza. Other elements of ActivFeed MPU include Direct Connect Architecture and HyperTransport Technology.

Piasecki predicts that FPGA will carry immediate benefits for some kinds of scenarios in the financial services industry. Latency, for example, is already only 65 microseconds with FPGA. Other advantages will include greatly increased throughput.

But high-speed architectures such as FPGA are not for everyone, according to Piasecki. Indeed, much discussion at recent industry conferences has revolved around when to deploy HPC, and when not to use it. For one thing, HPC platforms are much more expensive to operate than software-based platforms, and vendors tend to pass these costs along to customers, suggested several of the speakers at this summer’s High Performance on Wall Street conference in New York City.

“Some customers of our options feed want to analyze and add their own value to our data. They aren’t looking for those levels of speed. They aren’t using the feed to do real-time trading. They’re much more interested in the reliability, quality, and breadth of the data,” Piasecki notes.

“As a content generator, I want the data to be reliable and the provider to be responsive to our needs,” Guziec says.

Morningstar’s Guziec echoes the assertion that the reliability and quality of Activ’s options data feed are some of the aspects that are most appealing to Morningstar. He also gave particular applause to the Windows-based product’s ease of use and to Activ’s demonstrated responsiveness to customer requirements.

“As a content generator, I want the data to be reliable and the provider to be responsive to our needs. And there’s nothing we’ve ever needed from Activ that we haven’t gotten,” Guziec says.

Guziec notes that, in using Activ’s feed for analyzing the options data, Morningstar’s researchers are now exercising skills they’ve already learned in stock evaluation. Meanwhile, Morningstar’s Web site for individual investors is using Activ’s data and Morningstar’s analysis in an effort to simplify decision-making for individual investors around highly complex materials. The Web site team is already using the feed to provide full option pricing data throughout the day for all companies on which options are traded.

Moreover, Morningstar.com now features a new options home page, which is somewhat along the lines of existing home pages for stocks, funds, and personal finance, for example. Like other home pages on the site, the options home page includes topic-specific text, graphics, and video content, along with its own discussion board. By entering a ticker on the options home page, the investor can personalize the display of options information, such as historical statistical volatility and key derived options measures. The derived options measures include implied volatility and option tools, which measure sensitivity of option price changes to factors such as stock prices.

Investors can also use a new Morningstar Option Strategy Map, a framework that aligns Morningstar’s Equity Research analysis with option investment strategies. Additionally, the Web site has now launched a new family of proprietary option volatility indexes. The Morningstar Volatility Index (MVI) is designed to aggregate the implied volatility of individual options against the index, so that investors can figure out whether an option is “cheap, average or expensive” as compared with options on similar stocks, Guziec says. Investors can also access data options analysis from other areas of the Web site. Option chains on single companies can be easily accessed by entering the ticker in a quote box that shows up at the top of each page of the Web site.

As Piasecki sees it, the already strong industry demand for high-quality options data will only continue to mushroom. This assessment is well supported by industry statistics. Way back in 2005, OPRA stipulated a required capacity of 173,000 messages per second for OPRA data. By 2007, that number had soared to 573,000. For 2008, OPRA currently projects a required capability of 907,000 messages per second, according to Joe Corrigan, OPRA’s executive director.

But whatever the future holds around the volume of options data, Morningstar now seems to be well-positioned.

“Activ is making equity option data work for us, in a way that’s easy for our analysts and programmers to handle,” Guziec says.

www.morningstar.com

www.activfinancial.com

By Jacqueline Emigh