Exchanges without borders – Meeting access and latency challenges across the Asia Pacific


By John Knuff
Can there possibly be a silver lining in the current financial meltdown? John Knuff of Equinix, argues that now is a time to upgrade your investment, allowing the Asia Pacific region to catch up with its US and European peers.

While the global financial crisis has inevitably had an impact on investment, most commentators seem to agree, that the Asia Pacific market will see on-going development, particularly as it continues to invest in the infrastructure and technologies, that will allow it to match its US and European counterparts, in key areas such as execution speed, easier market access and direct data feeds.
Analysts such as Celent see the current downturn as a significant opportunity for Asia exchanges, even suggesting in a recent report that Asian exchanges have the potential to overtake their US colleagues in the near future. Before this can happen, however, there needs to be sustained investment in the technology, skills and processes that will enable lower latency, easier access and faster data feeds across the region.
One of the key challenges remains the diversity of the region. While the geographical diversity, and vast distances involved, will always make it hard for traders to gain low latency access to multiple market centers, the added complexity of local regulations and last mile access make region-wide performance goals even more difficult to achieve. Nevertheless, factors such as direct market access, the increasing presence of alternative trading systems and the introduction of crossing networks, will have a tremendous impact shortly after local regulations ease.
Investing to close the gap with other global markets
To assume that the different markets in the Asia Pacific region will progress seamlessly together towards a more deregulated and open environment would be unrealistic. The global financial crisis is already leading some Asia Pacific exchanges and regulators to be more defensive in their outlook. However, it also provides an opportunity, for more traditional venues, to develop and implement their own alternative trading strategies to compete, more favourably, with new market entrants as conditions improve.

It is this imperative to remedy the handicap of limited bandwidth and slower trading platforms, that is driving Asia Pacific financial institutions to continue to update their technology infrastructure. As many of the incumbent exchanges re-tool their matching engines and foster technology partnerships, with global leaders like NASDAQ OMX and NYSE Euronext, the broker / dealer communities are quickly positioning themselves to be the partner of choice for many of their US and European counterparts.
Given this background, we believe it’s important for Asian market participants to ensure they are making the right infrastructure and connectivity choices today, to allow them to compete more effectively tomorrow.
A world of more end points and more trading venues
In an Asia Pacific market driven by the continued growth of automated and algorithmic trading, the emergence of new liquidity opportunities and increasing numbers of order destinations and market data sources, we’re increasingly going to see financial firms trading a much wider range of asset classes and instruments across broader geographies.

In those countries, where the incumbent exchanges still handle the majority of trading, these new market developments will have a significant impact as local traders who, limited by their current choices, increasingly send order flows to more accessible and transparent electronic markets. All this translates into more end points and execution venues, and is driving demand among financial services firms for a greater choice of networks with low latency/ high bandwidth capabilities to enable these higher message rates and optimise throughput.
With the landscape of the Asia Pacific market’s different trading centers evolving so quickly, it’s becoming increasingly apparent that a strong element of foresight, and much broader connectivity options, will play as important a role as proximity, when it comes to making location decisions across the Asia Pacific region.

Making the right technology decisions
This is important given the highly volatile and competitive nature of today’s financial markets. Trading volumes are shifting dramatically, new entrants are changing the market opportunities, and there’s a continued growth in automated, algorithmic and alternative trading strategies. At the same time, many markets are fragmenting away from their traditional single venue exchange-based structure, while major players continue to join forces in line with the trend of globalization and consolidation.

Whatever your line of business, there’s a pressing requirement for a stable, global infrastructure that assists you in achieving your market goals. Whether you’re an asset management firm or a hedge fund, you depend on the ability to access continuous streams of global market data, messaging, news, history and analysis to ensure successful execution of your trading strategy. Or you could be an exchange that needs to be able to quickly connect to participants or clients, receive orders over a range of different financial extranets and broker connections, post or match the orders almost instantly, and respond in milliseconds (or increasingly microseconds).
It’s the same for those who trade equities, forex and derivatives, where firms are dependent on a stable infrastructure that can deliver secure connectivity to specialised market data feeds around the world, as well as support for robust analytical tools and access to electronic STP technology for execution, settlement and clearing.
So when it comes to weighing your location options across the Asia Pacific and wider global markets, it’s important that organisations balance key factors such as execution speed of the exchange, sources of inbound order flow and the flexibility to achieve the right mix for their current and future needs. By concentrating simply on proximity to a single local exchange, the goals will be set around low latency for market data and single exchange routing. Liquidity providers, however, require extremely low latency and co-location to reach multiple venues, while off-premise members need much more flexibility, including a robust choice of options for connecting that deliver reduced latency/cost control and technical support.

Evolutionary stages for exchanges
This balancing act will become much more important across the Asia Pacific region, as organisations come to terms with the different evolutionary stages that exchange data centers typically pass through.

The first stage – still common across the region – is where exchanges operate in their own data center. This can work well initially, but when the exchange’s volumes grow it can find itself competing with its own client base for limited data center resources such as space, power and cooling. This can potentially prove limiting, and shows the need for exchanges and trading venues to understand clearly where their longer term business value is likely to come from.
The second stage is when exchanges start to co-locate with their local established carrier or telecom provider. But as we’re seeing across the Asia Pacific, this can quickly become a limiting factor for order flow as remote broker dealers seek direct access. The well recognized carrier of the exchanges home country may have a limited (or non-existent) service offering in other key global financial cities.
While they might, for example, be enjoying high order flow volumes from proximity traders, exchanges also need to acknowledge the high value revenue flows that primarily come from institutions and off-premise firms. There’s not much point in majoring on connectivity to liquidity providers, if it’s only going to impact the quality flow of data from the institutions that are likely to be one of your prime revenue sources. So when designing the optimum infrastructure, it’s essential to weight your decisions on what actually drives the most profit.
Such exclusive co-location arrangements can often seem very attractive to trading venues, particularly in the early stages of expansion, however they can lead to significant penalties for their member firms going forward. Exclusivity with network providers can significantly constrict the flow of orders through the trading venue, whereas network neutrality can increase competition and provide options for members which help drive down connectivity costs as bandwidth requirements increase.
At Equinix we think of networks and financial extranets as the cardio-vascular system for successful electronic trading communities. We believe it is essential for trading venues to extend rather than restrict their connectivity options. This is where colocation with access to global, regional and metropolitan financial extranets and telecom companies can prove valuable. Exclusive arrangements with the incumbent carrier simply cannot provide this kind of support.
This market reality highlights the pressing requirement for the next stage of development: co-location in a networkrich environment with a carrier-agnostic specialist. Typically the health and vitality of an exchange is limited by its order flow, however as connectivity options grow, the volume from liquidity providers and remote participants also increases.
Our experience suggests that it will be the venues that evolve to carrier-agnostic facilities that will position themselves for stronger growth. At the same time, the integration of global connectivity providers, regional telecom companies and the latest generation of financial extranets, opens up the possibility of cross-connecting with other regional participants. This will remove traditional barrier-of-entry costs and enable connectivity to exchanges, alternative venues, liquidity providers, pre- and posttrade reporting, clearing and settlement providers, market data vendors and other outsourced solution providers.
It’s this kind of approach, taking advantage of dense interconnection points and connectivity options, that we believe is ideally placed to support organisations across the Asia Pacific region.