By Kevin Carrai
Direct Edge’s Kevin Carrai explains how they chose their new data center and what criteria were most important in making the decision.
Proximity to Liquidity
Anyone familiar with the real estate market knows that the three most important factors are location, location and location. However, the factors that make one location better than another may change over the course of time. At one point in life, proximity to bars and restaurants may be a priority; after starting a family or getting a pet, proximity to good schools and parks may become more important. The same holds true when you are finding a home for your trading infrastructure. In the heyday of high volumes and deep pockets, firms colocated in multiple facilities regardless of cost in order to be as close as possible to liquidity destinations. In today’s trading environment, firms are reconsidering this need and are looking for a facility where they get the biggest ‘bang-for-their-buck’.
The New York/New Jersey/Connecticut tri-state area has become the location of choice for data centers that cater to the U.S. financial markets.Within this geographic area, if firms cannot be everywhere, where should they be? It is more advantageous for firms to be in a centralized location, where they can access many financial resources rather than duplicating their infrastructure at multiple data centers. Facilities that host companies who provide the same services foster healthy competition, thereby forcing vendors to improve functionality and curb costs.
Proximity to competitors, dark pools and other liquidity destinations was a key feature that attracted Direct Edge, a U.S. equity exchange that currently trades more than 9% of total consolidated volume, to NY4, an EQUINIX data center. Other market centers that have also chosen NY4 include International Securities Exchange (ISE), Hotspot FX, Boston Options Exchange (BOX) and CBOE’s new C2 Options Exchange. Having other liquidity destinations just a cross-connect away enables Direct Edge to have a robust, high performing, efficient connectivity infrastructure at a low cost.
Not only does NY4 provide proximity to a multitude of resources internally, it is well positioned physically in the NYC area. The latency between EQUINIX’s NY4 facility and Savvis, a third-party data center that hosts major exchanges and dark pools, is less than 100 microseconds.
Recent conventional wisdom has been that in order to ensure profitability, trading firms had to have a presence in every data center where there was accessible liquidity. As the number of market centers increased, so did the expense required to install and support trading and telecommunications infrastructure within each facility. Firms would gladly pay the increased expense while volatility and volumes were high, but they are now taking a hard look at this strategy.
In these uncertain market conditions, firms are more cost-conscious than ever. In order to remain profitable, firms have significantly reduced technology and telecommunication spending and can no longer support the trend of co-locating their trading infrastructure in every facility. With the increasing premiums imposed by many exchanges for co-location space, trading firms are trying to save money by reducing their footprints and minimizing hand-offs. Therefore, the selection of a few key facilities, or one facility, has become a realistic alternative to multi-facility co-location, especially with the advent of low latency connectivity between market centers.
The most cost-effective solution for majority trading firms is to co-locate in a third-party data center that is home to multiple exchanges, dark pools, ATSs, hedge funds, clearing firms, market data vendors and other financial service providers. Third party data centers enable firms to efficiently access the many vendors required to do business and keep expenditure low.
Such cost savings are another key factor that led Direct Edge to EQUINIX’s NY4 facility. By leveraging EQUINIX’s financial ecosystem, which includes telecommunications providers, application and data vendors, and – most importantly – many of their customers, we have created a fast, low-cost solution to allow the exchange and its customers to quickly connect and begin trading. We uses its infrastructure at NY4 to provide a low latency network service, called Connect Edge, that enables market participants to reduce telecommunications costs.
By leveraging existing connections to NY4, firms have the ability to utilize our established network to exchanges, dark pools and market data providers rather than expend significant resources on maintaining multiple telecommunication connections to each market center or vendor. Using an existing connectivity infrastructure allows firms to increase both network and bandwidth requirements to accommodate growing business needs without the burdensome costs of additional hardware and resources. Services like this offer subscriptions on a month-to-month basis, making it easier to expand and move connections than having to work with the longer-term contracts of most telecommunications providers.
Flexibility and Scalability
Co-locating with a specific exchange is not only more expensive, it can also be more restrictive. For example, some exchanges prohibit third party market data distributors in their data centers, limiting customers’ access to important data products. Facilities operated by exchanges also require specific vendors for telecommunications, which may involve long-term agreements that restrict firms from moving or optimizing their connections.
In addition to liquidity destinations, other important vendors such as market data distributors, clearing firms and news feeds leverage third-party data centers. EQUINIX is home to more than 550 financial institutions, including both buy-side and sell-side firms, exchanges, dark pools, clearing firms, market data providers, data analytics providers, asset managers, hedge funds and news feeds.
In an ever-changing marketplace, firms need a data center that can continually meet growing needs. Third-party data centers specialize in building top-of-the-line data centers, and it is essential to their business that they always have enough capacity to accommodate customer needs. EQUINIX addresses this by adopting a campus environment for their data centers. When one facility fills to maximum capacity, they build another one next door. This circuit of data centers is then connected by dark fiber, making it a continuous network facility.
When trading volumes and volatility deflate, profits also decline, requiring IT departments to rethink the need to co-locate at every liquidity center. The proximity requirement is now being balanced against other important factors such as infrastructure installation, operating cost, flexibility and scalability. In addition, with the advent of low latency connectivity services, firms can further reduce the cost of trading without sacrificing speed of access. Third-party data centers can provide an optimal solution, placing firms in close proximity to essential financial service providers – all competing to provide the best service at the lowest cost – while providing flexibility and scalability to accommodate a growing business model.
By Kevin Carrai