What is driving co-location and proximity hosting in Asia?
Emmanuel Doe, President of Trading Solutions, Interactive Data examines narrowing structural differences between Asia-Pac and the rest of the world.
Asia Pacific is fast emerging as a hub for electronic trading globally. Despite the fragmented geographic structure of the region and a complex regulatory landscape, international traders are finding Asia-Pacific increasingly compelling as a business opportunity to help differentiate their trading strategies from other participants.
Many firms are increasingly attracted to the Asia-Pacific region because of its diversified range of markets. In terms of high frequency trading the developed markets – Australia, Japan and Korea – have evolved their infrastructure based on European and North American best practices. The developing markets, such as China, Hong Kong, India, Singapore and Taiwan, are investing in technology upgrades and are catching up with the more established markets.
However, despite the attractions of these markets, a number of operational and infrastructure challenges still remain for traders.
The regulatory landscape within Asia-Pacific is complex due to the lack of a single regulator driving the regional equivalent of a MiFID or RegNMS style regulation that would place multiple markets into a coherent framework, drive standardisation and potentially reduce clearing costs.
Some national regulators welcome overseas firms and competing execution venues, while others are more cautious. Transaction costs also vary and in some of the markets can be significant due to stamp duty and transaction taxes, which are charged on top of commissions and spreads.
This is likely to change as more global firms enter these markets. Asia Pacific’s advantage is that it is still relatively immature compared to the US and Europe and so can learn from the developments within those markets and consequently adopt a more balanced approach to reform
Given the distances between major trading venues, network latency is an extremely significant factor for electronic trading in the region. For example, the direct route between Tokyo and Hong Kong is approximately 2.5 times the route between New York and Chicago, or approximately 4.5 times the distance between London and Frankfurt. This inherent latency does have an affect on the decision on where to locate trading operations in the region and how to execute multi-venue trading strategies.
Location also tends to be determined by the type of trading strategy employed, such as single market cross-asset, multi-market intra-region, or multi-market inter-region. Hong Kong is seen as the key venue for traders looking to access China, while Japan has strong links with Chicago and Singapore for futures trading. Singapore is fostering links with the emerging Southeast markets (Malaysia, Vietnam, Indonesia, the Philippines, and Thailand) via the Association of Southeast Asian Nations’ (ASEAN) trading link up to facilitate increased cross-border trading in the region.
Demand For Co-Location And Proximity Hosting
Co-location is nothing new in the West and the trend is now extending eastwards in order to minimise order roundtrip latency for firms executing on the various Asia Pacific exchanges.
With the increased focus on the region, there has been, in turn, greater demand from trading organisations for enhanced connectivity and co-location availability. Many of the region’s major exchanges have responded to this. According to research by GreySpark1,61% of exchanges offer co-location services and 39% offer proximity hosting.
There has been a sustained period of technology investment in the leading markets of Australia, Hong Kong, Japan and Singapore as well as in the emerging markets that are trying to compete with the traditional liquidity centres. This investment has included trading system upgrades to boost capacity and speed, adoption of standard technology offerings from NYSE Technologies and NASDAQ, and the introduction of Direct Market Access (DMA).
These enhancements will require firms to locate hardware and applications closer to the matching engines in order to remain competitive. As competition increases, co-location and proximity hosting have grown in importance.
While an increasing number of exchanges are offering co-location facilities that boast of reduced latency, not all are comparable. Some, such as the Singapore Stock Exchange, provide transparency around their co-location design and latency measurements. Other co-location centres, generally the smaller exchanges, are not as transparent with regard to performance metrics.
Managing Total Cost Of Ownership
With Asia hosting more than 20 electronic trading venues and nearly 50 exchanges, dispersed across a wide geographic area, accessing all of the markets required to execute a strategy can be difficult.
Infrastructure is not currently mature enough to support the speed at which the market is growing, and this has prevented electronic trading on the scale seen in the US and Europe, due to the high investment required to upgrade lines to enable higher volumes. Network costs are far higher due to the greater geographic distances between venues.
In the race to reduce latency in Asia, the cost of building software and infrastructure platforms to take advantage of liquidity on these venues can be significant. There is also the cost of ongoing maintenance and the overall total cost of ownership (TCO) to consider.
Cost is driving demand for managed services that can offer a mix of DMA, co-location and proximity. This enables firms to access specific markets in the most effective way to execute their trading strategies. This outsourced approach has the clear benefit of offering a lower TCO for multi-market and multi-asset trading.
In terms of co-location, a managed services provider can provide a faster connectivity option by allowing financial firms unobstructed access to exchange matching engines. With new routes scheduled to open and technology continuing to advance, firms that choose to outsource don’t have to worry about investing in the fastest lines between markets, or ensuring they have the latest switching and routing hardware. All of those elements can be managed on their behalf at a reduced total cost, leaving them to concentrate on strategy and client service.
There is also a growing requirement for consolidated data feeds for global markets being fed into these co-location sites. This gives trading firms the lowest possible latency for their primary trading markets alongside access to market data from a large number of regional markets, delivered to a single point.
Proximity hosting, generally delivered through data centres located near many leading exchanges, can provide microsecond-level access to an exchange presence, often at a fraction of the cost of hosting in the exchange’s proprietary co-location facility.
Time to market is another critical factor that has led more firms to examine the outsourcing of their trading infrastructure, particularly if they want to access multiple markets. With each venue having differing regulations, technology rules and upgrade plans, trying to manage all of the moving parts can be challenging.
The continuing evolution of developing markets, especially in relation to technology upgrades, and the complexity of their internal infrastructure, creates opportunities for trading firms. Technology upgrades which level the playing field for electronic trading firms are happening across the region and are in various stages of progress and refreshes.
As the markets continue to evolve so too will the demand to access new pools of liquidity and the alternative venues that will emerge as a result of new regulation. This will continue to drive demand for advanced co-location and proximity hosting solutions to ensure firms can access their desired markets quickly and cost-effectively.
1 “Low Latency in Asia-Pacific: An infrastructure overview”. Frederic Ponzo, Anna Pajor, Saoirse Kennedy, 2012
This article is provided for information purposes only. Nothing herein should be construed as legal or other professional advice or be relied upon as such.
© Interactive Data (Europe) Ltd 2012