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In financial services, there’s no need to waste a millisecond

Published: December 15th, 2020 By: IT World Canada

Equinix

By Bill Ruvo
Financial Services, Equinix

Bill Ruvo

In ancient Roman times, people gathered in the Forum to do business face to face. In Dickensian London, Ebenezer Scrooge lurked under the clock at the Exchange, ready to dispense and receive cash.

But today, things happen a little faster, and trading is an impersonal multinational electronic exercise where bits and bytes fly from place to place over networks that may or may not be efficiently configured to properly serve capital markets.

In modern digital markets,  trading opportunities happen in milliseconds. In fact, an Information Week article about electronic trading suggested that a 1-millisecond advantage in trading could be worth $100 million a year to a major brokerage firm. To put that in perspective, one millisecond is one one-thousandth of a second – the duration of light from a typical camera flash.

That is why traders want to be as close as possible, electronically, to the exchanges or other venues they trade on. Even a tiny delay in getting a transaction instruction from trader to exchange could be expensive. That delay, known as latency, is the bugbear of high-speed trading systems. Multiply that little delay per transaction (and its associated cost) by the millions of transactions flowing through a typical trading network per second and the dollars add up quickly.

Capital markets infrastructure providers, which include financial trading platforms, interdealer brokers, clearing houses, information services and technology providers, securities depositories, and servicing firms, have stepped up to close the gap. According to a 2017 report from McKinsey they enjoyed a 3 percent average annual revenue growth from 2010 to 2015, and McKinsey predicted that their annual revenue growth rate would be 5 percent through 2020. That, they said, outperforms both the buy and sell side.

One of the market forces the McKinsey report cited that has fueled this growth was, you guessed it, electronic trading. Given that incentive, many providers have invested to build the robust infrastructure necessary to support the increasing demand for low latency high throughput environments.

But there are still challenges. As the Equinix white paper Ecosystems and Liquidity points out, “Electronic orders can now reach most global financial centers literally in the blink of an eye, provided that they have access to the right networks.”

However, if traders and exchanges are located in different places, they may not have that access with sufficiently low latency to trade efficiently.

To mitigate the problem, traders and exchanges are increasingly locating their trading systems in network-neutral datacentres. There, they have the benefits of multiple network points of presence (PoPs), as well as proximity to major Cloud Service Providers (CSPs) providing connectivity as well as redundancy. And as many other trading partners and exchanges reside there, the goal is that latency is minimized.

In the United States, New Jersey is one such hub, housing numerous exchanges (Nasdaq, New York Stock Exchange), alternative trading systems, dark pools, market makers and both buy-side/sell-side Wall Street firms.  Additionally, many of these trading venues have backup sites in Chicago as well for redundancy and failover.

In Canada, the ecosystem is less mature than that of our neighbours to the south. It is fragmented with many venues scattered across different datacenters, losing the advantage of the US’s mass interconnectivity of trading partners. This can add inefficiencies to the market that could potentially be minimized by creating a colocation hub where parties could meet and trade in a network-rich, low latency environment.

Stay tuned as Equinix executes on its strategy for its recently expanded portfolio of data centers in Canada.  For a peek at our GTA electronic ecosystem, please see our Toronto Metro Report