Co-location, co-location, co-location: the role of the neutral data centre in 21st century trading

15 July 2010

By Robin Manicom,
director of financial services,

The complexity and volume of electronic trading has increased exponentially over the past decade as the financial industry continues to invest heavily in computer-driven technology. The Financial Information Forum reports that from 2006 to 2009 peak messages per second increased more than fivefold, leaping from 314,733 to 1,795,348 – and this growth rate continues its climb unabated.

The continued fallout from the world’s recent economic crises has obviously had an astonishing impact here, but this is by no means the only influence. Regulatory changes, leading to increased market competition and fragmentation as well as tighter fraud prevention and risk management procedures, have significantly added to the complexity and volume of trading input variables. A further driver stems from the desire by financial services firms to exploit business opportunities beyond their traditional geographies, as they seek to expand the range of instruments and asset classes they trade.

This evolving landscape means today’s market participants are under unprecedented pressure to process higher and higher volumes of data – and fulfil their increasing compliance obligations – all without compromising their ability to execute their trades in real-time. It is this requirement that has placed technology at the very centre of trading in the 21st century. And if technology has become the key facilitator for trading, then it is fair to conclude that the neutral data centre has become the cornerstone for the rapidly expanding world of global financial markets.

The data centre’s role in satisfying the need for speed

A great proportion of organisations have already recognised that it is simply too costly to build and run their own data centres and so are turning to outsourced data centre providers to host critical IT infrastructures. Such third party operators are proven to deliver ultra-secure data centre space, uninterrupted power, reduced costs, efficiency savings as well as a predictable payment model. However, these are by no means the limits of their attractions. The well connected data centre can also boost their customers’ ability to trade.

By locating their IT equipment at densely populated, multi-tenanted data centres, market participants can gain direct connectivity to
whole communities of related firms, providing a ready-made marketplace of potential partners, customers and suppliers, which can help them extend their business operations. Indeed, these data centres are becoming such critical hubs in the trading process, that to not co-locate inside one is to miss out on significant business opportunities and potentially fall behind the competition.
At the heart of this competitive advantage is speed. By directly connecting trading platforms with buy-side or sell-side firms, with market data sources or other pre- or post-trade service providers, all of which are located in close proximity within the same data centre, the speed at which trades can be executed is cut to mere microseconds.

The importance of neutrality

Today’s top-of-the-range financial services data centre is home to a diverse range of companies, all playing a crucial role in the trading ecosystem. These include trading venues, buy and sell-side firms, market data vendors, technology providers and specialist financial services network operators.

These various participants exchange information through direct connections, or “cross-connects”, taking advantage of market-leading technology specifically engineered to deliver ultra-fast, highly reliable throughput.

In many ways the relationships between these market players is symbiotic; each contributes to, as well as receives value from, the ecosystem, which drives the continuous improvement of technology and services. One of the keys to maintaining both the balance and growth of this community is neutrality.

Neutral data centres are open to all comers andhouse a wide range of networks as well as a critical mass of financial community participants. As long as firms co-locate at the same data centre as the exchange matching engine or access node, they will benefit from the same low-latency access to that platform as other customers in that data centre. This ensures fair competition, maximum choice and equal market access to all co-located participants.

The open model also promotes greater innovation and competition, as participants have complete choice over which of their peers they connect to and, more importantly, trade with. This in turn attracts a critical mass of participants who want to co-locate at a neutral centre in order to maximise their future business operations. And so the ecosystem grows and diversifies, offering an ever widening choice of firms with which to partner.

Facilitating global trading

A further advantage of the neutral model is that individual data centres do not work in isolation. Each is connected to others located around the globe through an efficient web of low-latency, high- availability links, allowing companies to trade on a genuinely global scale, 24 hours a day. These specialist financial networks facilitate the global exchange of information at lightning-quick speeds. For example, it is now technically possible for electronic information to make a round trip between London and New York in less than 65 milliseconds.

However, in a marketplace where speed provides the competitive edge, even these sub-millisecond speeds may be not be fast enough. While perfectly adequate for parts of the trading process that do not need to occur in real-time, an alternative is needed to ensure the best possible execution times in instances where any kind of delay, however short, cannot be tolerated.

In response to this, many market participants are utilising the power of cloud computing to establish strategically placed Points-of-Presence at key data centre locations close to the world’s major financial markets. This enables them to trade in real-time anywhere in the world. For example, a financial services firm currently operating in Frankfurt can start trading on alternative European markets, or even in North America or Asia, by simply deploying its applications onto cloud provisioned infrastructure in additional data centres.. Along with cutting infrastructure costs, the added benefit to this approach is that it also cuts telecoms costs, by negating the need to ‘long haul’ information around the world.

Ultra-competitive market conditions have already led many financial participants to look beyond their conventional territories in order to capitalise on differentiated trading opportunities. Choosing the right data centre provider is a critical part of this process. An operator with a global footprint, with facilities in close proximity to all of the world’s key financial hubs, not only affords maximum choice over where to do business, it dramatically simplifies the process of entering a new market. With a single, global data centre services provider, a solution that has already been implemented and proven at one data centre can be instantly replicated elsewhere.

The right time to turn neutral

The open and diverse marketplaces facilitated by neutral data centres operate as a check to the financial communities located within a captive data centre. Run by and aligned to individual exchanges, these centres depend on a business model that may restrict trading opportunities to particular exchanges. Such ring-fencing may limit business opportunities, and is often not the right model for players eager to diversify operations, fend off the competition and ultimately grow their profits.

Driven by the desire to achieve competitive advantage through faster processing power, higher throughput and ever-faster speed to market, neutral financial ecosystems, and the data centres that house them have emerged as the cornerstone of global financial markets in the 21st century.

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