Dan Barnes
Dan Barnes

Emerging Market connectivity - The key to capturing new FX trading opportunities

Reaching natural liquidity when trading EM currency pairs requires a connectivity provider that has the resilience and reach to provide access regardless of local environment as Dan Barnes discovers.

First Published: e-Forex Magazine 79 / ALGOFX LAB / January 2018

Firms looking for liquidity in emerging market currency pairs can typically find trading opportunities in the major data centres in developed markets. However trading directly into the national market can provide natural liquidity, sourced from corporates and investment firms who engage with overseas counterparts for business. 

“I would say emerging market connectivity isn’t necessarily about low latency, particularly in Asia,” says James Banister, CEO of FXecosystem. “I think the local market, if we can frame it like that, has different drivers. There are exceptions in some of the major hubs such as Singapore and Hong Kong, either firms trading locally or back to London. But if you are a regional bank the priority is more about being able to get the overall trade done and less that it’s done at an ultra-low latency. The volume of transactions is just not the same as it would be in the major trading centres of London, New York and Tokyo.”

The challenges in connecting to local markets differ according to the types of connectivity provider being used. For major telco providers, the focus tends to be around having resources on the ground, with local knowledge, local language experience and being able to have the processes and agreements in place to build out these networks. 

“The beauty of BT Radianz is that we have actually got the networks in what you describe as emerging markets whether Argentina, Saudi, Malaysia or the Philippines we have got the network already built out,” says Yousaf Hafeez, Director, Capital Markets Development, BT. “So what we try to say to our customers is, we have hopefully taken that pain away from you, the network is there, ready to be used today. So in terms of FX connectivity, for a regional bank who has a particular FX problem, that infrastructure exists, it’s in the ground.”

For non-telco firms, providing connectivity via a managed service in emerging markets, the same hurdles in those markets can often be the same ones seen in London, New York and Tokyo, primarily being at the right data centre, having the right connectivity and if they are putting out circuits to clients outside of those data centres, making sure they are on the right circuits for particular client profiles. 

“You have to make sure you have a reliable service that encompasses all of that, to be fully operational 24/7, to be able to handle any issues and queries around connectivity or serviceability,” says Banister. “We pride ourselves in being a fully managed service, so we are not circuit provider dependent. We have a roster of circuit providers that we use in all our different locations and always seek out the best solution for a particular client. Banks, institutions and retail brokers have different requirements and therefore we offer them slightly different services to meet their specific needs.”

James Banister

James Banister

“I would say emerging market connectivity isn’t necessarily about low latency, particularly in Asia,”

Alex Walker, Executive Vice President and Managing Director of Transaction Network Services’ Financial Services Division, says that in addition to having the local contacts where a firm wants to establish connectivity, which is a major operational hurdle, firms also need to consider return on investment and total cost of ownership. 

“The cost of establishing that service must be assessed, because whereas you may have a relationship with somebody that you want to trade FX with, is there enough profit in that relationship to warrant the cost of a specialised connection?” he says. “I think that’s where we would see demand coming in, for example when there is an international or overseas player in an area who wants to participate in FX trading, we would be the organisation that helps to fulfil that back end connectivity.”

That is particularly relevant in areas that are very fragmented from a communications and connectivity perspective. Asia can be an expensive and complicated area in which to acquire connectivity. As such having the support of a business that has already established a significant presence in that region can be immensely helpful for trading firms seeking liquidity from trading counterparties, ECNs and providers. In addition to the benefit of community reach, the ability to tap into facilities that are already in existence greatly helps to speed up the process.

The right qualities

“A particular challenge faced by FX trading businesses is creating the optimum low latency trading facility, and by that I mean the connectivity as well as the applications and the software that you use to trade,” says Walker. “It is a challenging exercise and requires a considerable amount of money to build up that infrastructure. Now one of the things that can be done in terms of assisting that low latency trading, is to have your facilities as close to the source of liquidity as possible and to achieve that you will need co-location facilities close to or within that liquidity sources data centre. That is one of the areas that we have identified over the last number of years and why we developed our managed hosting, co-location and connectivity solutions.” 

Yousaf Hafeez

Yousaf Hafeez

“The flexibility of being able to turn up bandwidth and turn down bandwidth is crucial,”

Where a provider manages the hosting service within the environment that a firm needs to be located, such as being in the same data center as an ECN or major liquidity provider, that will typically achieve the lowest latency for the trading firm. 

“It’s not always the case that all trading parties are within the same facility or even within the same city and where that is the case, you need to make sure that you have done the due diligence to understand where the lowest latency connectivity paths are, between one part of the region and another part of a region, or indeed between regions,” says Walker .

Hafeez notes that building out a very resilient network is crucial to BT’s model in order to provide reliability regardless of the geography that a client works within. 

“Worst case scenario there is a service available at any given point in time, so the way we try to do that is we work with different tariffs, different partners to make sure, it is totally diverse and totally resilient,” he says. “There are challenges to bypassing tried and tested infrastructure. If you put in a satellite route in some of that infrastructure may disappear, where a more robust solution is cables in the ground thereby eliminating some of that risk but also giving our customers resiliency and reliability they need.”

When a firm moves into new geographies, especially when using new infrastructure, it must be conscious of the climatic and atmospheric challenges that might impact connectivity. This is by no means an emerging market problem – Hurricane Sandy in the US was a major weather event that caused chaos in the financial centre of New York and Japan has been hard hit by a major tsunami recently– however if a firm is working in emerging markets for the first time it must be sure that the connectivity component of its infrastructure is fit for purpose. 

“On both of those occasions we were able to stay running for our clients and they were able to sustain trading,” says Walker. “But that comes through looking at the risks, evaluating those risks, and building an infrastructure to enable the service to be provided. I will give you a good example, in Tokyo which is on one of the fault lines, we have been very careful to make sure that we have got services which are diversely connected on either side of those fault lines.”

That means that, in the worst possible circumstances, a catastrophic event occurred between one side of that fault line and the other, the firms would have the ability to maintain connectivity through that network. 

“That does not come easy, there is a lot of due diligence involved in doing that, and there is considerable investment that is involved in that ensuring that is in place,” he says.

Asia can be a very expensive area to acquire connectivity
Asia can be a very expensive area to acquire connectivity

In addition to resilience an important quality is flexibility of service, which can apply to many aspects of the provider’s operations. 

“The flexibility of being able to turn up bandwidth and turn down bandwidth is crucial,” says Hafeez. “That’s the service we offer our customers, to virtually turn up bandwidth, as they require. And the other thing about that is it allows them to have the ability to access new markets as their trading strategy changes. We try to offer a connectivity model to give our customers the flexibility they require at the price point they need, but also the ability to access the liquidity they need as well.”

Fully managed services

A fully managed service and the less common software defined networks (SDNs) offer users outsourced services which provide reliability with an infrastructure behind them which can quickly respond to service issues. 

“It’s the crux of what we do,” says Banister. “There are many advantages associated with managed services and software defined networks, for example we can put in connections quicker and faster than an institution that has to go through a very strict protocol internally. For example, we can shorten that protocol because we are an independent technology provider.”

When a firm moves into new geographies, especially when using new infrastructure, it must be conscious of the climatic and atmospheric challenges that might impact connectivity
When a firm moves into new geographies, especially when using new infrastructure, it must be conscious of the climatic and atmospheric challenges that might impact connectivity

The future of connectivity services provision is SDN, according to Banister, and the cost of SDN is now coming down radically from 18 months to two years ago. 

“We are exclusively a Cisco user and have therefore been looking at a Cisco solution around SDN provision,” says Banister. “It is becoming far more cost effective to offer software as a defined network, to control cross connects and turn them on and off as required. It’s important to highlight that we don’t just focus on connectivity. We also monitor all data passing through our network to make sure that there are no dropped data packets and that the networks are operating effectively at all times.”

Alex Walker

Alex Walker

“In Tokyo which is on one of the fault lines, we have been very careful to make sure that we have got services which are diversely connected on either side of those fault lines.”

Walker says, “Infrastructure as a service (IAAS) extends beyond just the connectivity piece. It would include high performance connectivity, but it also includes the provision of co-location and managed hosting services. This extends the reach beyond just the connection between two data centres for example, or right up to a customer’s site. The terms IAAS and managed service are used interchangeably, although I do think that as a fully managed service you are getting a higher level of attention and service, - the reach goes beyond just the simple provision of the environment. It’s about being able to provide firms with monitoring and management as well as the performance statistics that they will need in order to be able to make sure that the service they have invested in is fully supporting their trading activities. SDN is advancing rapidly and we will develop tools to enhance the customer experience as we move forward, for now it’s not capable of fulfilling a comprehensive service to our customers, but it won’t be long before it is.”

For the end user, the difference that they might see using an SDN as opposed to more traditional offering will depend on what level of service the providers is offering the client. There will not necessarily be a visible difference unless the provider offers the user some form of portal at the front end, to conduct functions such as ordering a cross-connect to speed up the process of getting it engaged. 

“There are huge efficiencies to be gained from SDN,” says Banister. “Our clients will have access to an FX portal through which they will be able to see all their services. They will be able to self-determine which markets they want to link to and will be able to quickly turn these on and off. For example, they may wish to set the service to switch on liquidity in London tomorrow and stop liquidity in New York for a week. They will be able to activate these requests themselves, with the right client permissioning. It will become a little bit like Software as a Service (SaaS) where you can take the service on demand. The SDN is just the mechanism for delivering that.”

Tailoring to your needs

Depending upon the specific market and the existing infrastructure, firms may need to engage with consultancy and bespoke services to get access to the markets and counterparties they need. In frontier markets which may lack the same types of telco networks as developed markets, trading businesses can look outside of the box for solutions.

In frontier markets which may lack the same types of telco networks as developed markets, trading businesses might need to look outside of the box for solutions
In frontier markets which may lack the same types of telco networks as developed markets, trading businesses might need to look outside of the box for solutions 

Hafeez notes that using the BT Radianz model there is no consultancy required because the offering allows connectivity across markets, and is designed to reduce any need for customer involvement. “If you start wanting connectivity in a mining field which is 100 miles away from any sort of city, and there is no infrastructure nearby, you may need some sort of professional consultancy to help you design and develop the most appropriate solution,” he says. “But given we are typically targeting capital market customers, what we try to do is design a solution that doesn’t require any consultancy services. We try to make it as simple as possible. It’s a model they have used for a number of years, it has been used globally it’s a proven technology so I think we have eliminated that need.”