Financial Extranets - Reducing the cost and complexity of FX connectivity

Financial extranets’ place in the fabric of the global currency trading landscape are set to grow in importance amid an FX market structure evolving towards greater levels of complexity. As buy and sell side firms navigate fragmenting liquidity across FX markets that are increasingly interconnected, financial extranets are providing a technological fix that fewer firms can do without. Joe Morgan investigates.

First Published: e-Forex Magazine 77 / Networks, Hosting and Connectivity / September, 2017

Alex Walker, executive vice president and managing director of Transaction Network Services’ (TNS) Financial Services Division in London, says the increasing importance of financial extranets across FX markets is intertwined with the evolution of trading after the collapse of Lehman Brothers, the US investment bank. “Post-Lehman, when the equity side of the market had a poor time, we saw a significant move by our customers into other asset classes as a way of making money,” he says. “That was quite a big change which increased demand for FX services and many firms turned to TNS as a strategic partner that could easily help streamline the resulting complex connectivity requirements.” With more than 20 years’ experience serving the financial markets, TNS now has an extensive global financial community of interest which includes more than 2,000 endpoints supported by over 125 points-of-presence.

Alex Walker

Alex Walker

“Given the proprietary nature of the software that FX trading firms deploy, and the sensitive trade data between parties, the infrastructure needs to be dedicated to support both performance and security.”

Fragmenting liquidity

“Participants need access to more and more pools of liquidity in more and more locations,” says Yousaf Hafeez, head of business development at BT Financial Technology Services in London. BT links directly into five major third-party global datacenters located in London, New York, Singapore, Tokyo and Hong Kong.  These hubs account for 77 percent of the US $5.1 trillion daily traded volume in FX markets, according to the 2016 Triennial Central Bank Survey. “If you are sitting in London and you want to access FX pools in, say, Tokyo or Singapore you can have access to them very quickly, within a matter of days,” says Hafeez. 

Andy Young, global head of solutions and sales at Colt Technology Services in London, says financial extranets remove the need for FX trading firms to navigate the “spaghetti junction of cross-connect connectivity” inside major data centers. Young points to the morass of trading platforms and liquidity pools located at major global data centers such as the LD6 Equinix International Business Exchange in Slough and Equinix’s NY4 IBX Data Center in Jersey City. “That {a single point of market access} has really driven next generation extranet,” he says.

Colt’s PrizmNet financial extranet, which contains an ecosystem of more than 10,000 firms operating in financial markets, offers buy and sell side firms solutions within and outside the data center environment. “If you have a client in a data center they just need to order one pair of cross connect and they can have multiple services to multiple ECNs and single bank platforms logically configured over those cross connects,” says Young. “They can also access other interrelated markets within the data centers. You have fixed income platforms as well as other exchange related futures and interest rate markets so it is not just necessarily FX but also other derivative markets and electronic trading platforms. They can utilize that single access into an extranet and have multiple FX liquidity as well as inter-related markets.”

The difficulty of obtaining access to a growing variety of liquidity pools and market data sources makes it increasingly a challenge for many FX trading firms to manage their own in-house network. When trading firms utilize the services of a financial extranet provider it enables them to focus more resources upon their core business activities. This enables buy and sell side firms to better navigate an FX market that is facing challenges similar to those that equity markets faced a decade ago such as fragmenting liquidity, a fall in average trade size, and the rise of globalization, according to Hafeez of BT. “In addition there is a growth in FX of emerging market currencies,” he says.

When trading firms utilize the services of a financial extranet provider it enables them to focus more resources upon their core business activities.

When trading firms utilize the services of a financial extranet provider it enables them to focus more resources upon their core business activities.

“We created a new proposition called BT Radianz FX Express, providing dedicated low latency links within and between the world’s five biggest FX trading locations, helping FX firms lower costs and create opportunities for international growth,” says Hafeez. “By having that knowledge we’re able to enhance a customer’s trading experience or if they are a venue, ultimately bring them new business too. We are also able to help them win new customers in locations where they may not have a presence, such as China, Turkey or Singapore.”

Tim Carmody, vice president network product and engineering at IPC in New York, says FX trading firms that are considering using extranets should always look at the breadth of market participants and depth of liquidity sources available. IPC’s Connexus Extranet offers participants access to more than 6,000 global firms, including corporate treasurers, non-dealer institutions, regional banks, asset managers and institutional investors. The extranet is built for the financial markets and provides a suite of services, including market data, order routing, order management, trade execution, execution management, risk management, portfolio management and settling and clearing services. “The benefits of having a diverse range of participants can become most apparent during stressed conditions in which many participants withdraw liquidity from the market,” he says.

“This [a wide network of participants] makes the chances of finding a counterparty significantly greater,” says Carmody. “When many are selling there are openings for an opportunistic provider of liquidity such as an insurance company or a hedge fund. FX markets have been prone to volatility of late. We had the Swiss National Bank and then Brexit. Being part of a diverse community is very helpful.”

Hafeez says BT ensures every key FX venue that has liquidity or potentially has liquidity is connected to its extranet. “We’ve done that to ensure our customers can have access very, very quickly,” he says. “When deciding which connectivity partner to use, firms need to look at the community accessible on that network already. How many participants are already connected? How many traders are connected? How many FX venues are available – and in which locations? Which market data feeds are accessible?  That will help them decide the best infrastructure for them to boost their competitiveness and grow their business.

Hafeez says BT has successfully migrated customers that had previously been using the Internet to trade and obtain market data services. “This results in three key things happening,” says Hafeez. “One, order flow increases. Two, customer satisfaction improves.  And thirdly, those firms benefit from the increased security and resilience inherent in our Radianz suite of services, as well as reduced cost and operational risk. Our view is that while the Internet may be one option to connect to different venues, the serious players in the FX marketplace need the quality of a secure managed shared infrastructure type service.”

Tim Carmody

Tim Carmody

“The benefits of having a diverse range of participants can become most apparent during stressed conditions in which many participants withdraw liquidity from  the market,”

Low-cost and reliable high-speed trading

Jay Hibbin, regional sales director, financial services and insurance at CenturyLink in London, says demand for financial extranets among FX trading firms has been further bolstered by a significant drop in the cost of using these services, relative to co-location services or a dedicated low-latency fiber network. This has enabled extranet providers such as CenturyLink to step into the fold. The IT services company – which offers managed services at more than 55 data centers worldwide along with a major US fiber network – has a consultative approach, enabling its clients to obtain the best execution venue for key applications.

In the past, the cost of low-latency connectivity could be ten times the price of a conventional connection with subscribers obtaining a speed advantage in milliseconds, according to Hibbin. “The laws of physics come into play,” he adds. “There comes a point where you can’t decrease latency much further. Then there is very little more that you can do, shaving off microseconds and nanoseconds. Extranets are increasingly picking up low-latency routes and integrating them into their network. The delta is now smaller. Hundreds maybe ten’s of microseconds. For a lot of the buy side this is not significant and for some of the sell side also.” 

Colt provides FX trading firms with the ability to monitor the performance of the network along with the tools to manage any changes that take place on the network. “This enables our clients to manage the performance of the network in real time and see if they can understand what is happening and make changes if there is an issue,” says Young of Colt. He says the capacity of financial extranets to provide a consistent level of latency performance is cementing the place of the networks in the FX trading landscape.  “We are not talking ultra, ultra low latency,” he says. “But clients expect a consistent and reliable latency performance; in other words, deterministic latency. Making sure the behavior and performance of the network has reliability from one day to the next so it enables clients to manage their applications better and to create a more predictable performance. Trading applications tend to be quite sensitive to any change or spike in latency.”

Yousaf Hafeez

Yousaf Hafeez

“If you are sitting in London and you want to access FX pools in, say, Tokyo or Singapore you can have access to them very quickly, within a matter of days,”

‘A safe walled garden’

Carmody highlights the security of financial extranet’s trading environment as a key benefit of the networks. Participants can interact with each other in a “safe walled garden,” he says. “We have an acceptable use policy. We have the right to remove participants. You won’t have people hacking or trolling the network. Everyone on the network is curated where as on a public Internet there are people scamming.”

Walker of TNS says financial extranets’ place as fully regulated and secure trading networks makes them preferable to trading services delivered over the Internet or via cloud computing that may also not have the same depth of bandwidth. He says: “We have established connections with multiple global FX destinations giving superior FX market coverage via one simple supplier relationship. By offering this kind of level of market access, supported by industry-leading security and resilience, we can deliver exceptional service levels which would be difficult, costly and complex for clients to achieve using the Internet and cloud services.” 

“We over provision bandwidth and two things happen,” says Hafeez of BT. “One, order flow increases. Two, customer satisfaction improves as well. While the Internet has that overall mix of methodologies to connect to different venues the serious players in the FX market place need the quality of an extranet type service. Venues benefit from that and see an increase in order flow and improved customer satisfaction.”

Walker of TNS says that the high levels of security and performance that financial extranets embody are particularly important for FX algorithmic trading firms. “Algorithmic trading requires complete control of systems,” he says. “The public cloud won’t provide this. Given the proprietary nature of the software that FX trading firms deploy, and the sensitive trade data between parties, the infrastructure needs to be dedicated to support both performance and security.”

IPC enables FX market participants to meet their regulatory reporting obligations under the Markets in Financial Instruments Directive (MiFID) II RTS-25, the Securities Exchange Commission (SEC) Rule 613 and Financial Industry Regulatory Authority (FINRA) Rule 4590. IPC’s turnkey clock synchronization and time stamping service, Connexus Chrono, provides a traceable time feed of trades that take place on its network. IPC delivers this solution globally at different levels of accuracy, ranging from 1 microsecond to 250 microseconds. “This is a very granular guaranteed clock service,” says Carmody. “A guarantee of exactly when a trade happened. This enables regulators to reconstruct a trade and identify exactly when a trade happened.”

Walker of TNS says regulatory and reporting requirements are creating more demand for financial extranet services. “This is not least the case for trade reporting,” says Walker. “The requirements for that are growing and spurring more connections to repositories, venues and clients. As the requirements for risk management also grow, that is creating more connectivity needs as well. At TNS we have a wealth of experience establishing and maintaining multiple connections and have designed our solutions to be scalable and flexible so we can respond quickly as business needs evolve. New on-net connections are typically set up within three days.”

High levels of security and performance that  financial extranets embody are particularly important for FX algorithmic trading firms.

High levels of security and performance that financial extranets embody are particularly important for FX algorithmic trading firms.

One SLA for all your trading requirements

Hafeez says BT Radianz’s role as an extranet provider is primarily that of a facilitator, providing the necessary infrastructure, hosting and connectivity in order for FX trading firms to pursue strategies across global FX markets. “We try to say to our customers, whatever you want to do, we will try to make that as simple and cost effective as possible,” he says. “We will help give you the low lead times to make new additional services available as quickly as possible. We will provide you with a single Service Level Agreement for all your services. We will simplify and implement what you need.”

When choosing a financial extranet, FX trading firms need to ensure that the SLA guarantees 100 percent up time with no “single point of failure”, according to Carmody. “At IPC we’ve built a network from the ground up for the financial services industry. We have a diverse network. We understand financial customers. What they demand of their trading requirements. We know how to service those customers because we understand what they are doing. We know what this market needs and what it takes to support this network.” 

Walker of TNS says FX trading firms should consider the size and scale of the connected financial community as well as the SLA’s provided as key indicators of the capabilities of any extranet. “That way you’ll be able to sort out the wheat from the chaff,” he says. “Look at who is using the extranet. Look at who you can get access to. Look at the performance guarantees.”

The “ubiquity of access” within a financial extranet is of critical importance, according to Hibbin of CenturyLink. He says FX trading firms should scrutinize SLAs for the levels of availability and up time that the platform offers, along with failover capacity and latency. “Speed to market is key,” he says. “You need the shortest amount of time to get up and trading so you can start seeing returns.”

Jay Hibbin

Jay Hibbin

“Extranets are increasingly picking up low-latency routes and integrating them into their network. The delta is now smaller.”

Quick deployment of new services

The fast moving nature of global FX markets makes it essential for FX firms pursuing sophisticated trading strategies to be able to obtain access to new market data and connect to new pools of liquidity. BT can add new services in a few days over its existing infrastructure, according to Hafeez. “There are a number of trends that we’re seeing in the FX space. The first is the development of very niche FX data feeds which trading participants are keen to access. The second is an increasing number of fintech participants in the FX market place. These are providing some interesting and exciting solutions that the FX market would like to access. Finally, the third trend is the rise of firms turning to extranet providers to access applications that help firms address their MiFID II obligations.”

“If we had a connected Asia-based FX trading firm and they wanted to connect to Currenex or Hotspot FX, for example, then we can have that connection established within a couple of days,” says Walker of TNS. “For new members of our community, we can build the initial connection to our extranet and ensure full connectivity within just two to five weeks. This quick connection time frame is a big advantage for firms looking to trade in new markets.”

Andy Young

Andy Young

 “If you have a client in a data center they just need to order one pair of cross connect and they can have multiple services to multiple ECNs and single bank platforms logically configured over those cross connects,”

The future of FX trading

Hibbin of CenturyLink says software-defined networking (SDN) will in the future become an important part of the fabric of extranet services offering buy and sell side firms seamless access to new sources of liquidity. “SDN’s could reduce FX venue connectivity from a matter of months to hours or even minutes,” says Hibbin. “The integration of SDN and cloud computing will result in services being available on demand and be much more agile. You could bring in a new source of liquidity. Connect or disconnect with venues. Change the mix of capacity or be able to quickly put new trading strategies to the test.” Colt plans to leverage its position as a telecommunications company that owns a fiber-optic network to roll out SDN across its core financial extranet. “What we’re essentially going to do is bring the PrizmNet platform on to that SDN enabled network,” says Young. “Then you can start talking about almost real-time provisioning utilizing SDN.”

Financial extranets act as a facilitator for new technologies that fulfill a pent up demand among FX trading firms for services that can navigate an increasingly interconnected and complex market place. These ecosystems provide a more secure ‘walled garden’ for FX trading and offer participants a depth and variety of liquidity sources that can be particularly beneficial in stressed market conditions. As the capacity of financial extranets to offer a wide breadth of FX trading tools and low-latency services increases, their place in the FX trading landscape will arguably become only more significant.