As Covid-19 swept across the globe earlier in the year, the way in which we worked, socialised, communicated and cared for each other changed. These changes were quickly enabled in part by existing technology that had thus far been underutilised, such as video conferencing, but also by new technologies now coming to the fore like those involved in the rapid provisioning of medical equipment and treatments. The financial markets were, of course, not spared the upheaval, and for the first time, trading desks were split up and de-camped to spare bedrooms, living rooms and occasionally in gardens throughout the world. So, it is with no surprise that in today’s competitive FX markets landscape, technology that can enable rapid, cost-effective and robust global connections has never been more important. Participants need to move fast to seize new opportunities as markets react and accessing the right content and services on-demand, with a resilient and agile infrastructure has become a pre-requisite for resiliency within trading. Covid-19 in itself wasn’t the catalyst for these technological advances, however, it has highlighted to firms the need for a robust strategy around resilience and where the best investment decisions lie. Three key themes are emerging as we see conversations about connectivity increasingly centre around how best to monetise these advances in technology. This is true for both providers of liquidity who’ve seen their margins squeezed by years of tightening bid/offer spreads, or trading firms finding their strategies are being compromised by poor or non-deterministic latency and inferior hardware.
Technology within Liquidity hubs
Focus now is increasingly turning to connectivity within liquidity hubs like NY4, LD4, SG1 and TY3, using the latest technology to improve time to market. Technologies such as Software Defined Networking (SDN) allows the rapid provisioning of connectivity to counterparties, including FX Trading platforms, Inter-bank Platforms, Derivative Exchanges and MTF’s. Market participants require more control and automation through self-provisioning in real-time via a portal or API’s to enable customer application software to control the connectivity. Advanced network reporting and analytics of market data feeds (raw and normalised), can monitor bandwidth utilisation of granularities of up to 1 millisecond, message rates, dropped packets and A/B feed latency deltas. All this functionality has become even more important to monitor during the pandemic, where key decision-makers are no longer operating within the same room.
With increasing volatility in FX markets, particularly evident during March and April this year, it’s vital firms stay on top of these analytics. Often operators will not update data feed bandwidth recommendations regularly which can lead to poor outcomes for traders who rely upon these analytics to inform decision making. We have seen cases of bandwidth capacity requirements being under and over-estimated by some distance. In times of high volatility this can led to dropped packets and vital trading data and ticks being missed or not fed into trading software. Therefore traders should consider using their own robust estimate of the average daily bandwidth peak rate they encounter to compare to the operator’s estimate before they decide on how to size their infrastructure. Having the analytical software in place beforehand is key and in some cases, confirming bandwidth recommendations with a third party is recommended.
Ideally, a reputable Capital Markets Infrastructure provider should not enforce formal caps on utilisation, ensuring packets aren’t dropped when trading volumes are high, and bandwidth capacity can go above agreed thresholds. This ensures that connections are stable and able to feed into trading software and algorithms even during unprecedented events like those seen recently.
Conversations around the physical locations of liquidity hubs are also being set within a new context. New York, London and Tokyo remain the key FX liquidity venues; however, as with the general shift in e-FX, we have started to see an increased interest in connectivity via Singapore. Indeed, latencies from there to regional markets are often very competitive, and speed savings are regularly against more traditional locations within the Asia Pacific. Hong Kong has historically helped bridge the divide between the capital systems of the West and China, and will always play a vital role in a successful overall strategy for firms. However, with the outlook there currently uncertain, firms are looking to diversify within Asia to ensure for future-proofing. It is therefore important when selecting a connectivity partner that they have the expertise already in place and have feet on the ground with local language support.
The Public Cloud
The second trend has been the move towards the public cloud – one mirrored throughout the entire economy. Those participants that are compute-intensive can take advantage of the on-demand nature of the cloud and access to crucial ISV’s, data vendors (for real-time, intraday and historical data) and other service providers of regulatory and quant analytics. Costs savings can be enormous when utilised correctly, particularly for back and middle office functions that are not latency-sensitive. Again, making sure that your connectivity partner has those relationships with the cloud providers already in place, will be vital to ensuring participants can make the most of these efficiencies.
Perhaps the best example of where this benefit can be realised is in the myriad of compliance & regulatory solutions now on offer via a cloud interface. With firms now required to store and report more data than ever before, including on OTC markets, cloud computing capability has come into its own. The on-demand nature of the cloud allows firms to tune up or tune down their requirements dependent on market volatility, which in turn drives data flow. This allows smaller firms to benefit from the economies of scale offered by pooling in with other entities. We are increasingly seeing the cloud become a part of an overall connectivity solution demanded by market participants. There are some regulatory pressures that were not considered a problem until recently, such as the storing and monitoring of communications and browsing history from multiple locations. Solutions to these problems are now required in the pandemic, and possibly moving forward as workers demand more flexibility. These needs can only underline the advantages of cloud based solutions, which are tailed to meet the problem of centralising large individual sources of data.
Expertise in Exchange Colocation
Finally, Exchange colocation sites are key for latency-sensitive participants like HFT’s and Specialist Brokers who execute client orders. Although hosting and compute power are often the main determinants to setting up a successful FX infrastructure within these sites. It is increasingly important that those providers that have expertise in Capital Markets and Emerging Markets are key to supporting a global FX infrastructure where understanding of language, laws and regulation as well as logistical support are vital to ensuring a fast deployment and time to market.
As Covid-19 has shown, the ability for people to move around the world at ease can be shut down with devastating speed if governments require. A connectivity partner that is offering a fully managed service with a local presence has shown how vital this can be in the crisis. For those firms which need technical support that require on-site maintenance or upgrades to new hardware within the colocation site can achieve this quickly without having to require personnel to cross international borders when restrictions could still be in place. Contingency planning that involves the sudden shutting of international travel should now become part of any trading firm’s strategy.
Looking ahead, connectivity solutions need to focus on technology efficiencies across all these three areas; within liquidity hubs, public cloud and exchange colocations. On-premise located software platforms continue to migrate to liquidity hubs or straight to the cloud, and most regional cloud PoPs are located in these same venues. We are seeing a mass migration of providers and consumers into these ecosystems. By doing this, providers of liquidity can ensure they stay competitive in a landscape where margins have been driven to near zero by a race to the bottom on spreads. By working with an infrastructure provider that has ultra-low latency connectivity between the main exchanges and FX hubs globally through a reliable, dedicated and consistently optimised network will ensure the quickest way to receive signals for market-making, price-taking and hedging.
For consumers, who also rely on technology for trading signals and in line with the recent uptick of HFT strategies, quant trading and machine learning, we have seen an increased use of hardware-accelerated network interface cards and low latency switches to further reduce market data latency to the single nanoseconds within a colocation facility. Network backbone upgrades are also becoming more competitive, with key routes in Europe and intercontinental routes such as Tokyo to Chicago in particular focus.
Although specialist hardware and network optimisation are a battleground, more than ever there is a need to provide a superior level of deterministic latency for data transmission. Knowing that trades will reach the market within closely defined parameters can be the difference between a winning and losing position. It is important for consumers of these services to ensure that these types of SLAs should not just be for those firms who specialise in trading in an ultra-low latency environment, but also be sold as a pre-requisite for all. These are the added extras that all participants should now be demanding from their connectivity partners.
The Covid-19 crisis is of course by no means over, and we are yet to see how the world will look in months to come. However, as working environments start their long return to the ‘new’ normal - it’s likely trading desks will be the first office workers to return. However, Covid-19 has shown that remote working, the technology which enables it and the power of strong connectivity solutions at the heart of trading infrastructure are what will make a difference to ensuring a firms success. Enabling efficiencies generated from the on-demand capability of Cloud computing, hardware upgrades in colocation sites and key liquidity hubs, as well as deterministic latency for all and harnessing the expertise of those on the ground will be key to ensuring resilience is met.