Removing opportunity bottlenecks in high performance FX trading

The past five years have been a time of great change in global markets.  The uncertainty of Brexit, and the geo-political shifts associated with the American Presidential race, the global pandemic, and the circumspection around Chinese markets, have all presented challenges that have catalysed emerging opportunities, as well as the technological advances necessary to take advantage of these. 

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Gordon McArthur - CEO, Beeks Group

Introduction – FX issues and opportunities

The past five years have been a time of great change in global markets.  The uncertainty of Brexit, and the geo-political shifts associated with the American Presidential race, the global pandemic, and the circumspection around Chinese markets, have all presented challenges that have catalysed emerging opportunities, as well as the technological advances necessary to take advantage of these. 

From a technical perspective the inexorable march towards the Cloud continues apace, with 69 percent of respondents to eFX technology provider Integral’s FX survey in the final quarter of 2020 expecting their FX workflows to be either Cloud- or Hybrid-based by 2026. The demands around connectivity, performance, commercial flexibility and technical portability are all set to soar as the sector moves to satisfy its hunger for innovation and quicker access to markets.

Meanwhile, regions such as Singapore are responding with steps to incentivise trading business within their Exchange, giving risk-reduced access to the Asia-Pacific region (APAC) in its bid to overtake Hong Kong and Shanghai as the region’s third most important centre for FX trading.

This article will explore the current considerations for security, performance and cost that businesses must face when wishing to expand their trading reach, presence and success. 

Singapore opportunities

With EBS closing the Tokyo matching engine by the end of 2021, the Monetary Authority for Singapore aims to make it the leading global financial centre in Asia.  Several major banks and non-bank liquidity providers are agreeing to congregate and build matching and pricing engines in the country as it prepares to become the focal point for APAC FX trading activity. (See our regional report on page 20). This will transform the location from a booking centre for trades to a key financial hub where price discovery and matching actually take place, reducing the round-trip latency of trades that would normally be routed to Tokyo by 70-80 milliseconds. 

CEO of infrastructure provider Beeks Group, Gordon McArthur explains: “Everyone wants a slice of the APAC business, and as a relatively new venue SG1 is free of a lot of the legacy constraints that hamper growth in NY4 and LD4. This gives organisations the ability to take a fresh approach.
Add to this the tax incentives that MAS are offering make SGX a very attractive option for relocation and expansion.” 

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Alan Samuel - Head of Sales, Beeks Group

Managing Director of MAS Ravi Menon asserts: “With strong connectivity to South Asia, India, Australia, China, Japan and Korea, Singapore will become increasingly important as a reliable and stable pan-Asian financial centre, at the heart of a region growing at an average of 5% to 6% a year.”

Additional opportunity for Singapore is likely owing to the electronification of the NDF market and the development of further on-exchange currency futures. As these markets develop, customers will be increasingly focused on the latency differential between Asian/Middle Eastern exchanges offering futures contracts as well as the OTC venues (whose Matching Engines are still primarily out of region) offering NDF trading.

Ironically, there is also an element of trans-Atlantic rivalry that plays out in the competition between Singapore and Tokyo. Tokyo is best placed for low latency connectivity to Chicago and New Jersey due to its latitude, having the shortest communications path to these financial centres. 

By contrast, Singapore has much lower latency links to South Asia as well as benefiting from a broader choice of low latency links to London. In light of these geographical differences, it will also be interesting to observe what impact EBS’ closure of the Tokyo matching engine has on FX trading activity in the region, with Singapore having the opportunity to capitalise on EBS’s London-based matching engine for emerging markets and NDF pairs.

Location, location, location 

Connectivity, low latency and security are undoubtedly amongst the most crucial aspects of an Exchange’s eco-system, and entrants to the new and appealing Singapore market need to understand the best way of achieving these as efficiently and cost-effectively as possible.

“Latency is the killer of FX profitability, so being in the same location as the matching and pricing engines is key,” McArthur adds. “Buy side and sell side participants need private direct networking with each other, the engines and with their tech providers.”

Nevertheless ambitious companies need to be able to spin up their infrastructure easily and in a commercially sensible way, ideally across all 4 major trading centres globally.  Given the fast moving changes in the sector it is essential to work with a specialised infrastructure and connectivity provider who can facilitate all the necessary business requirements.

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Source: FX Markets survey commissioned by Integral March 2021

In-house solutions 

“While the more sophisticated financial institutions might invest heavily in increasing their hardware stack in any given location this is a major opportunity block,” McArthur comments.

Single organisations trying to keep up with the latest technology in-house will naturally compromise on some area of their implementation, security and performance monitoring. Given the pace of change in the sector it is rapidly becoming unsustainable and very expensive to manage proprietary connectivity, compute and performance monitoring. 

“If there is no guarantee that your platform is performing as it should you could be running the risk of stale pricing,” says McArthur.

In addition long term infrastructure contracts over years and years are no longer viable since they prohibit rapid expansion. Traditional commercial models for technical infrastructure provision also typically confer the risk onto the purchasing organisation, which does little to build confidence in the platform.

“To benefit fully within a dynamic and fast-moving environment trading organisations need to focus on what they do best, which typically isn’t the support and monitoring of the technology,” says McArthur. High performance FX trading is best achieved through specialist partnerships that can quickly mobilise to remove bottlenecks and get quick results. 

Outsourcing benefits 

Slowness in any way, shape or form is clearly anathema in FX trading. And if this is more of a risk with in-house infrastructure provision then considering an outsourcing model is one option to mitigate this. This is pertinent in the case of Singapore, since it is a new location that companies would have to build out from scratch. In this scenario, third party management of an established and fully populated secure private cloud infrastructure within the data centre co-location may prove to be an attractive enabling route to new  business. 

CAPEX to OPEX 

In the current climate organisations are looking for speed to market and the ability to move to new territories quickly. Putting together a Cost Benefit Analysis to justify the build out is too time-consuming. Furthermore the trend away from long term contracts that take years to construct is driving organisations to seek short term commitments.

Head of Sales for Beeks Group, Alan Samuel states: “With a properly geared up Managed Service Partner, organisations can spin up Proof of Concept trading environments in new territories that can quickly give a view of ROI and time to money. This approach permits full testing of trading strategies prior to production, without typical contractual restraints. Outsourcing can also introduce the possibility of flexible OPEX costing models which enable organisations to scale up and down as their business requires. Young companies can start small and grow, while established institutions can have tighter financial control over their expansion activity, as well as quicker wins.”

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Source: FX Markets survey commissioned by Integral March 2021

Best in Class Technology, Security and Performance

The economies of scale that Managed Service Providers are able to achieve with multiple clients mean that there can be a consistent specialist investment in technology.  But the most decisive factor in outsourced capability according to Gordon McArthur must be security and performance monitoring.

“Security protocols and performance analytics are the most important thing for IT to think about,” says McArthur. “There are so many layers involved, including processes, procedures, certifications, specific software and hardware as well as man-power. Organisations need a dedicated security team monitoring 24/7 against cyber-attacks, Denial of Service and any incidents and events on the periphery of the network.”

Also of utmost importance are best-in-class performance monitoring tools and expertise, which can be difficult to achieve in-house. Having the ability to monitor connectivity, third party networks, bandwidth utilisation and micro-bursts of network activity ensure that prices are optimal, trades are made at the expected calibre and any third party liabilities can be swiftly pin-pointed.

Trouble-shooting and issue resolution can be extremely time consuming and costly without collating accurate recordings and evidence. This needs proper resourcing and focus to enhance trading confidence in the platform. 

“It can be quite shocking how many organisations bury their head in the sand and overlook these components,” comments McArthur. 

Checklist 

There is no doubt that a dedicated Managed Service Provider operating economies of scale and an already built-out presence in all the significant trading exchanges globally offers a more attractive proposition to trading organisations that reinventing the wheel in-house.  All that remains is the question of how to choose such an outsourcing partner. Gordon McArthur warns against selecting the cheapest service provider, and instead recommends undertaking a thorough exercise in due diligence, focusing on the following aspects:

  1. Key differentiators of real-time monitoring and measuring performance
  2. Proof of security certifications and ISO
  3. Company profile
  4. Number of engineers and dedicated security personnel
  5. Board Level security representation
  6. 24/7 support procedures and SLAs
  7. Documented security function
  8. Number and profile of security and performance monitoring tools in place
  9. Evidence of funding and liquidity from the company balance sheet
  10. Profile of company ownership
  11. Communication protocols around issue reporting
  12. Ability to check historic performance
  13. Transparency and honesty

Final Word

Another interesting line of enquiry when examining MSP options is to investigate their track record during the COVID pandemic. How many data centres did they build out? What is their lead time for new turn-ups and configurations? How long do they expect to take to build out a new Data Centre?

“Statistical SLAs and actual achievements are vital indicators,” says McArthur. “And when all the criteria have been satisfied, be sure to ask for references or case studies from the MSP’s existing clients to get a true picture of their agility and responsiveness.”

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Source: Z/Yen Statista 2021

About Beeks

Beeks is a leading managed cloud computing, connectivity and analytics provider in the financial markets. The Beeks Group infrastructure comprises a growing global network of data centres that allow direct, secure access to key financial hubs and exchange locations. Beeks help customers understand their ROI both quickly and economically by adopting a fully OPEX based pricing model. Their continuous addition of capacity in the global market is driven by customer demand and market trends.  

Beeks are continuing to increase their presence in the Asia Pacific region (APAC) with additional data centres as well as securing a joint venture with the Singapore Exchange SGX. 

The Beeks SGX and SG1 IaaS solutions provide rapid time to market and reduce sizeable barriers to entry, while providing best-in-class resiliency and security.  By utilising both Virtual Private Server (VPS) and Bare Metal Server solutions, Beeks provides entry level access to both UAT and Production environments either directly in SGX, or by connecting privately from the Beeks infrastructure in SG1. 

As well as Singapore, Beeks is also live in Hong Kong, Tokyo and Sydney, allowing customers a variety of trading opportunities across both OTC and Exchange based markets in the APAC region.