by Alastair Watson, Managing Director, EMEA, TNS Financial Markets
Financial traders need responsive, reliable access to global financial markets to drive trading.
Many will choose a partner for their hosting, low latency connectivity and high-throughput market data feeds services within data centres and exchange co-location facilities. The reason for outsourcing is simple: the cost of building and maintaining the underlying network infrastructure can be challenging and expensive.
Putting a partner in a critical trading path with counterparts can be deemed high risk. To avoid issues, banks must partner with trusted and proven experts, with experienced teams who understand their business. The best offerings combine the flexibility to select optimal technology solutions, combined with the simplicity of a fully resilient, managed service, accessing multiple exchanges and financial market data providers, while staying ahead of ever-expanding bandwidth requirements.
The importance of latency to trading outcomes varies significantly depending on the nature of the trading model and the investment period. All things being equal, the lower the latency, the better the trading outcome. For very short-term trading models, latency becomes an integral factor for the profitability of the strategy. Banks typically work with partners that offer a global footprint for complete infrastructure, hosting and connectivity solutions. This can be from latency optimised remote trading, to co-located hosting, to ultra-low latency Layer 1 exchange connectivity.
Banks provide their clients with Direct Market Access (DMA) to financial markets, to allow them to directly contribute and access liquidity on exchanges at the lowest possible latencies. To ensure there are appropriate controls in place, banks are required to install a pre-trade risk layer so that their clients can operate within pre-defined limits and controls to avoid creating or contributing to a disorderly market.
Some firms will develop this capability in-house, whilst others will use a third party or, in most cases, leverage an exchange’s pre-trade risk offering. To achieve the lowest latency, and therefore, the fastest exchange access, this risk layer is co-located next to the exchange’s matching engines. The client’s trading infrastructure and platforms are also located by the exchange, resulting in a distributed global footprint that needs to be installed, managed and connected.
Banks also provide more advanced execution services that allow for more discretion over the execution of client orders and where and how they’re executed. Typically, banks will use trading algorithms and Smart Order Routers (SORs) to reduce any potential market impact of their activities. Banks often run this trading technology on infrastructure hosted in centralised locations with optimised, remote access to the various global exchanges and liquidity sources. In this setup, banks are consuming market data from multiple sources to drive execution decisions. Therefore, they need high fidelity, low latency data delivered to these central sites with complete reliability. To build, run and manage a global network which leverages the lowest latency circuits with resilience guaranteed through fully diverse secondary circuits, costs many millions.
In the increasingly competitive financial trading market, access to the right technology platforms and services drives a competitive edge and the rate and pace of change can be challenging for internal teams to maintain. Additionally, cost savings are often front of mind and can be difficult to achieve when going it alone. As data volumes continue to rise, the cost of maintaining uninterrupted access to all these markets globally can become prohibitively expensive. TNS’ recent acquisition of West Highland reduces cost and complexity across every element of market data related spend and support, which now includes market data middleware, application, and commercial management. Banks need to realise economies of scale by leveraging a mutualized global infrastructure delivered as a service model, that is supported and managed by highly experienced network engineers, without compromising on performance or latency.
Alastair Watson, TNS Financial Markets, Managing Director, has over 20 years’ experience delivering technology solutions for Equities global markets. He brings banking sector insight, having worked for UBS, where he was latterly responsible for building market leading execution technology and growing the UBS quantitative client base in EMEA.
