Why connectivity, colocation and communities are key to solving the MiFID II compliance conundrum (By William Fenick, Interxion)04.26.2016
With changes afoot in European trading, many capital markets participants find themselves busy in terms of planning for and managing regulatory change.
The European Commission has extended the deadline for implementing the Markets in Financial Instruments Directive II (MiFID II) until 3 January 2018, but is still pressing ahead with adopting ‘level II’ implementing measures to provide legal certainty.
The clock is still ticking for market participants too, as the challenge of dealing with the complexities of data transparency, storage and reporting under MiFID II are significant.
To address these challenges efficiently, flexible technology and a strong connectivity framework will be essential. Chief amongst the requirement is low-latency connectivity to key liquidity venues for any firm employing electronic execution.
Numerous latency factors can affect trading performance. They range from poor order-execution times resulting in slippage; through to slow pricing engine updates that leave traders open to arbitrage.
Sources of internal latency can include network equipment, operating system stack and application processing. Meanwhile, external sources of latency can be experienced across execution venues, client systems and network connections.
Best-in-class streaming analytics harnessing network data is proposed as one potential solution. The idea is to deploy a data-driven approach to position and optimise platforms, manage customer experience, and interact with key trading partners and stakeholders.
A data-driven approach can determine how fast trading firms need to be, identify areas where investment will produce meaningful returns, as well as detect faults or anomalous conditions before large financial sums are placed at risk.
Irrespective of the solution employed, the arrival of MiFID II means market participants need more powerful systems and ICT infrastructure to be able to sustain high volumes of data, crunch numbers and perform calculations in real-time.
A virtualised IT environment offers an optimum model. With virtualised server farms, firms can spin up computing resources in an instance to complete tasks without impacting on their IT systems and limited physical capacity.
Colocation, colocation, colocation
Sourcing models for computing resources range from internal data centres, virtual infrastructure in the cloud to third-party hosted and hybrid models of two or more of the previous.
Given the wide ranging and extensive incoming regulation, an increasing number of firms are moving to a hybrid model with a third-party data centre offering the most cost-effective route to compliance.
Colocating to a third-party data centre provider brings benefits to all stakeholders involved, especially in carrier-neutral facilities where all financial networks are located. The latter ensures optimised, cost-effective connectivity to all liquidity venues.
Market participants can also benefit from improvements in performance in data acquisition and data distribution. Colocation allows data processing to take place nearer the source of its creation, resulting in the filtering and optimisation of data earlier in the process.
Being located close to the data source helps financial firms save substantial amounts of time and money by only focusing on the data that matters and reducing latency through proximity and network optimisation.
Similarly, for distribution processes, market participants typically receive the data first and then have to redistribute it to their own clients. In a colocation facility, clients can locate within the same data centre as the distributing firm and can cross connect, presenting opportunities for instant distribution and significant time saving.
The power of the community
Cross connects improve overall trading performance by reducing network costs and latency while providing efficient and robust access to all of the main market data vendors, independent software vendors (ISVs) and brokers.
Connectivity also helps markets participants be more flexible in terms of their choice of instruments and execution venues, and enables them to aggregate their order books off multiple exchanges rather than just one.
For example, major players have deployed their aggregation infrastructure into Interxion’s London data centre to trade multiple markets because our facilities provide the prime location for best execution. We’ve also seen firms move their matching engines to our facilities to take advantage of our leading connectivity and Financial Hub community.
Situated equidistant from key liquidity venues, Bats Europe to the West of London and Euronext and ICE Futures Europe (Liffe) to the East of London and right next to the London Stock Exchange, Interxion’s London data is a key strategic execution point for trading Europe. It provides more than 100 capital markets participants with access to over 80 connectivity providers, ISPs, and Internet Exchange providers.
Using cross connects customers can interconnect to over 12 liquidity venues including Euronext, Nasdaq, Bolsa de Madrid, London Metal Exchange and Bats Europe. Our data centre also hosts key industry vendors and service providers of market data, direct market access, sponsored access and clearing.
For markets further afield, customers can use the dedicated, high-bandwidth fibre connections available from leading financial network service providers. And because they have an existing presence in our data centre, customers are able to negotiate competitive rates and reduce costs, providing plenty of opportunities to improve return on investment.
With the second wave of financial regulations driving adoption of colocation data centres for high-frequency trading performance, risk management and analytics, download our white paper to find out more on the impact of MiFID II and preparing to Trade Europe.