Exchanges Expand Infrastructure Services Globally To Tap Liquidity

Terry Flanagan

Exchanges are expanding their infrastructure services on a global scale, offering data center co-location and market data feeds to enable international trading.

In Japan, NYSE Technologies, the technology arm of exchange operator NYSE Euronext, has extended its footprint with its Tokyo global liquidity center, part of a strategic vision for creating a globally connected “ecosystem” that offers greater connectivity to markets and access to liquidity in key trading destinations around the world.

“NYSE Technologies is building out its low-latency SFTI network, which started in the U.S., then evolved into Europe, and connected in Singapore. This year we invested into expanding SFTI to Hong Kong and Tokyo, so now have all global markets connected to Asia’s foremost financial cetners,” said Daniel Burgin, head of Asia Pacific at NYSE Technologies.

In June, in an effort to drive competition due to the pending Tokyo Stock Exchange (TSE)/Osaka merger, which has since been completed, Japan’s Financial Services Authority (FSA) announced the abolishment of the 5% TOB [Takeover Bid] rule applicable for proprietary trading systems (PTS) which is due to take effect this October.

Thus, market share of the PTSs is expected to grow.

“The TSE-OSE merger provides the impetus for regulators to increase competition,” said Burgin. “By exempting Japan’s two PTSs [Chi-X Japan and SBI Japannext] from the TOB rule, the FSA is supporting market fragmentation and more foreign order flow to be directed into the PTSs.”

In Canada, TMX Atrium, a provider of financial networks, is collaborating with data center provider Interxion to deliver Canadian market data feeds to their respective financial services communities.

TMX Atrium has invested in a number of POPs (points of presence) within Interxion’s data centers in Brussels, Stockholm and London to offer the electronic trading community ultra-low latency connectivity to global liquidity venues.

“We are continuing to see increasing demand for market data feeds across North America, especially Canada,” said Emmanuel Carjat, managing director of TMX Atrium, in a statement. “Canada remains a very attractive trading destination with it strong growing economy offering extensive trading opportunities for European trading participants.”

Interxion’s data centers host a large number of equities and derivatives market participants and are widely recognized as valuable electronic trading centers. Similarly, the TMX Atrium trading community offers access to a number of venues in addition to a community of electronic trading participants.

“The trend that we’ve been noticing these past few months is that exchanges are taking control over the connectivity between their matching engines and their customers in order to boost liquidity,” said Patrick Lastennet, director of business development in the financial services segment at Interxion. “As a result, they are building relationships with carrier-neutral data center providers like Interxion.”

Although PTSs were introduced in Japan in 1998, it was not until recently that the PTSs had wrestled significant market share away from the incumbent exchanges, exceeding market share of Osaka Securities Exchange for the first time in the second half of 2011.

The two PTSs, Chi-X Japan and SBI Japannext, have crossed the 7% by traded value of the Nikkei225, according to a July report by independent research broker ITG.

“In parallel with the TSE merger discussions, in 2011 foreign players started directing international securities’ firms smart-order routing systems to the two PTSs, which was one reason for growing their market share,” said Burgin at NYSE Technologies.

Originally, the 5% TOB rule was intended to prevent investors from secretly executing large transactions off-exchange by requiring transactions totaling more than 5% of the outstanding shares of a company to go through a tender offer process.

Since PTS transactions are considered off-exchange, many professional investors chose to stay away from them out of fear of triggering the 5% TOB rule, according to ITG.

“Effectively, this proposal will grant exemption from the TOB rule to PTSs and allow for larger investors to fully participate in trading activities on these venues,” said the ITG report.

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