12.20.2012
By Terry Flanagan

Financial Ecosystems Take Hold

A critical mass of exchanges, alternative trading systems, sell-side and buy-side firms, market data vendors, clearing houses, as well as technology and connectivity vendors are coagulating within data centers to form ‘financial ecosystems’.

The trend holds implications for all capital markets sectors.

“First, it should minimize the costs associated with connecting firms that do business together because that cross-connectivity can now be internalized within a single data center,” said Justin Llewellyn-Jones, chief operating officer at Fidessa, a trading technology firm. “Second, it allows firms to leverage expertise around infrastructure that they may have in house already. Third, it encourages firms to work with their peers, allowing them to capitalize on best practices and find partners and customers.”

However, it also means that operational risk is now more concentrated.

“Before, data centers tended to be single-firm oriented and geographically dispersed,” said
Llewellyn-Jones. “Now, these financial ecosystems are concentrated, which can result in greater risk during incidents such as Hurricane Sandy.”

The Right Stuff
Ecosystems provide new opportunities for vendors to deliver value-added services to their clients, and for consuming firms to rationalize what services they should provide themselves, what services they should procure and what services they should partner for based on the trade-offs between competitive advantage and the cost of doing business.

Philip Enness, director, markets infrastructure IBM

Philip Enness, director of markets infrastructure, IBM

“The desire to achieve ultra-low latency affects data center placement, server placement in exchanges and the underlying technologies that are used,” said Philip Enness, director of markets infrastructure at IBM, a technology firm. “Also, cross asset systems are on the rise as firms look to leverage the entire ecosystem, as opposed to individual venues.”

This applies to situations such as unwinding a trading desk, as many of the larger firms shed their prop desks or sell off business units.

“When hosting in a market ecosystem, or any retail data center for that matter, separating out a business unit may be as easy as transferring the paperwork to a new business entity,” said Paul Rowady, senior analyst at Tabb Group, a capital markets consultancy. “If that same infrastructure was hosted inside a proprietary data center, the migration effort could easily take months to complete and cost quite a bit of money.”

With firms and venues deploying infrastructure at one, or more, of these sites, natural leverage has resulted.

“The move from private and disparate facilities to more centralized regional facilities by market venue has produced various ecosystems with many benefits,” said Scott Caudell, vice president of IT infrastructure at Interactive Data, a financial data provider.

In order to understand whether a particular strategy will generate the required return, a firm must have access to a breadth of data to fully assess that asset class or new venue.

“As bandwidth increases, so does the drive to get consumption of that data closer to the source,” Caudell said. “That dynamic alone dictates that many groups wanting that data end up in proximity to each other, thus building the ecosystems and mini-ecosystems we see present today.”

Consumption of Data
Interactive Data’s Feed Handler creates an output format that emulates the data format used by Thomson Reuters’ Reuters Market Data System, or RMDS, which allows companies to consume market data and distribute it to applications that would otherwise only consume RMDS data.

The Feed Handler is optimized both in terms of performance and business logic.

A single instance of the Feed Handler run on commodity hardware can, for example, process a 400,000-instrument watch list universe and up to 900,000 updates per second with virtually no added latency.

“So the initial investment has been extended and we now see data centers that were initially designed to house infrastructure for equities trading now also being used for other asset classes,” Caudell said. “This has created new and natural convergences between access, assets and the various market participants.”

Ecosystems have the potential to take cost out of the market, optimize trading and consolidate many infrastructures into one. However, a truly consolidated financial ecosystem would need to be created with neutrality at its heart.

“It would need to operate to support the market, rather than create monopoly for an individual player,” said Mark Akass, chief technology officer at BT Global Banking & Financial Services, a communications provider.

There are clear market benefits from having a single infrastructure. For example, it could reduce barriers to entry for new participants.

“As it stands, there’s a high cost of entry for playing in the low latency game,” said Akass. “The challenge would be to create a facility that allows all participants to play and operate fairly in all markets.”

Some discount the need to house multiple trading architectures within a single data enter.

“I don’t think this is a [requirement], unless you are seeking a low-latency transaction time, which is absolutely required in high-frequency trading and a very limited amount of commercial operations,” said Bill Mazzetti, senior vice-president and chief engineer at Rosendin Electric, which specializes in designing and building data centers for clients like Facebook and several large major money center banks and hedge funds. “While there may be some convenience to building a physical financial ecosystem, the ability of networks to solve this issue trumps the physical location.”

Moving significant network operations is very costly, difficult “and can be outright dangerous to your enterprise”, Mazzetti said. “What this means is that the mature network connectivity, especially on long-haul fiber, is not going anywhere soon or easily,” he said. “Any exchange like those suggested would seek to be near those kinds of facilities.”

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