Transatlantic Trading Need: Local Expertise12.21.2016
Say a U.S.-based hedge fund or proprietary trading shop identifies trading opportunities in Europe. Perhaps the firm wishes to buy shares of Micro Focus International, a mid-cap British software company; sell put options on the euro; and enter into a commodity swap based on expectations of a decline in oil prices.
The wish list can be checked off remotely, via computer and telephone trading. But just like a downtown bazaar that has tourist prices and local prices, overseas securities markets are tapped most efficiently when a buyer of brokerage and technology services has a presence on the ground.
“The most concerning issue for remote trading functionality is physical performance,” said Jock Percy, CEO of managed-services and connectivity provider. “So the things to think about to ensure you won’t get your face ripped off are the classic issues: proximity, co-location, managed hosting, and connectivity.”
Buy-and-hold investors need not be overly concerned about the intricacies of an overseas market; they may be able to get the exposure they need through an exchange-traded fund and/or liquid large-cap stocks, and their trades are infrequent enough that some slippage can be baked into returns. But for shorter-term market participants whose business model is geared toward smaller profits on more frequent trades, minimizing trade friction is mission-critical, and ‘boots on the ground’ — whether their own or those of a proxy — are needed.
“What’s important to ensuring success in Europe is an expertise in market structure, technology, and data,” said Jarrod Yuster, CEO of Pico, a group of affiliated managed services providers of multi-asset electronic trading technologies.
“Clients expanding to other regions need to understand the markets and also gain access to the data, both real-time and historical, so they can do back-testing and run their models accordingly,” Yuster said. “Markets are a bit more spread out in Europe than they are in the U.S. This makes connectivity a little more difficult and there’s also a need to ensuring redundancy, diverse paths and scalability.”
Also, whereas the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission oversee market participants from New York to Los Angeles, different European countries have different rules and regulations, placing a higher premium on knowing the lay of the land.
Another nuance of trading in Europe is its co-location data centers, the largest of which are in the financial districts of London, Frankfurt, and Stockholm. With matching engines, servers, telecommunications and other critical IT infrastructure, data centers are the de facto nerve centers of financial markets, and participants need to position themselves strategically.
Exchange data centers are the incumbents, but carrier-neutral data centers can have deep liquidity and they are more cost-effective and quicker to get up and running, market participants note.
A trading firm in Chicago, New York or Greenwich, Connecticut can host its own trading infrastructure domestically, and trade with market signals that cross the Atlantic. Low latency, enabled by a European prime broker or custodial trading firm hired to route orders, is important in this scenario, noted Percy of Perseus.
“In this case you need very fast market data, because you don’t want slippage,” Percy said. “When you make your trading decision, you send your signal back the other way to your gateway, or to your PB or your execution management system or trading platform, if it’s a third-party platform. You need high performance and you need security, but you have largely deferred the risk of data protection/security, by residing outside of Europe.”
“You need to be in touch with any number of broker-dealers, exchanges, and market makers,” Percy continued. “If you’re not, you have to do a lot of legwork, such as finding contacts at the exchange, trying to license and buy market data, and contacting data-center owners directly to buy co-location.”
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