The global FX marketplace is huge and highly

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1 all trading in FX is done electronically up from 57% the previous year. We think that trend is going to increase, he continues. Where there is more volume it will attract high-frequency strategies. With this focus now on low-latency to meet the demands of some of the algos and HFT firms it has become more expensive to avoid slippage. You don t want your complex FX trading strategy to fall apart or be subject to high broker commissions due to slippage and therefore being unable to trade at the price you wanted. Technology lessons The technology lessons that have been learnt in the equity market are being applied to the world of FX, but the different market structure is delivering different results. There has been a similar race to achieve speed, but with fragmentation and no central market the challenge has been a little more perplexing than if trading activity were centralised. Ecosystems, financial infrastructure and various connectivity tools combined, are developing that join up the dots. Evaluating ecosystem strategies for improving FX trading performance Dan Barnes As increased adoption of algorithmic and highspeed trading strategies continue to turbo-charge the FX landscape, Dan Barnes explores how FX trading has become very time and latency sensitive, multiplying the challenge of tracking market activity and the cost of doing business. The global FX marketplace is huge and highly fragmented and, as Alan Schwartz, President at Transaction Network Services (TNS) Financial Services Division observes, Trading has become more costly in the sense that there are multiple venues that are regional. If you need to focus on each of those markets, with colocation it is definitely more expensive, Over the last few years this fragmentation has significantly increased along with demand for e-fx trading. Richard Man, head of business development at BT Radianz believes that the growth in electronic trading and the complexity of the trading infrastructure are both likely to continue for the foreseeable future. I ve spent six years with BT Radianz in Asia-pacific and in Japan and we have seen a lot of connectivity by large liquidity providers through distribution of their FX platforms or the multibank portals driving business with multiple 3rd tier banks in the region, he says. We have seen that and also a report by Greenwich Associates some time ago said that 61% of The market complexity has in one sense created more opportunities than it has in the equities market, which became a race as to who could be co-located closest to the central market, leaving a few firms in a winning, but not massively profitable, position. In the FX world there will be more opportunities for people in different market locations. The rise in algorithmic and high speed trading platforms has meant that more firms than ever before are now able to execute equity trades through an increased number of exchanges from numerous venues around the world, said Mark Cooper, business development manager, financial markets at Exponential-e. Such trade execution is much harder to regulate than traditional methods, which has led to the rise of liquidity fragmentation as corporations look to deal with increased competition. The increase in access and use of trading platforms along with fragmented liquidity has meant new strategies have been required and created in the FX market to ensure such an increase can continue and still be dealt with. Market fragmentation has in turn made it more challenging to find liquidity, with many sell-side firms operating single dealer platforms (SDPs), numerous multi-dealer platforms aggregating liquidity from SDPs and offering a pricing model that is based around giving access to the wider market. 114 october 2012 e-forex october 2012 e-forex 115

2 FOREX TECHNOLOGY >>> Ganesh Iyer, senior manager, product marketing, IPC says, A shared infrastructure allows providers of services and capital market participants consuming those services to link to one another and seamlessly distribute and receive applications in a secure trading ecosystem. Gaining access to a community through a fully managed network allows capital market participants to focus on their core business of generating alpha in the global FX markets rather than worrying about network connectivity. Entering an ecosystem Faced with cost pressures from technology and liquidity aggregation, trading firms are seeking to reduce the connections they need to access multiple markets and gain as much access to other services as possible. This can be achieved by joining an ecosystem. An ecosystem helps the trading lifecycle from trade to post-trade and then the components of the ecosystem such as infrastructure enable the different services - for example market data, order execution, transactional analysis, connectivity to different partners, solution providers, etc. said Varghese Thomas, vice president, financial markets vertical, Savvis. Getting access to those different markets, and how you do that though your underlying infrastructure, either via a network or access points or colocation with a venue and its matching engine is all part of these ecosystems. Alan Schwartz The advantage that ecosystem providers offer is the gathering of venues in close proximity to each other. The key is how do you get to the broader, fragmented markets? he continues. Do you diversify, which may require expanding into other regions? Are there innovative platform solutions to be leveraged? For example, in the interbank market Thomson Reuters is offering a matching API which wasn t available before, now you have the ability of having a colocation offering. Defining the ecosystem is a challenge, adds Schwartz at TNS. One of the big colocation providers is 116 october 2012 e-forex

3 >>> FOREX TECHNOLOGY >>> should be cautious before over stretching their reputation Schwartz warns, I do think that some of the colocation facilities viewing their world as an ecosystem is somewhat foolish, and maybe they realise that; they can t mandate how the world is going to operate around them; all it takes is one of the venues to move some place and the trading partners, having invested in the physical location are in trouble. Pulling it together Nevertheless the idea of an ecosystem is appealing says Nick Brooks, EMEA product marketing director, Finance Vertical at Savvis, as by offering a range of services in one spot, providers can reduce users total cost of ownership. Richard Man As a buyer of colocation in a data centre, thinking you are buying a rack, a cable away from where all the liquidity is, our advice for HFT clients is to ask where the FX matching engine actually sits rather than who they can cross connect with at that data centre. Different participants can now access multiple venues in a data centre through a cross-connect, leading to operational efficiencies by not having to manage multiple carriers or connectivity options across the board which often impacts their own focus and IT resources, he says. The key is understanding where the markets are. Where are those venues and do you want to collocate with a venue (or range of venues), connect via an access point, or do you go with a Smart Order Routing algorithm that connects you to different venues with added analytics? claiming that their environment and the way that people connect to it is the ecosystem. Is it the physical facility or is it a network like TNS where we are connecting our own world? That depends on your perspective. In the equity world you can define an ecosystem around a specific venue. In FX a Eurodollar is a Eurodollar wherever you go. Man says that the definition of an ecosystem varies from firm to firm; a datacentre provider will tell you it is the datacentre but to agree is to ignore the network. We believe our FX ecosystem is one of the most expansive, he says. And we have invested in our ecosystem for over ten years and have built up that community. If you think about our heritage and our relationship with Thomson Reuters, the cornerstone of their business has been their huge success in capital markets. Being a network provider for Thomson Reuters has enabled us to leverage all of the points of presence we have built up in that time. Broadly, ecosystems can be defined as any network, datacentre or infrastructure that offers a complete range of services beyond basic connectivity, from tools, to market access to execution. But firms Mark Cooper Choosing the best financial ecosystem is dependent on a number of factors. The geography of the ecosystem is vital, depending on the location of the firm, as is the reach it is able to offer and the number of venues it is able to trade into. 118 october 2012 e-forex

4 At a datacentre that hosts execution venues, whether interbank, institutional or even retail, the trading firms will need to connect in to different venues, so you get this ecosystem of service providers; application providers or even connectivity providers trying to provide FIX engines. That makes it even more attractive for the banks because not only do they simplify connectivity into the venues but also connectivity into the vendor service providers. A network community also allows traders the ability to house systems where they are not physically located or co-located. Schwartz at TNS notes that his firm offers services to clients that want to be cross connected and co-located in facilities where they do not have their own equipment. We have a cost-effective way of allowing customers to do it, he says. It saves time and money, yet still provides the flexibility to leverage our endpoints for less latency sensitive locations. Another consideration are monitoring tools. Who provides the monitoring and at what cost? Networks like TNS provide this as a key part of our value proposition. Ecosystems can be particularly effective in overcoming market fragmentation, says Cooper, by overcoming some of the physical and cost challenges that trading firms face. Meeting the individual trading needs of trading firms is a constant challenge for the network community, which has been increased by the rise of liquidity fragmentation, he says. Reducing the cost of connectivity is one of the first steps in creating an attractive trading proposition. Faster turn up ability is also highly important in order to deal with fluctuating levels of trades at different times. Finally, understanding the individual trading needs of different firms is essential. It is often the case that firms cannot absorb the costs for the fastest routes, typically at rates of 10GigE or even 100GigE, because they do not require the level of bandwidth or dedicated circuit. Know your strategy A trader must first define their trading strategy in FX then he can decide on the most appropriate infrastructure solutions, such as whether they ought to be based in the same datacentre as a venue they trade on or whether they can use an access point instead. The influential factors for firms depend on the trading strategy, confirms Iyer. For some it is the cost saving of having a single pipe as opposed to having separate connections, but those that tend to be attracted to IPC s offering want a ready-made financial ecosystem. Brook at Savvis notes that, We just had a specific example of a firm that wanted to locate its infrastructure in our NJ datacentre to get as physically close as possible with venues such as FXall and Currenex - when they found out that service providers such as Wall Street Systems and Traiana were also in that data centre it gave them extra motivation as they could simplify connectivity to these key vendor services. The location may also be deceptive, says Man, a physical location for a firm may not be the same place that they have located their own hardware. 120 october 2012 e-forex

5 be the vendor you buy your system from or it could be the liquidity point that you find most important for you. Working though a supplier like TNS lets businesses choose one particular location, based on the proximity to firms that are important to them with a second data centre at a TNS location at another desirable point. You don t have to be located there yourself, we routinely handle cross-connects, says Schwartz. So customers have a very high frequency, low-latency and also traditional extranet services. We tailor services based on requirements. A regular Extranet may be fine or you may need something that is more direct. This strategy can help firms overcome the technical challenges that working with other partners can pose. Ganesh Iyer Gaining access to a community through a fully managed network allows capital market participants to focus on their core business of generating alpha in the global FX markets rather than worrying about network connectivity. As a buyer of colocation in a data centre, thinking you are buying a rack, a cable away from where all the liquidity is, our advice for HFT clients is to ask where the FX matching engine actually sits rather than who they can cross connect with at that data centre. You see the major interdealer platforms and multi-dealer portals in the popular data centre locations but it could turn out if you sit on the right hub of a network you will get just as far if not better overall latencies to suit your needs with multiple interdealer banks. Because it is all so fragmented there is not one place where you can get the best solution. Whatever your strategy, it is unlikely you will find a one stop shop. Getting hooked up Schwartz at TNS observes, The advantage that ecosystem providers offer is the gathering of venues in close proximity to each other. If that s important from a latency point of view you can do that at a physical location, but then there s the matter of how you cross-connect, e.g. whether you do it yourself or via a service like the one we supply. We have products that support cross-connects at a network level and also at a local level. Choosing which to use will be based on the connections most important to your business; it could Even if you are in the same building as a data provider you still have the issue of how fast the providers get their information, he warns. You could be in the same physical location with two providers and have different performance challenges with each one. Their back end communication links may not all be in the building if they are reaching out to global markets. The second aspect is the performance of their engine and how fast are they able to process data. Meanwhile, many of these firms are reducing IT staff and outsourcing roles, which can mean fewer people are looking at the details of their suppliers so it s possible that customers are looking at that after they ve committed to a supplier. Managed hosting and proximity services offer financial ecosystems with a number of innovative strategies, which can improve access to trading venues. For smaller firms a reduced cost of entry, utility based pricing for cloud services and the ability to issue fast network turn ups. Financial trading ecosystems provide for a fully managed customer environment taking care of the FX ECN connectivity, ultra-low latency infrastructure and data centre hosting facilities, said Cooper at Exponential-e. Outsourcing this burden allows trading firms to focus upon and fine-tune their trading strategies. Evaluation Before committing to joining an ecosystem, firms will need to evaluate the pricing available and consider whether alternative methods of connectivity, for example to multiple venues will provide them with a sufficient return on investment, adds Cooper. Exponential-e s experience with banks, such as NAB 122 october 2012 e-forex

6 in Australia, indicates that they will establish Virtual Private Networks (VPNs), take price feeds in to their Smart Order routers and then weigh up the pricing they would achieve and whether this outweighs the connectivity costs and membership fees. The more trading venues banks set up, the necessarily higher their costs will become whether because of infrastructure, hardware, software, or operations costs and also membership fees. Choosing the best financial ecosystem is dependent on a number of factors, he continues. The geography of the ecosystem is vital, depending on the location of the firm, as is the reach it is able to offer and the number of venues it is able to trade into. The initial and ongoing speed of delivery a network provider is able to offer a firm, as well as the level of support will also be a major consideration along with the offer of a single level agreement. Cost and a provider s reputation will also need to be carefully considered. Cost must also be considered as firms trade-off the must have features with nice to have features says Man. In a perfect world your state of the art algo would have seamless connectivity to all the major multi-bank portals and you would be co-located in Chicago, New York, London and Tokyo, he says. Your platforms would be interconnected by the lowest available latency routes. You would have sufficient bandwidth to cover all FX market data needs, and all of that has a cost. He adds, Whilst we re not seeing the huge bandwidth that we see in the equities market we are looking as low as 10Mb between Tokyo and New York, up to 50Mb depending on the trading strategy and how much market data is needed. But the cost is still onerous and if latency is a high priority it becomes a real headache. You have to manage the colocation, the cross connections, market data licensing, the network and mesh all that together. It is important not to overplay any one aspect of the infrastructure counters Iyer, who observes that when network providers give access to a ready-made ecosystem they provide a range of capabilities for market participants including access to fragmented liquidity, a single view of the market and best execution. Connectivity continues to be one of the most important technology building blocks for the global capital markets. You hear people talk more and more about low latency but that is just an arms race Varghese Thomas An ecosystem helps the trading lifecycle from trade to post-trade and then the components of the ecosystem such as infrastructure enable the different services - for example market data, order execution, transactional analysis, connectivity to different partners, solution providers, etc. limited by the laws of physics. Having the right trading strategies is just as important. Adopting a holistic approach to connectivity is critical and market participants should consider a number of elements besides low latency when developing their connectivity strategy. They need a trusted partner that can manage their network while they focus on their trading strategy and core business. adds Iyer. Regulation will drive the need for further connectivity, as under the Dodd-Frank Act many FX derivatives such as non-deliverable forwards (NDFs) will have to be traded electronically and cleared centrally. There will be significant demand for connectivity as a result of liquidity aggregation and the need to link to clearing houses. Expanding services For the ecosystem providers themselves, it is imperative that they are able to offer a full service package for customers that will account for every eventuality. Schwartz cites the example of one firm that could not get into its facilities during a disaster, even though its backup facilities were all working. 124 october 2012 e-forex

7 FOREX TECHNOLOGY Working with a major provider allows you to innovate, to route work out to your international operations for example, which is something you couldn t do on your own as you wouldn t have the flexibility. As we have seen at firms with technical challenges recently, whether Madrid and Tokyo Stock Exchanges or Knight Capital, you need to have a flexible design that allows for emergencies and rerouting, he says. We ve had customers ask for some emergency work to give them alternative routes to alternative destinations because of some of these recent issues; if you just work in one ecosystem in one trading facility, what do you do if there is some type of issue there? To have a company like TNS that has diverse destinations, diverse locations, and diverse hops gives a lot more flexibility in design. IPC has continued to expand its network across the Americas, Europe and Asia Pacific including countries such as Japan, Hong Kong, Australia and Singapore and is further growing its presence in many other developed, emerging and frontier markets globally. We currently provide access to over 50 liquidity venues around the world including many FX platforms. We also offer access to equity, fixed income and derivatives trading platforms that enable our clients to implement multi-asset class strategies, says Iyer. We have our offices located on the ground in the markets we operate in, which helps us to understand the local culture especially the regulatory mind-set and business practices. BT has recently partnered with data centre provider Equinix and is rolling out BT Radianz Venue Services globally. Equinix have a very rich FX ecosystem in New York where you can cross connect with ICAP and Currenex and at the same time you could get access to other venues by cross connecting with access node infrastructure so you don t need to be physically colocated at Equinix to enable your customers to cross connect, explains Man. They can set up a communications access node for easy connectivity. Nick Brooks Different participants can now access multiple venues in a data centre through a cross-connect, leading to operational efficiencies by not having to manage multiple carriers or connectivity options across the board.. We are extending our BT Radianz Cloud into Equinix key financial locations called IBXes, to reach all the other participants that may not be under that one roof. We have a Radianz Venue Access (RVA) Node installed at Equinix NY4 which will give all the participants quick and easy access to reach the FX community and the Radianz Community without the need to install a pair of lines and routers to use our facilities. 126 october 2012 e-forex