Understanding The Technology Behind The Future Of Finance

The Future Of Finance

Slow and steady? Think again. In the world of financial trading, it is the company with the quickest network that wins the race. Ultra-low latency has become a critical network characteristic of many organisations wishing to stay competitive.

This is particularly true for the world of High Frequency Trading (HFT) firms. The race began with Equities before moving to Futures, FX and now every asset class has its share of speed demons looking for a new racetrack or vehicle to take them to pole position. For these specialists, speed and latency reduction play a pivotal role in the success of a winning strategy.

For HFT companies in particular, latency reduction is imperative, especially when trading within highly liquid and volatile markets. Time measurements are now conducted in nanoseconds and in some cases, picoseconds. That said, not all trading strategies are so latency sensitive but for those that are, the Race to Zero is very much still on.

Trading firms are always looking to extend their competitive advantage. This search takes them to ever-more exotic locations – Moscow, Korea, Brazil are current hot spots. Reaching these locations at speed can be a challenge. The global telecoms carrier landscape is complex with thousands of fibre providers looking to take advantage and meet the demands of their consumers. There is no sign of this changing any time soon, or is there…?

Clarity is not always obvious or easy to obtain. Confusion and misdirection are common obstacles. As traders develop their strategies, focus on new markets and more performant technologies, they demand evermore-detailed information from their firms. Network sourcing teams need to be kept abreast of every change, new route and upgrade, as the network is the road surface that this battle is fought on.

Connecting Upwards

So, what options are available to companies looking for excellent telecoms infrastructure? Well, first it is important to classify what ‘excellent’ is? Some would argue it is bandwidth availability, others the raw speed. Connection quality, latency, customer service or even just cost – the most important aspect is having the ability to stay flexible.

HFT firms often frequently require low enough network latency to take advantage of small and fleeting pricing fluctuations and to quickly change trading direction and back again in an instant. If there is any delay, trading loss may occur and the knock on effect to other trades can be extremely damaging. Standard, off-the-shelf solutions, even those that boast performance-focused networking can be too inefficient for the sector and providers often lack the necessary specialist understanding and flexibility to ensure clients retain their competitive edge.

The best approach is to decide on a vendor-agnostic provider. Whatever the final connectivity decision, whether dark fibre, Ethernet, standard IP transport or more specialist connectivity like microwave or millimetre-wave, a provider that is focused on the customer’s needs will be a stronger choice than one concerned with its own profitability and network.

Neutrality ensures a network implementation that grows alongside the company with the exact traits needed by that organisation – for example, a Tier 1 broker that conducts a large number of automated transactions for its clients between London, Frankfurt, New York, Chicago and Moscow will need infrastructure different from a smaller HFT proprietary firm with two sites looking for a single low latency connection.

Choosing The Right Path

This possibility of global spread – a major challenge for trading desks – has placed a premium on electronic exchanges, especially those leading in the race to zero latency. Traders require networks that deliver unrivalled return on investment – again, as mentioned previously, a desire only possible through a carrier-natural provider acting with the desk’s best interests at heart.

Let us take the above two examples as case studies for exploring possible connectivity options. For the multi-site global brokerage or Tier 1 bank, dark fibre may be the perfect option (Ethernet could be an equally sufficient choice). It has the necessary capacity and flexibility to ensure the company has a scalable, secure and cost effective network end-to-end to satisfy both current trading levels and future growth.

For the HFT proprietary firm that trades futures across Europe (NYSE, Deutsche Börse), fibre may not be fast enough.

To implement the lowest latency currently available, microwave-transmission could be utilised. Latency has been cut by ~40% between the colocation data centres of NYSE Liffe and the Deutsche Börse. This reduction naturally means ~40% quicker decisions, a literal age in the world of high frequency and algorithmic trading.

The cost may be higher but so are the potential profits. It is a genuine consideration for those serious about leading the market. Both should be supplemented with direct, low-latency diverse connections to the colocation centres. This ensures the resiliency and backup in the event of any failure, thus minimising risk.

Drop The Latency, Not The Profits

Understandably not every company will need latency so drastically low, nor will it possess the trading strategies that warrant a method like microwave technology but it is a genuine example of just how serious the trading landscape has become and how important it is for companies to have a high performance global network at their disposal.

Which network to choose is certainly not a decision to take lightly, especially when so much is at stake so it is critical to choose a provider with the right support structure, global connectivity and one that prefers a consultative approach. Without these qualities, the network can quickly destroy competitiveness rather than cultivating it – a destructive lack of effective investment if there ever was one.

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Gareth Richardson

Gareth Richardson is MD of Custom Connect. Gareth’s sales management career spans 17 years. Previously he was at Interactive Data 7ticks and prior to that he worked for Fixnetix, Logicalis and with HP, Cisco and IBM.