Conditions improving for co-location in FX
Co-location providers in the FX market are finally seeing better prospects
Rising activity in Asia is proving to be a welcome boost for co-location providers, many of whom are still dealing with the consequences of the Swiss central bank’s decision to abandon its peg to the euro in January 2015.
The events of that month seriously damaged demand for co-location services. Peter Heales, managing director EMEA at FCM360, a cloud hosting company, observes that the market took a good year to recover, attributing this year’s positivity to “the market responding to old fashioned fundamentals”.
He suggests that the escalation of cyberattacks over the past 12 months has also benefited co-location providers by making market users sensitive to the ability of their chosen vendor to resist distributed denial-of-service (DDOS) attacks and provide fail-over services.
“Institutions and liquidity providers are increasingly requiring co-location, largely driven by the fact that the banks are looking at outsourcing more services to specialist providers,” says FXecosystem CEO James Banister. “We are seeing interest across all segments of the FX market, with particular interest from Asia.”
According to James Maudslay, senior manager financial services and insurance at Equinix, banks are now bringing their pricing engines to co-location providers.
Most firms that need to be in co-location or proximity for FX trading have established positions in European and US markets in the past few years, observes CenturyLink’s regional sales director financial services EMEA, Jay Hibbin. “Some smaller firms which did not have particularly latency-sensitive strategies or could not cost justify the investment continue to buy co-location services as the cost barrier reduces and continue to shift strategy and move into co-location/proximity.”
Jay Hibbin, CenturyLink
In Asia the situation is more fluid and new markets are opening up, he explains. “Margin rule changes and competition between financial hubs in Tokyo, Singapore and Hong Kong plus increasing volumes are driving more co-location. We see consolidation in the market as cost pressure gives rise to the need to look again at the technology deployed and the liquidity venues being used.
"For some firms, balancing cost and the real need for ultra-low latency trading has led them to reassess the services and footprint needed in expensive co-location venues versus more cost competitive proximity venues.”
Latency could still improve
Jason Mochine, commercial director at Fixnetix, refers to getting risk and credit close to the installation to further reduce proposition latency as a key element of an FX co-location service. He reckons further reductions in latency are technically achievable.
Peter Heales, FCM360
Heales at FCM360 adds that co-location reduces execution latency to such a level as to create an almost-level playing field for market participants. “Fibre cross-connects further enhance speed, leaving hardware, operating system and front end APIs as the main speed bumps,” he says.
He argues it is hard to see how current infrastructure could be enhanced to a level that would make a material impact on speed of data flow, but acknowledges that such predictions have proved wrong in the past – a view shared by Equinix’s Maudslay, who suggests it is impossible to say how much faster executions could be raised.
“The move by banks to bring pricing engines to us means that one more part of the process becomes internal and therefore possibly faster due to proximity and reduced cross-connect distance,” observes Maudslay. “It would therefore be sensible to assume that some form of speed increase is achievable.”
James Maudslay, Equinix
There are time pressures associated with operating in global markets and having a team available to do specialist engineering work in real time across all time zones is absolutely critical, adds Banister at FXecosystem.
He says there is more to FX co-location than speed and being in the right data centre — it is also important to be able to monitor and analyse data in order to resolve network issues when they occur.
CenturyLink’s Hibbin notes that the key element of an FX co-location service is access to liquidity venues in the most direct/lowest latency manner possible. “This means space, power and low latency connectivity to the key liquidity venues and FX publishing venues. For brokers who publish FX rates directly to customers there is also a need for an open data centre with multiple carriers and networks available to meet client choice of connectivity provider.”
He adds that it is important to remember that whilst co-location venues will advertise that a large number of venues are present in their data centre, many of these may be hubs or gateways with the actual trading engine in another location. “Moving to a single co-location venue to reduce latency is more complex to achieve in FX due to the diverse number of venues and liquidity.”
Most of the technology gains deployed in FX originated in equities and there is an obvious diminishing return effect in play, with gains on the technology side now so marginal as to be largely irrelevant for all but a handful of players whose trading strategies are sensitive to micro- or nano-second delays.
“That said, not everyone has kept up due to cost and capital constraints in the period following the financial crisis, leaving many firms able to see a significant benefit just by refreshing technology and reviewing connectivity strategies to key venues,” concludes Hibbin.