FX: Confluence of conditions boosts co-location providers
Co-location providers are getting a boost from higher levels of electronic trading, the ambitions of Asian brokers to grow their businesses in Europe, ongoing concerns over cybersecurity and regulatory factors.
Demand for FX co-location services is benefiting from increased adoption of electronic FX trading across options, futures and spot markets.
John Knuff, Equinix
That is the view of John Knuff, vice-president of digital payments at Equinix, who refers to co-location as the best option for enterprises that need their technology to be highly interconnected with customers and vendors.
In terms of demand, FX co-location services in London and New York are pretty much saturated – everyone knows the importance of being in LD4 and NY4.
Increased volumes of business are being driven by Asian-based brokers wanting to grow in Europe and looking for hosting in London and Hong Kong, explains FXecosystem CEO James Banister, adding that any increase in interest during the next 12 months is also likely to come from Asian brokers.
The heightened focus on best execution and trade reporting resulting from the Markets in Financial Instruments Directive II (Mifid II) is another factor impacting demand, with the former in particular creating a knock-on effect for FX co-location, says Alex Walker, executive vice-president and managing director of TNS’s financial services division.
Firms have to achieve best execution for their customers and so they have to demonstrate their ability to connect to a satisfactory number of the main FX trading venues and liquidity providers in a low-latency manner, he adds.
Challenges in choosing
Walker describes the main challenges for firms choosing co-location as cost management; finding the right resources; managing the overall project; and rapid access to a ready marketplace.
“They want to be able to rapidly spin up services in the right FX locations so they can start to make returns,” he says. “These challenges become even more acute when you are looking to establish a presence overseas.”
FXecosystem’s Banister plays down the extent to which co-location providers have been boosted by concerns over distributed denial-of-service (DDoS) and other types of cyberattacks, though he acknowledges the importance of preventative measures.
“For example, we not only have failover ISP services – so that if there is an attack we shut down the primary connection and move everything to the secondary connection – we have also separated ISP providers by subnets,” he explains.
“This gives a wider range of options for us to move clients to should there be an attack and means that if one client is impacted, our other clients are not subject to the same attacks.”
The above measures are more applicable to retail broker clients since institutional clients tend to have point-to-point circuits that provide a higher level of protection against attack.
The longer it takes to mitigate a DDoS attack, the higher the risk, observes PrimeXM CEO Cristian Vlasceanu.
“Co-location can shelter institutions against such attacks since DDoS messages are not able to affect internal communication between the co-located entities,” he says.
“Of course, ensuring that your hosting provider is able to quickly mitigate the attack by blocking the messages and letting though only clean traffic is also essential.”
When it comes to speed, opinion is divided on whether it is realistic to expect further reductions in latency – whether that is at server, application or network level – and any improvements are unlikely to be of the same magnitude as those achieved during the past decade.
Although specialized hardware and network technology has already pushed communication times very low, Vlasceanu is optimistic that speeds can be further improved.
“Hardware is constantly being upgraded, while the collective expertise and know-how of the fintech industry is also growing, so we can expect the boundaries of latency to be redefined,” he says.
Kyle Tuskey, COO at Deep Systems, suggests that latency requirements vary, and that while there will always be firms that are incentivized to reduce latency at every opportunity, most are hitting a point of diminishing returns where being competitive doesn’t entail shaving off every possible nanosecond.
Banister says: “In theory, new applications and software could result in a further latency reduction in future, but I am not aware of anything significant under development that would impact latency in the FX markets,” adding that there are other ways of increasing speed.
“If we look at the equities market – where even lower latency can be critical – there are developments in place such as ultra-low latency microwave solutions,” he concludes. “However, I don’t think that the current costs for such a solution could be justified in the FX market.”