FX: Financial extranets become all-important in a world of fragmented liquidity

By:
Paul Golden
Published on:

Fragmented liquidity has helped make financial extranets fundamentally important tools for global FX market players, but traders need to do their due diligence in picking the right fit for their strategies.


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Financial extranets have become a fundamental component of the business done by buy-side and sell-side FX trading firms, although traders need to consider that not all offerings are the same.

A financial extranet provides access to a service or liquidity pool no matter where it is hosted.

In cases where the network provider has a point of presence in a datacentre and provides connectivity between multiple datacentres, trading firms can take advantage of that infrastructure to have one integrated and centrally managed connectivity solution combining local cross connects and low-latency, inter-datacentre connectivity.

This is particularly appealing to firms trading in more than one location at the same time.

Optimization

Allowing firms to directly access multiple services over a single infrastructure optimizes processes and reduces costs, observes Yousaf Hafeez, BT’s head of business development for financial technology services.

“Crucially, extranets allow firms to automate the FX trading cycle by providing access to pre-trade, trade and post-trade applications,” he says.

Trading firms need support to maintain operations in a key datacentre, whether that is in managing their cross connects in a single centre or hosting servers in multiple centres and providing market access.

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Alex Walker, TNS
That is the view of Alex Walker, executive vice-president and managing director of TNS’s financial services division, who adds access to a fully managed service to the list of benefits of financial extranets.

“We have very high service-level objectives which we are contractually obliged to fulfil and we can rapidly implement changes based on customer need,” he says.

“More importantly, we provide performance and monitoring statistics so that firms can anticipate changes in advance and eliminate negative impacts on trading.”

According to Terence Chabe, business development manager at Colt, financial extranets are a crucial factor in buy-side and sell-side firms securing a fair price in a fragmented market.

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Terence Chabe, Colt

“The extranet has reach to all the major FX liquidity venues, and membership gives customers access to all venues globally via a single access point,” he says.

Financial extranets help capital-market participants tap into services from a range of different providers – cash or derivative exchanges, cross asset trading platforms and bank cross asset platforms including FX – as well as the primary FX markets and electronic communications networks (ECNs).

The more consolidation, simplification and flexibility a firm can achieve by grouping together access to different platforms for different asset classes, the more relevant an extranet can be.

However, Jay Hibbin, CenturyLink’s regional sales director for financial services and insurance, observes that even in a single asset class, such as FX, there is enough fragmentation of liquidity in the market across different venues to drive demand.

“It is rare with more complex trading strategies that you access just one or two venues,” he says. “Most firms tend to require a broader group of venues, making the financial extranet still valid in a single asset class.”

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Willem Lambrechts,
Drebbel

Willem Lambrechts, managing director and co-owner of technology broker Drebbel, agrees that financial extranets play a key role in the FX market and that from the perspective of network management and total cost of ownership they make a lot of sense.

“There is also the security aspect,” he says. “A network where access is limited to recognized financial professionals and where connections are established only when and where there is a formal agreement in place between the connecting parties is far safer than the public internet, where the default setting is that every user can access any connected source unless a formal restriction is in place.”

Walker at TNS advises firms evaluating an extranet provider to conduct due diligence to ensure that the provider has the community reach and operational processes in place to support all of their asset-class needs.

“They should also look at how their business can be supported as it grows – geographically, by asset class or just in sheer volume terms – and the provider’s ability to support a mission-critical trading environment,” he says.

Selection criteria

The quality and number of trading venues and services that can be accessed over the extranet should be the first selection criteria, suggests BT’s Hafeez. Firms should also assess which participants are currently connected as well as the total cost of ownership.

“Finally, firms would be well advised to only engage with established service providers in order to avoid third-party risk,” he adds.

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Jay Hibbin,
CenturyLink

Transparency is also critical according to Hibbin at CenturyLink. 

“It is key to be able to see performance statistics in near-real time at a granular level for capacity management as well as being able to verify the latency and availability of the service provided,” he says.

However, Drebbel’s Lambrechts suggests that the final decision comes down to coverage.

“The only factor that really matters is who is on the network,” he concludes. “The provider with the broadest coverage – or at least the liquidity pools that the FX trading firm needs access to now and in the foreseeable future – is the right choice.”