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Do Proximity and Resilience Have to be a Trade-Off in Trading?

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By Mark White, Manager – Financial Markets and Fintech, Telehouse.

Are proximity and resilience a trade-off in trading? In the quest for speed and proximity, many banks have services hosted within an exchange. Whether this is as trading or matching engines; to support connectivity for global networks through a point of presence or an access point, this all typically comes at a premium price.

Many investment banks and trading companies see this as an imperative. For them, the need to host their core services within an exchange is non-negotiable. And with banks under pressure to reduce costs and comply with a swathe of disparate regulations, it can be difficult to identify where exactly to cut the cloth. So where should they start?

Getting close to the market

High-frequency traders (HFTs) are dependent on being as close as possible to the point of execution, when accessing the most critical services. They need fast connectivity to access market information, process data, manage risk and plan their trading strategies. And they need speed to execute their algorithm-driven buying and selling activities and gain an edge over the competition across as many venues as practicable. Any delay, even milliseconds, could have a huge impact in terms of decision-making, reaction times and ultimately profits, so there is little room for compromise when it comes to direct connections.

However, the advantages of exchange hosting and cost reduction need not be mutually exclusive. The problem is many banks still host their back up services within the exchanges or execution venues, whether that is to reduce complexity, ensure resilience or guarantee speed. But with these back up services being less reliant on proximity and latency, banks need to consider whether the benefits justify the high costs involved. These services can instead be hosted in a co-location space just as effectively and at much lower cost.

The number of racks deployed at these back up sites often even dwarf those deployed at the central exchange. That could include risk data, settlements, central counterparty clearing houses (CCPs), other market data feeds and supplementary services. All these back-office operations can be effectively handled and managed within a data centre and within a highly resilient colocation facility that has proximity to the main trading markets in which the bank is dealing.

The benefits of colocation

In the move to streamline operations without compromising on resilience, banks’ appetite for co-locating in facilities with maximum security is on the increase. The physical security that a colocation site can provide: in particular, the ability to meet the highest levels of building security, with trained staff on call 24/7, electronic access management, access control systems and CCTV, guarantees multi-layer security provision.

Proximity is still important – these services need to remain as close as possible to the source to enable real-time data processing. But by choosing a colocation facility with rich connectivity, near to the markets, banks can reduce their total cost of IT ownership, while improving resilience, security and connection speeds.

Ultimately, the drive to locate supporting servers and back-up services in resilient colocation facilities will come down to cost. Colocation offers a cost-effective way to provide all the functionality banks need, but at a much lower price than doing it on their own premises or at the trading venue itself, where they would typically have a much larger footprint.

At the same time, the right colocation partner can provide access to a connected ecosystem of service and cloud providers. From the settlement perspective, this helps banks achieve the connectivity and data access they need to comply with new and evolving regulations. It helps them negotiate the challenges they face with clearing across the financial markets.

The benefits of colocating also extend beyond security, speed connectivity and cost. Scalability, availability and the sheer capacity, in terms of the size of a facility and its available power, are other key reasons for adopting colocation. In a time-pressured industry, banks simply cannot afford any downtime and need to be sure of a fail-safe power supply and ample room to grow. Choosing a provider with superior 2N+1 levels of redundancy, guaranteed uptime supported by SLAs and direct power lines to the National Grid are key considerations.

Challenging the status quo

In today’s fast paced environment, no bank can rest on its laurels. Continuous innovation and learning must become second-nature and organisations must ceaselessly challenge the status quo to see if things can be done differently to drive improvements.

As data demands further rise and pressure to innovate while also reducing cost and maintaining compliance grows, being able to quickly ingest and process data will be vital for banks in gaining the edge on their competition. The good news is that by making simple changes, proximity and resilience do not have to be a trade-off in trading.

Through colocation, it is possible for investment firms to have both – and at a cost-effective price. But choosing the right data centre provider is key. Get it right, and it can serve as an invisible USP – providing the connected, flexible and scalable infrastructure banks need to support innovation for years to come.

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