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Considerations for Low Latency in Asia Pacific – Part 1 – Growth and Drivers

Asian markets are undergoing a paradigm shift as they mature, grow and react to the redistribution of global wealth. Markets in the US and Europe have been undergoing rapid change over the last few years with volumes rising, spreads tightening, and significant growth in high frequency and algorithmic trading, together with widespread regulatory change. Some of these developments are spreading to Asian markets with the changing financial landscape presenting a number of challenges. From a technology infrastructure perspective the demand will be on supporting changing business requirements.

Development of the Asian markets is driven by four factors:

1.     Peer pressure between existing exchanges.

2.     The advent of new and competing trading venues.

3.     The desire to keep abreast with technological advancement.

4.     The growing importance of Asia on the world stage.

The IMF and others forecast that in addition to mainland China’s primary market for equity offerings, most parts of Asia, excluding Japan, will increasingly contribute to world growth for the foreseeable future, with attendant capital investment requirements.

The Importance of e-Trading in Asia-Pacific Is on the Rise

Asia is not just another U.S. or European environment. Asia currently has over twenty different electronic trading venues that are disjointed by geography and a variety of regulations. There are nearly 50 exchanges in Asia with 16 of these APAC bourses being members of the world federation of exchanges. Asia is expected to be the largest equity growth area (larger than Latin America), with Hong Kong being seen as the freest economy in the world to do business. There is a track record of market cooperation (with multiple listings, for example) that helps exchanges stay relevant and improves liquidity. The increasing regulatory pressure in the US and Europe over the last few years also helps to make Asia a more attractive market for investors.

The majority of Asian venues are exchanges with only a small number of Alternative Trading Systems (ATSs) or Proprietary Trading Systems (PTSs). It is a heterogeneous market structure with a high percentage of trading volume conducted on exchanges. Features of the Asian market that have historically contributed to relatively low trading volumes are:

·     High clearing costs.

·     High membership fees – due to low trading volumes and a lower degree of automation compared with the U.S. and Europe.

·     Weak, slow infrastructure – due to insufficient pressures and an unattractive business case for investment projects; network costs in APAC are higher than in Europe and the US due to greater geographic distances and governance fragmentation, additionally there is a shortage of experts to deliver projects.

·     Regulatory constraints – regulatory frameworks lag behind the U.S. Europe.

·     Inefficient market structures – the main focus is on exchanges, low market share of ATS.

While most of these parameters are undergoing change, many remain prevalent outside of the core markets of Tokyo, Hong Kong, Singapore and Sydney. Changes are occurring as part of a process of.

Distances in Asia-Pacific Make Network Latency a Priority

One of the key infrastructural differences between trading venues in Asia and those in the U.S. and Europe is the sheer physical distance between them.

Tokyo to Hong Kong is roughly 2.5 times the distance from New York to Chicago, or 4.5 times the distance from London to Frankfurt.

The distances involved and the inherent network latency affect decisions about where to locate systems, especially when multi-venue trading strategies are considered. Given the fragmentation of liquidity seen in the U.S. and Europe with their large number of venues, this is expected to become ever more critical in Asia.

It should be remembered that latency reduction is part of the daily trading routine, it is evolutionary not revolutionary. This is part of the response of technology to trading strategies but is not in itself a trading strategy. Good models and a deep understanding of the market, in addition to infrastructure that does not constrain, are needed. Once low latency is achieved the cost to reduce latency further down to ultra-low levels becomes almost exponential, often to the point where costs outweigh returns. This is the reason organisations invest in smarter pre-trade analytics, or analytics with a broader source of data.

Co-location as an Enabler of Low Latency

By strict definition, co-location is the provisioning of computing services when trading parties use assets located in the same centre, or simply the placement of several entities in a single location. With respect to the financial trading industry, co-location is assumed to mean “co-located with the exchange or venue.” However, from an infrastructure perspective simply being in the same location is only one factor. The choice of equipment that is colocated and the network connectivity where it resides are equally as important.

The advances in speed that come with low latency trading has led to firms needing to locate their trading engines close to the trading venues, in co-location areas, rather than in traditional corporate datacentres. Low latency trading requires the re-evaluation of all layers of the infrastructure and application stacks – co-location is just one component. Ultra low latency trading requires considerably more effort than low latency, and to achieve these performance levels requires significant, recurring investment often in highly customised, niche technologies, together with support staff.

The cost of low latency, co-location trading has driven the demand for what is known as proximity hosting. This is a pragmatic solution whereby firms whose trading strategies do not need ultimate speed, choose to locate trading engines in facilities that have higher speed access to the market than traditional datacentres, but conversely are less expensive than co-location facilities.

Related Research from GreySpark Partners

·     The full report that contains discussion of low latency in Asia-Pacific, with an analysis of the technology offering – Low Latency in Asia-Pacific: an Infrastructure View, GreySpark 2012.

·     Detailed discussion around the low latency benchmarking, technology stack or latency and jitter measurement – covered in Low Latency: Faster than Light, GreySpark 2012.

·     Consideration of the trade-off between operating and capital expense – covered by Infrastructure Investment: Are Banks Penny-wise and Pound-foolish?, GreySpark 2012.

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