The need for speed and beyond: accelerating financial trading competitiveness

On high-frequency trading, William H. Donaldson, former chairman and chief executive of the New York Stock Exchange (NYSE), observed: “This is where all the money is getting made.”

Since the 1990s, the impact of high speed telecommunication connectivity on the trading world has been phenomenal. It is estimated that trading firms can now execute more than 100,000 trades per second for a single customer, with the World Bank (WB) reporting US$4.6m worth of stocks being traded per minute. It has also been estimated that high-frequency trading makes up more than a third of equity trading in Europe – and half in the US.

In the Asia Pacific (Apac) region the need for speed is increasingly being felt, with 26,270 listed companies and US$10 trillion in value of shares traded across Singapore, Hong Kong and Tokyo during the month of April 2016, according to the World Federation of Exchanges (WFE). The WFE also recorded a 127% increase in the value of shares traded across the region from 2014 to 2015, meaning Apac has overtaken Europe, Africa and Middle East as a major trading hub and is fast catching up with the Americas.

With the increasingly global nature of high-frequency trading flows, low latency long-haul routes and the ability to connect a broader set of global locations across financial ecosystems is crucial to the competitiveness of trading firms in the Asia-Pacific region.

The race to zero: the best possible infrastructure

Kickstarting the ‘race to zero’ in 2008, UK business-to-business (B2B) e-commerce company BT Radianz introduced a service called Radianz Ultra Access, a high speed and fully resilient service that could deliver transaction speeds of approximately one millisecond. It was the first low latency network connecting exchanges and brokers in the New York metropolitan area.

Around the same time, Us-based Spread Networks invested US$350m to build a fibre optic network between the New York and Chicago stock exchanges that was shorter than any existing link. By 2010, the company had shaved three milliseconds off the round-trip time for communications between the two exchanges, reducing this to 13.3 milliseconds.

Spread Networks was soon overtaken by companies launching microwave networks between the two US cities – a technology previously not considered sufficiently reliable for financial trading. These providers now offer a round-trip time of about 10.4 milliseconds for the Chicago-New York route, and the race is on to further reduce this to the theoretical minimum of 8.06 milliseconds.

The ‘race to zero’ highlights the importance of high speed connectivity to the industry. Indeed, when Radianz Ultra Access and Spread Networks was first conceived, it was estimated that a millisecond advantage in trading applications could be worth US$100m a year to a major brokerage firm.

Globalisation of the trading industry has placed a premium on proximity to electronic exchanges. Outside of the US, trading desks separated by thousands of kilometres of water face the challenge of establishing optimal connections between trade locations.

To address this challenge, a new trans-Atlantic subsea cable was established in 2015 to shave five milliseconds off the round-trip time between the London and New York exchanges. In addition, this year Australia’s Telstra expanded its Ethernet Private Line Express (EPLX) service connecting financial markets in London, Chicago and Sydney, recently adding some of the fastest routes available between points-of-presence in financial exchanges in Singapore, Hong Kong and Tokyo. This has reduced the round-trip time to less than 30 milliseconds from Hong Kong to Singapore and about 40 milliseconds from Hong Kong to Tokyo. The company also plans to add more EPLX routes from Asia to North America by the end of 2016.

For mission-critical trading operations, the goal should be to gain a competitive advantage through a combination of highly reliable infrastructure with the lowest possible latency. As the ‘race to zero’ expands into Asia, this can only benefit trading desks in the region, allowing them to more effectively execute their strategies and realise a positive return on investment.

Beyond low latency: Flexibility and scalability

Apart from low latency, trading firms must also ensure that communications links are available 24 hours a day, five days a week. They must be able to quickly increase bandwidth to meet demand and to reduce bandwidth on-demand so they don’t pay for capacity that isn’t needed.

Reliability, capacity and flexibility are other key requirements. Digital technology allows financial services companies to provide customers with an even more diverse set of products. This is where an optical transport network (OTN) comes into play. For example, a financial services institution can partner with a provider to deploy an OTN to roll out future digital banking applications without having to order upgrades and arrange downtime on the network.

Trading firms in the Apac region must ensure their subsea network operators have service level agreements for availability and round-trip delay, for scalability and ability to handle the rapidly changing bandwidth demands characteristic of high-frequency trading. Trading firms will also require capacity monitoring and management capabilities to plan ahead.

The world of high-frequency financial trading is getting wider, more complex and the list of organisations adopting highly reliable, high-bandwidth low-latency services for mission-critical applications is ever-increasing. Today, Asia is the world’s economic engine room and being able to buy or sell faster and cost-effectively is imperative for success. There is no better time than now for firms in Asia to seize the opportunities presented by advances in technology and network infrastructure.


Related reading