When the equities and derivatives industries pioneered colocation with the intent of eliminating latency from order execution by locating their servers near, or within, the buildings of the world’s exchanges, they sparked a move toward colocation in Foreign Exchange (FX) markets. However, among the FX markets, colocation is not as straight forward. There are a multitude of liquidity pools and execution venues to choose from and, as a result, a growing breed of new technology solutions are being introduced to offer managed application hosting, exchange connectivity and proximity hosting to the FX markets. To meet the FX trader’s needs now and well into the remainder of the decade, FCM360 specializes in turnkey data center solutions for FX Brokers, liquidity providers, traders and exchanges. These solutions include low latency technologies, colocation and connectivity, and proximity hosting for high frequency trading, automated trading, algorithmic trading and exchange connectivity. FCM360 is able to provide such turnkey solutions by building its infrastructure in the same buildings as major liquidity pools, exchanges, crossing engines and news aggregators where in the later portion of 2013 we deployed some of the most robust servers available and related software and information services in New York, London and other locations such as the two major Asian FX hubs: Hong Kong and Tokyo. Among those marketplaces are Currenex, Knight Hotspot FX, Integral, FXall and Lava FX, ICAP EBS, major bank liquidity providers as well as Thomson Reuters Machine Readable News service News Feed Direct and Need to Know News. FCM360’s client base, which has sharpened the demand for colocation and managed services, includes FX Brokers, trading houses, liquidity providers and FX aggregators, and bridge providers. Notably demand for colocation and managed services is shifting away from banks and large hedge funds. This is due, in part, to the ever-changing regulatory environment, but more importantly, to traders who have been setting up shop in order to take advantage of the lower barriers to the spot FX market. Aggregators and brokers are also growing in numbers as they try to gain desktop market share with added-value services.
Colocation vs. Managed Services
Colocation is typically the process of housing one’s servers and networking gear in another desired location. Colocation facilities such as those run by Equinix do not provide any support outside of basic rack-and-stack services or basic hardware servicing such as swapping a faulty removable hard disk or power supply. Beyond that, the colocation clients are responsible for the maintenance, repair and replacement of their hardware. Those who choose to colocate in an area where they have no staff or presence, the decision will likely cost more than originally estimated. Conversely, Managed Services typically includes the rental of servers and network devices that are truly managed, configured and repaired by the actual managed services provider. This eliminates the need for the client to fly out to a site to perform repairs or schedule a third party technician and arrange for a security clearance to troubleshoot a device that needs to be replaced. This list of inconveniences goes on as well as the unexpected cost of up to $350 an hour for remote hands on services that lack sufficient knowledge of the actual equipment they are expected to service. FCM360 provides managed services that far exceed what typical managed services companies provide. These services are focused on its electronic trading client-base. Services such as turn-key Metatrader or MT4 Broker servers in locations such as Equinix NY4 and LD5, the lowest latency private circuits between London and New York or Micro Pop services in Hong Kong that are targeted to FX Brokers are specifically not available with other service providers. FCM360 clients are also able to take advantage of the best processing, disk and network hardware available with no capitalization costs or large up-front expenses. More recently, FCM360 launched its Cloud Services Product Suite which offers turn-key cloud hosting services in Equinix NY4 and LD4 and has deployed the latest in processing, disk and switching technologies for client use. Its core capabilities are based on the latest Intel Ivy Bridge 2 chipset technology allowing for the absolute fastest server processors available today.
Colocation in New York and London is Key
The ever-growing FX trading venues have located their matching engines in strategic locations that make trading accessible to nearly all market participants – both institutional and retail. This substantially differs from the equities, futures, and capital market sectors that have developed, until recently, without the awareness of proximity to electronic traders. FX trading firms can easily locate just outside New York City, in New Jersey and another just outside London to provide proximity to the majority of electronics crossing networks (ECNs) and international FX bank liquidity. For market-making firms or true high frequency traders (HFTs), the list of locations could be expanded to meet their particular needs. With a concentration of ECNs and liquidity providers around New York, London, Tokyo and most other financial hubs, traders will generally have several primary markets available to use on a daily basis. Some firms will have as many as 10 ECNs or liquidity providers interfaced with their trading API. Additionally, to be competitive, successful trading organizations, not only require constant market and operational risk monitoring and strategy evaluation, but seamlessly switching execution venues. This enables them to improve fills to ensure success and is achieved by colocating at the major FX trading hubs.
Presence in Asia: Hong Kong, Tokyo and Singapore Growing Rapidly
With the tremendous growth of FX Brokerages in Asia, the trading community is left needing substantially better access to low-latency, or even high quality executions. The most frequent problem facing traders based in Asia, in particular China, is major latency and terrible fills on even limit orders. Nearly every FX Broker servicing Asia is forced to use liquidity in London and New York. As a result of this mega-latency and bad fill problem, FX Brokers have been considering placing servers in Asian datacenters to resolve these issues. Although there may be some improvements using that strategy, FCM360 has pioneered a much better, cheaper and more successful technology called Micro Pops. Since their introduction, demand for Micro Pops has grown among FX Brokers and Liquidity Aggregators who need a Point of Presence or POP service in Hong Kong and Tokyo. The Micro Pop service allows brokers and other aggregators to provide network access to Internet clients, such as MT4 traders, that takes the lowest latency routes from Asia to London or New York without having to change any existing services. Micro POPS are among the numerous relatively simple proximity hosting solutions now available that do not require in-house IT management or a major capital investment in infrastructure. Indeed, the barriers to entry are fairly low when it comes to achieving a sophisticated high-frequency foreign exchange trading infrastructure at a fraction of the cost of colocating at the world’s exchanges. Software licensing, brokers’ minimum deposits, regulatory compliance and infrastructure fees required in other markets are generally not necessary in foreign exchange.
FX and High Frequency Trading
Foreign exchange lends itself to HFT in ways that futures and equities trading no longer does. With the steady growth of electronic trading in FX, the need for state-of-the-art technology to give traders the edge needed to navigate the currency markets has become of paramount importance. Building a viable trading platform in-house can be a hurdle to many firms interested in entering the fast-growing FX market. Fortunately, a number of algorithmic platforms for foreign exchange trading have been introduced to provide highly configurable, direct access to liquidity by reaching banks, ECNs and exchanges. These algorithms also provide real-time risk management, dynamic aggregation and filtering, prepackaged and customizable algorithms as well as access to an array of broker algorithms. This technology has also been deployed to allow sell-side institutions to privately aggregate and issue price information as well as allowing client-to-client order matching – directly with the trading desk, or back-to-back with all liquidity providers, using broker neutral API links to liquidity providers and ECNs. Typically, there are no mandatory and costly software licenses and location premiums either. Depending on the type of FX trading, one simply needs to be located in the two primary buildings just outside New York and London known as NY/4 and LD/4. For this reason, small groups of FX traders, with modest IT budgets, are managing to build HFT strategies in FX that cannot be achieved in futures or equities within comparable budgets.
Industry observers have seen a tremendous increase in colocating for FX, both from existing participants, who had their servers at their own data centers, as well as from new participants who rely on outside service providers. FX traders recognize that in order to level the playing field with their other trading equivalents, they need to match their speed and access to the various pricing engines – in other words equal proximity to data and matching opportunities. Note too that with colocation, the distances between all the venues can be normalized using cross connects in a hosted solution. What’s more, with cross-connects IT the costs will be minimalized In the past, one of the biggest measures of latency had been the connectivity, but by colocating, one drastically minimizes this, while reducing costs. Typically, those who use a hosted solution now host servers with multiple hosting providers. According to the majority of FCM360 clients, they prefer having all trading venues accessible through colocation or hosting in datacenters. Doing so obtains the best price and quickest execution.
The Future of Colocation
How colocation will evolve and how the regulators will look at it in the coming years is uncertain as colocation becomes more integral to the FX trading sector. With the migration of trade cost analysis into FX, colocation improves measurement and streamlines the process. Ultimately though, it comes down to the market participants wanting the best execution. Service providers have also been responding to a sustained demand to replicate the low and deterministic latency characteristics of FX and other asset classes. These demands drive requirements for physical adjacency either as colocation in the same premises as a matching engine or proximity to one or more venues with complementary networking. This is becoming more urgent with demand driven by banks, as well as proprietary and hedge funds, that want to replicate strategies from other assets classes. As the venues and products become more latency capable, colocation is expected to grow substantially throughout the decade. Growth in colocation also reflects a standard approach in which there is a best practice adoption of low latency strategies. Another consequence for a subset of participants has been a drive to network these locations to facilitate efficient communications. Colocation at multiple markets is an emerging theme, in both a local and a cross-border context. This is generally a consequence of electronic trading and low latency oriented strategies specifically intersecting a highly distributed and fragmented market. Since liquidity moves around between ECNs and brokers, best practice calls for having the technology spread across several locations in order to be closer to the best liquidity currently available. As a result, and in response to demand, forward-looking service providers are developing and bringing to market new ways to leverage the global capabilities that are now available. Engineered paths between venues in different cities and at different locations provide clients with optimal inter-venue connectivity. As colocation growth continues, with the physical footprint broadly coalescing on a set of key data centers, and with more market participants looking to optimize their installations, the industry sees an increased focus on and demand for very low and deterministic latency communications between centers that support the increasingly fragmented global market. As a consequence, demand for low latency, cross-border routes such as Tokyo-to-London and Tokyo-to-Chicago is expected to grow. Additionally, the growing interest in using algorithms and low latency trading strategies in FX means that colocation is set to expand throughout the world. Even for those not using algorithms, the mere fact that colocating connections to all liquidity pools in a single data center lowers execution latency gives colocation a wider appeal to the entire international FX community. In short, it’s prime time for colocation.
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Jubin has over 20 years of E-Commerce and application hosting and development experience. In his roles at LTCM, JP Morgan’s Lab Morgan, GFI Group and Check Free Investment Services he built trading applications for some of the world’s largest financial companies. Jubin has helped thousands of organizations with their complex hosting requirements over the past decade.
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