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FEATURES Navigating the communications minefield: High performance connectivity for High Frequency FX trading Joe Hilt 52 | january 2010 e-FOREX The Capital Markets landscape consists of a complete multi-asset, multi-partnered and multi-regional infrastructure in order to be profitable in today’s market conditions. Trading execution venues, their participants and technology vendors must now all be at the front of technology advancements. However, the need to be in as many markets and to communicate to as many clients and partners as possible has made connectivity to market access a “mine field” of obstacles. In the second in our series on high frequency FX trading, Joe Hilt, VP of Sales, North America, Hibernia Atlantic, outlines some of the key issues facing FX trading firms who are planning how best to link their trading infrastructures to trading venues and what lessons they can take from latency, networking and trading connectivity developments in other markets.
In the previous decade, the capital markets trading infrastructure looked very different. Trading floors existed on exchanges, where the buy and selling of stocks, bonds, options and futures were negotiated for best prices. Having a high performance communication system meant having extremely fast and legible note takers along with a few loud voices. In today’s global marketplace, floor trading has become obsolete due to the demanding volume from the electronic trading era. High-speed, automated and algorithmic trading have set the next generation standard in finding best prices and executing better strategies across dozens of market centres. The various market centres of Exchanges, ECNs, Dark Pools, Crossing Networks and the 10,000+ institutions that trade them, must continue to be fast and always faster in the processing of trillions of requests to buy and sell stocks, options, futures and currency contracts. Due to major economic turbulence and anomalies, the global capital markets community has begun to come closer together. Trading in the FX market for example, has increasingly become a leading asset class strategy for many firms who traditionally only traded stocks or >>> options. As a result, rapid expansion of new Electronic Communications Networks (ECNs) and high frequency trading across all asset classes have pushed the demand to Ultra-Low Latency connectivity solutions. Connecting to equities markets have begun to drive the Ultra-Low latency race. However, in the next generation multi-asset class world, trading firms now have to also connect to securities, securities options, futures and FX nationally and internationally, processing data, sending orders and communicating with thousands of clients. Proximity vs. Latency According to the Bank for International Settlements, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. The US stock market place of about $50 trillion in assets consists of fifty Exchanges, ECNs, Crossing Networks, Dark Pools and other Bidding platforms. There are over 5,000 active trading firms of these markets with a race to be the fastest and most efficient in completing a trade. Firms are constantly faced with the same basic principals: being close to the market and getting in and out as fast as possible! Proximity has been used for the Market Enters to be closer to the participant similar to how the floors were being operated a decade ago. Proximity is measured between the trading venue and the trader and is highly dependent on the physical network talking to the market systems, i.e.: Market Data or Order Execution. Latency is the round-trip measurement in speed on how fast a packet or a message runs over a network and through the various trading systems. Miles to Microseconds It started with the exchanges, when the New York Stock Exchange company SIAC opened up a colocation service to its members, vendors and their customers. Within the first year over 400 companies purchased colocated services right next to exchanges’ market data. As a result, trading servers created a within “proximity” Ultra-Low latency standard. Today, Nasdaq OMX, the London Stock Exchange (LSE), the Chicago Mercantile Exchange (CME) and every leading market centre around the world offer a similar service allowing for sub-microseconds of network latency to their venues. Several companies today provide the leading market place colocation facility for exchanges and their firms to build their proximity trading infrastructures. In addition to private exchange-owned colocation centres. data january 2010 e-FOREX | 53
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