Colocation and high-frequency trading
By Mark Cooper, Business Development Manager at Exponential-e
In the rush for speed in trading, ex¬changes are building huge data centres where members, non-members and traders place computers containing their trading algorithms next to an exchange’s matching engine, which matches ‘buy’ and ‘sell’ orders. Otherwise known as colocation, the practice shaves crucial milliseconds from the time it takes to complete a trade.
Fundamental in today’s market is being faster than your rivals to the best price and having the lowest latency. Delays are no longer an option. When traders’ computers are situated too far away from an exchange, they face a delay of milliseconds whenever they seek to trade a price via their computer screen. Due to this automated process of trading by algorithms, few serious investors can afford to be that late to prices that flash so quickly; indeed many traders now function in the smaller realm of microseconds.
The need for greater capacity and more efficiency of time to trade is thus increasingly important. The fragmentation of the foreign exchange markets means that connectivity solutions are critical to the success of trading operations, and colocation services, where specialist service providers host traders servers as close as possible to matching engines, are growing in popularity.
Helping smaller players compete
Colocation is not a new concept, and has been around for some time. It works exceedingly well as a hosting option for small businesses that want the features of a larger IT department at a fraction of the cost. While corporations may have a team of IT professionals and the infrastructure to host their own web servers, smaller companies struggle to compete. Ten years ago the emphasis was very much on expanding an enterprise’s own internal computer centres. However, there is now a growing trend towards IT outsourcing – be that equipment, staff, infrastructure or other elements required for moving and storing data. In the EMEA region for example, Forrester has confirmed that close to 60% of data centres are using some form of hosted facility.
Modern enterprises are increasingly finding that developing their own, internal data centres is prohibitively expensive. Enterprises are still wary of expenditure and CIOs are under immense pressure to reduce costs and operate more efficiently, despite the increasing complexity of their infrastructure.
The total cost of ownership for data centre infrastructure can be extremely high, not only in terms of the initial capital expenditure (CapEx) – i.e. the cost to design, build, test and commission – but also because of the inevitable, on-going operational expenditure (OpEx). For example, the TCO of a rack in a data centre is approximately US $120,000 over the data centre’s lifetime – around half of this is CapEx and half is OpEx. With data centres accounting for 20-30% of enterprise OpEx, many CIOs are looking for ways to shoulder the burden differently.
Hosted data centres are becoming increasingly popular amongst FX players, because utilising shared data centre infrastructure can provide multiple points of cost savings. By using a hosted data centre, enterprises can pay only for on-going expenses, such as power costs. Even in terms of OpEx, hosted data centres can help their enterprise customers run their facilities more efficiently and less expensively.
There is also the issue of speed. FX traders are well aware that we now live in a world where high-speed connectivity, 24×7 availability, unshakable reliability and comprehensive security are demanded. As networks have grown in speed, reach and ubiquity, their complexity has also grown in line. This growth of network complexity has produced many more potential points of degradation and failure and while the chances of potential outages have increased. So too have the negative consequences for companies facing any downtime, which in the world of high-frequency trading, can have serious negative effects on profits and success.
For traders further afield, the situation is much the same. A trader out in the Middle East for example, will experience latency delays, meaning price information and trade signals will be slowed. However, if his server is located next to the exchange matching engine, then he is in the optimum place to receive data in the fastest way. In other words, if his servers are located next to the matching engines, they’ll have the same advantages as everyone else. In London there may be several places to connect to, but by having one proximate location, he would be able to plug into lots of them more effectively.
Colocation is also a great option for smaller firms not only because they would not require new data centres to implement it, but also because it is often more simple and effective to take space in a data centre which the bank or broker is located in. One of the services Exponential-e provides is the availability of existing space in these facilities which it can effectively sub-let and provided to smaller firms as a managed space without them needing to take out a full rack. We analyse and advise small firms on the optimum place to co-locate and are also able to connect them to multiple points on our own network.
The FX challenges
As any trader will tell you, time is always of the essence. The biggest challenge present today in high- frequency trading is the need to be the fastest, have space in the right locations with the fastest connections and easy to make hardware enhancements. High-frequency and latency-sensitive customers need dedicated hardware resources with proximity hosting to the financial exchanges. This provides the potential of ultra-low latency connectivity to many market data providers and data centres. In conclusion, point to multi-point or multi-point to multi-point access and resiliency on a high-bandwidth network, results in a simple scalable and cost-effective solution for the demands of high-frequency trading.
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