Decisions about infrastructure and connectivity are among the most important a trading firm can make, and for obvious reasons. They are critical to its business model and profitability in both the short and long term, touching on a wide range of operational issues and the costs associated with them.
Given all of that importance, it’s unsurprising that a firm’s infrastructure approach carries with it a large number of risks. That’s the bad news. The good news is that by adopting a strategy of partnering with the right technology enablers and providers, a firm not only can manage those risks but also open up new opportunities.
Think of it as killing multiple operational birds with one strategic stone. So, what are some of those risks and opportunities?
Fear of the unknown
Trading firms face an array of external unknowns when it comes to infrastructure. New technological advances, the possibility of a venue making changes regarding its data centres, an evolving competitive environment, regulatory changes – any one of these has the potential to undermine a heavy infrastructural investment. Imagine completing a major infrastructure project only to find that a key venue is moving its matching engine. Suddenly, the potential ROI is decimated thanks to decisions made by other parties that have nothing to do with your own business strategy.
By partnering with appropriate infrastructure and connectivity specialists, it may be possible to ensure that the risks from those unknowns are essentially transferred over to a third party. For the trading firm, such an approach acts as a kind of infrastructural insurance policy, where the provider is responsible for addressing future issues such as a stock exchange’s data centre decisions or the need to build connectivity that incorporates state-of-the-art technology.
Extracting value from data
Any firm that has a decent-sized trading footprint is dealing with very large amounts of data. The question is, can they make the most of it? Having connectivity to various centres of liquidity is one thing, but firms also need to be able to generate alpha. They need to be able to dig deep into the data flowing through their systems. The right technology partner can provide the foundation to complement a firm’s own arsenal of algos and analytics.
Whether a firm is using its own algos or those provided by a supplier, it needs computing power, often far more than what’s available at a colocation centre. Increasingly, firms need to connect via a private cloud into the public cloud and tap into all of the computing power they might need for processing data.
This offers an additional side-benefit in that it frees up firms to experiment in areas without having to making large scale investments upfront.
Keeping a lid on costs
Infrastructure costs, exchange fees and market data costs have only been going in one direction. Any firm that is building and maintaining its own connectivity is exposed to those cost risks. But by working with a vendor providing that connectivity to multiple firms, the overall costs per client firm are lower. Customers also know that they have a level playing field and that the provider will be fighting for their interests, without bias.
At the same time, because an infrastructure provider is attracting investments from a variety of firms, it is in a position to channel that into new technological possibilities, whether that means radio and microwave routes, specific equipment such as FPGA-enabled architecture or in-house developed solutions.
Last but not least… focusing on the business
The benefits of scale and new investments that a specialist provider of financial markets infrastructure and connectivity offers are clear. They translate into measurable factors that weigh in favour of a third party-based strategy. But there is one other factor that is less tangible but every bit as important as those above. By bringing in providers, a firm doesn’t need to devote time and resource to areas that are unlikely to be core competencies.
In other words, it means that companies can focus instead on what really matters: their business.
Would you like to de-risk your infrastructure strategy?