The electronic trading landscape has seen dramatic changes over the past few years. Regulatory, market and technological changes have resulted in a rapid growth in the number and types of venues. Across the globe the exchanges are joined by multilateral trading facilities, alternative trading systems, electronic communication networks, dark pools and crossing networks who continue to gain market share.
The resultant market fragmentation is placing increasing demands on the trading community who require access to multiple liquidity venues if they are to comply with best execution policies as well as take advantage of cross market arbitrage opportunities. Fragmentation also brings benefits for market participants in the form of tighter bid-offer spreads, increased liquidity, more efficient markets and better price formation. As a result of these market changes, market participants have witnessed an explosion in market data volumes, a proliferation of lightning-fast algorithms and an arms race in ultra-low latency technology and connectivity.
When latency matters the most
With increasing trading possibilities emerging in the global capital markets, firms that are able to access and utilize enhanced connectivity solutions have been able to capitalize on the best routes to market. Reducing latency has become an ever-increasing goal of firms, particularly in light of the rise of stat arb desks and algorithmic traders, who are investing in ultra-low-latency trading infrastructure solutions to ensure they continue to maintain a competitive edge.
No two market participants are exactly alike, and each individual firm’s trading objective determines the relative importance of ultra-low latency to their business. For example, in arbitrage driven trading, speed is crucial since the goal is to capture alpha, which can erode in microseconds. Under these circumstances, the ability to rapidly uncover and source the right opportunities becomes crucial. For these firms, ultra-low latency connectivity is one of the most critical weapons in their arsenal.
On the other hand, ultra-low latency is not the primary driver for traders who want to participate in fragmented markets while minimizing impact and delay cost. These traders typically place duration orders that could stay on the order books for a substantial period of time. In this situation, traders value best execution and the ability to capture liquidity at the best available prices.
Building the best allies
While latency is an important element of an enterprise connectivity strategy, successful trading firms consider a more a holistic approach, paying close attention to other equally vital aspects of elements such as dedicated bandwidth, resilience, high availability and low total cost of ownership. Alongside trading speed, firms need to have the best connectivity solutions available to interact with their counterparties and other participants in the market ecosystem during the trading day. Trading firms who are confident in their ability to easily reach an established and diverse community of market participants, both now and as the firm continues to evolve, are also able to spend more time focused on developing their strategy and growing their business.
Ecosystem example participants
Buy- and sell-side firms
Clearing and settlement firms
Market data providers
A connectivity provider who offers access to a diverse and comprehensive trading ecosystem can also deliver significantly lower total cost of ownership with respect to infrastructure. The right choice of connectivity provider can enable a trading firm to ensure that they are able to fully capitalize on arbitrage, hedging and other trading opportunities, as well as accessing new markets and pools of liquidity, with minimal overhead and delay.
Choosing connectivity for success
Given that, these days, all connectivity providers offer various flavors of ultra-low latency solutions, what should market participants look for in a managed network provider? The ideal provider should not only meet a trading firm’s present needs, but also deliver a platform for growth and expansion, through which they can look forward to accessing new products and markets and expanding their global reach, as the business evolves.
A successful managed network community offers its participants connectivity to an already built, diverse and global financial ecosystem – one that includes a wide variety of counterparties for price discovery, liquidity and execution, such as broker/dealers, inter-dealer brokers, exchanges, other trading venues, dark pools, hedge funds, pension and mutual funds, institutional investors, trade lifecycle services and market data providers. In other words, the information that firms need to find liquidity, and the ability to access it.
Partnering with the right provider enables trading firms to realize their competitive advantage through high-speed price discovery and trading, the ability to guarantee best execution, and low total cost of ownership and end-to-end performance. The right managed network provider will be able to offer:
- An established community of liquidity venues, market data providers and trading counterparties.
- Deep knowledge of trading routes and an understanding of how to address the various sources of latency.
- Agility to adapt to the ever-changing regulatory landscape.
IPC – Building the infrastructure for successful trading communities
This is the platform that we provide at IPC. Our technology infrastructure powers a multi-modal platform and unparalleled community that together provide a comprehensive solution for end-to-end connectivity, facilitating secure information flow to financial customers globally. IPC’s commercial and technical flexibility allows the customer many options to connect and consume services, whether on premise or via private, public or hybrid cloud delivery. And our diverse global ecosystem enables a unique, unified industry solution for interconnecting counterparties and empowering direct end-user accessibility.
At IPC, we understand the power of community and the core role of the platform in facilitating communities within our ecosystem. Our mindset is to be the connector, and to help clients do their business better, by bringing them access to the wider community. As a firm that has been operating in this space for over 50 years, connecting people and connecting opportunities is in our DNA. It’s our signature, our claim.
✒️ About the author of this blog
As IPC’s Chief Marketing and Strategy Officer, Ganesh Iyer runs worldwide marketing for all of IPC’s products and services and is responsible for driving revenue, growth and market share. His teams lead strategic planning, demand generation, sales enablement, branding, advertising, thought leadership, and communications for the firm.