How can connectivity create a thriving capital market ecosystem?
- Fri 24 September 2021
- 5 MIN READ
A new white paper from research and consulting firm Kapronasia is an essential read for those interested in the future of exchange-operated colocation data centres and the value they offer to financial market participants.
Sponsored by the Australian Securities Exchange (ASX), Kapronasia’s Ecosystems for Success: The evolution of capital markets ecosystems and the importance of market connectivity provides learnings from wide-ranging research into capital market ecosystems and connectivity in the Asia-Pacific region and beyond.
As a long-time advocate for innovation and technology-driven transformation, ASX launched the Australian Liquidity Centre (ALC) data centre in 2012. From day one, the centre was designed to be more than a ‘closed’ exchange colocation facility but to also offer connectivity beyond ASX platforms. We evolved our connectivity services to bring financial institutions (FIs) and their counterparties closer together, and to create an ecosystem built for financial markets.
These connectivity-based, capital market ecosystems are set to become even more significant going forward, according to Kapronasia’s report.
For many market participants, connectivity is about much more than high speed or low latency. It also involves participating in a growing, thriving community of FIs, partners, vendors and other relevant stakeholders.
To understand the evolution of capital market ecosystems and the importance of market connectivity, the Kapronasia team turned to experts in the financial industry, including those from several exchange-operated data centres outside Australia.
The report discusses the emergence of exchange-operated colos and the value they offer for participants, and takes a close look at open versus closed operating models. It also features case studies from Canada, Japan, and Singapore and considers future trends.
Report highlights
The key findings in the report address:
- Market participants’ priorities when choosing a data centre, with surprising results showing that, for most, low latency is not the number one priority
- Whether it’s easier, in most cases, to work with an exchange-operated data centre or with a generic data centre.
- The range of factors that market participants consider when deciding to co-locate in an exchange-operated data centre..
- The advantages and disadvantages of exchange-operated data centres, in comparison with generic data centres, specifically in terms of aligning with customers’ business interests.
- The criteria that capital market participants must address in choosing between an exchange-operated colo and a generic facility, particularly in terms of the ability to access and interact with a financial ecosystem.
- The factors involved in choosing between an exchange-operated data centre that has an ‘open-ecosystem’ approach and one that has taken a closed approach.
Benefits of open-ecosystem exchange-operated data centres
The final point above is of particular interest to financial institutions that have already decided to co-locate in an exchange-operated data centre.
One of the most important initial questions for FIs is whether they should choose an exchange-operated facility or a generic datacentre. Adam Bradley, General Manager - Head of Sales, Trading Services, provides some key considerations in his recent LinkedIn blog; Selecting a datacentre: exchange colos vs generic data centres.
An exchange-operated data centre can take an open, pragmatic, collaborative ecosystem approach, or a ‘walled garden’ approach.
Those that take a more open approach – such as the ALC – welcome competition, dark pools and telcos. They aim to build an open, thriving financial ecosystem that serves a broader community.
In terms of geography, markets such as London and New York don’t have a concentrated centre of liquidity, diluting the potential advantages of operating in a centralised, exchange-operated colo. However, in others such as Australia, Singapore, and Toronto, co-locating in an exchange-operated facility with an open ecosystem approach can offer the following benefits:
- Expansion of the market through a diversity of participants, vendors, providers, and connectivity options. The more diverse the ecosystem, the better it is for individual participants and the contributing community.
- Increase opportunities through a range of partnerships.
- Potentially reduce costs, complexity and risk.
- Connectivity to international markets for multinational firms through collaboration with telco providers.
- Access to ‘dark pools’.
The ALC and other open-ecosystem facilities
ASX’s ALC is a good example of an exchange-operated open-ecosystem colocation facility. Built specifically for financial market participants, the ALC was launched in 2012 as a 500-cabinet, Tier-3 facility in Sydney.
It has since built further resources and capabilities to continue meeting evolving customer expectations including opening high-density pods in 2019. Most important to the ALC is the development of a thriving financial market ecosystem.
Alex Samad, Head of Infrastructure at Yieldbroker, which co-located in the ALC early, is quoted in the Kapronasia report as saying: “the ALC is focused solely on financial markets. You have got like-minded people together.”
ASX’s Head of Sales, Trading Services Adam Bradley is also quoted, saying “the ALC is for the exclusive use of the financial ecosystem only. If we are dealing with a global financial institution and they know that their neighbours in the ALC are all global financial institutions, they feel comfortable. We are for financial markets only. That makes us very unique.”
In the white paper, Mr Bradley offers an example of how the ALC can help its clients reduce costs, complexity, and risk, while helping them become more agile and take advantage of the ecosystem:
[…] a global financial institution entering the Australian market will need to find a local data centre. While it may not need low latency access to the ASX, it will need to consume ASX’s market data and connect to global market data vendors. If it is in a generic data centre, it will need to run connectivity into the ALC, because that is where the highest concentration of these organisations are.
Because global market data vendors do not share the same pipes, the FI will have multiples of connectivity and is going to need two to four different telcos. The FI will need ASX and alternative liquidity venue connectivity; it may also need to connect to buy-side firms who are in the ALC. That connectivity, be it via ASX Net [the ASX’s connectivity proposition], or via other telco providers, is going to equate to a lot of complexity.
The FI will also want to start trading or connecting to these other organisations as soon as it can. The time to run that connectivity, if it is optical/dark fibre, will take the FI six to twelve weeks.
However, cross-connects in the ALC are implemented in just a few days, significantly reducing the lead time to connect to clients and counterparties.
The white paper reports on how the connectivity that the ALC provides to the financial markets, resides both in the ALC itself and across the dark fibre networks of ASX Net and ASX Net Global.
The paper describes ASX Net as ‘the fabric that knits the financial ecosystem together’. It is the domestic connectivity offering for the ALC, while ASX Net Global is ‘the international connectivity offering for their POPs in the three or four specific financial markets’ hubs where there are arbitrage opportunities.’
SGX in Singapore offers another example of an exchange-operated open-ecosystem colocation facility that has, like the ALC, ‘evolved from being a venue for HFTs to an ecosystem of market participants’.
According to Goh Boon Kian, SGX’s Vice President of Data, Connectivity & Indices, an open ecosystem approach is required to build a thriving, healthy financial market community.
Mr Goh is quoted in the Kapronasia report as saying that one thing leads to another, adding that: “Connectivity, services, and other trading venues all accessed from one location … that is, I think, the beauty of it and you have a high concentration of the same community within one location who can easily interconnect with one another, within the same environment.”
Other case studies detailed in the white paper are JPX in Tokyo and TMX in Toronto.
Trends to watch in the evolution of data centres
As markets and exchange-operated data centres (along with their ecosystems) evolve, there are several trends to keep an eye on in the future.
1.
The shift to the cloud
2.
Connectivity via high quality networks
3.
Interconnectedness between exchange ecosystems
4.
Consolidation of data centre footprint
- Shift to the cloud. Financial institutions’ use of the cloud has grown faster than expected, as they have recognised the advantages of hybrid environments. Cloud access is increasingly available via data centres. There is potential to drive down costs, via the cloud, without compromising security.
- Connectivity via high-quality networks. There is a growing demand for high-quality networks between exchanges, especially as more market participants move to crypto and digital assets. Synergies are emerging between telcos and cloud providers.
- Interconnectedness between exchange ecosystems. Exchanges are increasingly partnering with each other to offer more opportunities to members. This could even expand beyond data-centre-to-data-centre connections to the facilitation of products traded on multiple exchanges.
- Consolidation of data centre footprint. Depending on market dynamics, exchange policies and member firm profiles, financial institutions may tend towards consolidating their data centre footprint. This is most likely in markets such as Australia where, for example, it is not unusual for a firm to consolidate from four data centres to two.
For more detail on these trends, I strongly encourage readers to download the white paper.
With an eye to the future, ASX’s connectivity services form an integral part of our customer-focused, technology-driven strategy. We are transforming our entire technology stack, from operational databases and communications infrastructure, to distributed ledger technology, cloud, big data and artificial intelligence tools.
This focus will empower our customers, offering quick and easy access to products and services, creating new opportunities for innovation and – through our open-ecosystem approach – enable customers to easily collaborate with us and each other.
I would like to thank Kapronasia for publishing such a thought-provoking white paper. Its clarity and depth make it a must-read for a broad range of professionals across the financial services sector – especially those who source, evaluate and support connectivity.
Download Ecosystems for Success to read the full report.
The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate (“ASX”). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.
Related links
About the author
