After discussions with hundreds of clients, I’ve learned that reducing cost, complexity and risk is the ultimate goal. As is connecting to the financial markets easily, through a single partner that can help deliver operational efficiencies and facilitate new business opportunities.

So where should you house your critical financial markets technology? There are 4 options available to you:

1. An exchange and trading venue colocation facility;

2. A third party generic datacentre

3. The firm’s existing in-house datacentre;

4. The public cloud.

In the simplest analysis, there is a cost associated with each—rack space, power, hardware, smart hands, usage charges, and so on—that must be weighed up against the benefits of each option.

You might begin your analysis by looking at the space and power costs of each datacentre provider. This approach is the quickest, but is also incomplete as it doesn’t take into account the clients’ total cost of ownership (TCO).

In my experience, financial institutions will want to access multiple trading counterparties, execution venues and service providers quickly and efficiently. When these counterparties are fragmented in multiple locations, there is a high cost associated with connectivity—running fibre or leased lines to connect to each of them. This approach introduces longer lead times, which can impact a client’s ability to capitalise on new revenue opportunities in the shortest lead time. Finally, connectivity on the street can be prone to cuts as a result of construction work, which then introduces operational risks and can even negatively impact an organisation’s brand.

Although, on the surface, many datacentre providers can appear very similar, there are some clear differences that need to be assessed.  For many financial institutions latency isn’t the only priority, so why would you colocate with an exchange vs a generic datacentre? There are several characteristics of exchange colos that make them attractive to market participants.

Bespoke for financial markets

As a market operator, an exchange has an in-depth understanding of financial markets and is uniquely tied to their clients.

Customer-impacting maintenance is an operational risk for any organisation in a colocation facility. Generic datacentre providers that service a wide variety of industries, tend to carry this out at times suited to the facility operator, often outside of peak retail hours.

However, if you’re in the financial markets, carrying out maintenance at times that coincide with the most critical periods of the trading day can introduce unnecessary risk. It is essential for any facility operator aligned with the financial markets ecosystem to recognise and understand that even a few short minutes of downtime during these critical moments of the day can be catastrophic for clients. Often, generic datacentre operators cannot put as much scrutiny on these areas—their client bases are so large and varied that it is not practical or economical.

Exchange-operated datacentres on the other hand not only have a high concentration of financial institutions in their facility, they also operate their trading platforms from this location. This means that exchange colos like ASX’s Australian Liquidity Centre, have a vested interest in running their maintenance schedules according to financial markets. The ALC places a strong focus on uptime and reliability with the understanding that the slightest interruption in service could have a potentially serious impact on financial markets.

Furthermore, colocating with an exchange centralises risk. In the event of an outage, all market participants are in the same boat - they are down with the market as opposed to suffering the reputational risk of being down on their own.

Likewise with security, the ALC has extremely high standards due to the nature of its own operations and those of its financial market clients. Many generic datacentres house thousands of clients who access the facility, creating much more risk of security incidents occurring. Mindful of what is mission critical, the ALC reduces this risk by ensuring foot traffic is kept to a minimum.

In fact, the ALC was specifically built for financial markets after reviewing different facilities and their design principles from across the globe. Equal length connectivity into trading platforms means that no matter where a customer’s cabinet is located on the ALC colo floor they have the same latency in and out of the market. Generic data centre providers may not have the luxury of customising their premises based on the needs of their financial customers, often building their facilities to a predefined model.

Further enhancements to the ALC have resulted from an innate understanding of customer needs.  The delivery of biometrically secured high density pods in 2019 was a direct response to the growing adoption by financial markets of data analytics, machine learning and computational grid computing.

An exchange colo’s alignment to their customers’ business also extends to regulation and compliance. Governed by the same regulator, an exchange must comply with the same standards as its clients. This also ensures that the exchange has a strong understanding of compliance requirements and any updates as they occur, and can therefore help their customers navigate these.

An example is the revised Markets in Financial Instruments Directive. To comply with this regulation, the ALC maintains two separate time synchronisation services: a global positioning system (GPS) time feed and a (precision time protocol) (PTP). The GPS time feed allows ALC customers to synchronise their computer system clocks to the GPS reference time. The ASX PTP time feed provides ALC customers access to the same time signal used to set the clocks on the ASX and ASX 24 trading platforms.

The ecosystem

Unlike generic data centres that host a variety of companies from a diverse range of industries, exchange colos like the ALC, operate exclusively for financial markets. This allows for the development of an ecosystem connecting participants whose interests are aligned. Physical proximity to like-minded organisations not only delivers a sense of comfort and security, it also opens new doors of opportunity by facilitating collaboration and partnership.

Take for example a buy‑side firm wanting to connect to multiple sell-side firms. Rather than being hosted by one sell‑side firm, buy-side firms are increasingly taking their own space in the ALC and adding connectivity to multiple sell‑side firms via a cross‑connect, which can be performed in a matter of hours.

Financial Institutions within exchange colos also attract a host of trusted, specialist partners, vendors, and telcos that operate across global financial markets. The ALC houses over 100 financial organisations including Buy and Sell Side Firms, Alternative Liquidity Venues, Independent Software Vendors as well as Infrastructure and Network Service Providers.

Connecting easily to these counterparties simplifies operations and for those financial organisations trading in multiple markets, offers the ability to replicate their setup and generate greater efficiencies. This set up is also advantageous for vendors. Providers of order and execution management systems or market data for example will want to connect with existing and new clients with minimal friction. Having their target market all under one roof within the ALC greatly reduces the lead times and barriers to doing business.

Financial institutions are also able to connect to remote sites extending this ecosystem beyond the ALC.  More than 120 client sites across the country are connected to the ALC by ASX’s managed dark fibre network, ASX Net. These sites have the ability to connect with each other, helping to reduce the need for third-party telecoms services. Clients can maximise opportunities to connect with exchanges, software vendors, liquidity venues, brokers, and buy‑ and sell‑side firms. All of these operating within Australia are accessible through the ALC, ASX Net or both. ASX can also quickly and cost-effectively connect to financial market hubs overseas—via ASX Net Global.