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Ecosystems for Success: The evolution of capital markets ecosystems and the importance of market connectivity

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Posted in: Institutional Capital Markets
Published: 20/07/2021

An extract from a whitepaper produced by Kapronasia and sponsored by ASX

 

 

For many market participants, connectivity is about much more than simply high speed or low latency. As we look to the future, the value of capital market ecosystems is set to become even more significant than it is today, according to Dan Chesterman, Group Executive, Technology and Data, and Chief Information Officer at the ASX. 

Featuring insights from experts in financial markets including GBST’s Head of Capital Markets, Denis Orrock, and Executive Manager, Institutional Business APAC, Paul Beal, this report discusses the evolution of capital markets ecosystems and the importance of market connectivity”. 

Dan Chesterman also explains that well before the Australian Liquidity Centre (ALC) opened its doors in 2012, the ASX imagined a data centre that offered connectivity beyond just its own ASX platforms. It built a colocation facility and evolved its connectivity services to bring financial institutions and their counterparties closer together – into an ecosystem designed to the exacting standards of financial markets. Today, financial organisations can access ASX and financial markets, their partners and each other via a fabric of highly secure connectivity. 

But going back to the 1980’s, the advent of electronic trading in the US introduced a new era of algorithmic or high frequency trading (HFT) whereby firms tried to get their trading applications as close as possible to an exchange’s matching engine to lower latency and speed up trade execution. By the 2000s, the exchanges were moving their matching engines into colocation data centres, where they were joined by the HFTs that would find no better substitute to being colocated in the same building as the matching engine itself.  

The HFTs brought with them their service providers and the network carriers, forming an ecosystem of member firms and vendors. Given the high premiums participants were prepared to pay to have rack space next to the matching engine, it was not long before exchanges realised that there were substantial benefits in operating their own colocation facilities. The exchange-operated colocation data centre was born.  

Orrock and Beal comment that the advantage of colocating in the ALC is that it also centralises the risk. Elaborating, they say, “years ago, if you had a data centre failure by a particular bank, that was their problem. The market continues. Now, if there is a critical failure of some nature then all participants are largely affected. So, it takes a level of risk mitigation away from the market participants. They do not need to have that data centre responsibility themselves. They take a position within the ALC and if there is a problem, then largely the market is affected by the same problem.” 

One of the most powerful draws of an exchange colocation facility, however, is its ability to build an ecosystem of stakeholders whose interests are aligned. Orrock and Beal say, “the footprint of clients that are largely operating in the ALC are interconnected in some way, be it for trading, market data, clearing and settlement, funds transfer, or registry services. It is an ecosystem of interconnected participants who are all coming to a common data centre.” 

“As we move into an era of higher scrutiny associated with data access, security services, encryption of environments, and access to environments, many data centres that would have previously been used may not obtain the level of compliance requirements that our clients now demand.” By contrast, Orrock and Beal say, “we think the ALC was well ahead of its time compared to its peers overseas in seeing the much higher level of compliance with data security mandates over time.” 

 As the evolution of exchange colos continue, there are four areas to keep an eye on over the coming years: (i) The shift to the cloud (2) Connectivity via high quality networks (3) interconnectedness between exchange ecosystems, and (4) consolidation of data centre footprint.  

Download the full whitepaper 

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