All the time in the world? Not if you’re an institutional trader
Michael Ourabah, BSO: While there are plenty of telecom providers to now choose from, there are fewer genuinely fresh trading opportunities available.
Organisations select a telecommunications provider for different reasons – reliability, global interconnectivity, price and performance are some of the more common drivers – so why do institutional investment arms and FX traders still buck this trend by focusing heavily on network latencies?
It is simple, there are very few sectors within international finance where time is quite so critical.
In financial trading, one millisecond can mean the difference between making and losing substantial sums of money. As a result, latency has a marked effect on general profitability, shareholder value and market competitiveness.
For years, telecom carriers and IT colocation providers have been working together to deliver ever faster network services, however established marketplaces such as Western Europe and North America are reaching an interesting point in the crossroads. While there are plenty of telecom providers to now choose from, there are also fewer genuinely fresh trading opportunities available.
New opportunities beckon
This is why emerging markets are so enticing to investment bankers and short-sellers. The issue is that many emerging marketplaces and the innovative asset products their exchanges offer are located within difficult-to-access countries that are only just entering the global stage.
Connecting to newer economies can require significant financial investment and a suitable length of time to understand cultural aspects. Dubai, Singapore, India and Turkey are popular examples of emerging economies, which on one hand offer impressive trading opportunities, but also present difficult regulatory landscapes, restrictions and market transparency, and until recently, a lack of investment by regional telecommunications infrastructure providers.
What this collection of challenges represents in real terms is a potential impact on latency and therefore on a trader’s competitiveness. Bankers are having to work in tandem with operational departments to decide which direct market data services to opt for or whether a private, ultra-low latency network is a better option for their long-term investment initiatives.
Keeping customers satisfied
Much depends on which asset classes the fund manager, FX trader or investment banker favours.
For example, how does a new economy affect the broader international investment strategy or is the financial exchange welcoming to international investors? Will expanding the current network footprint provide the necessary latencies or should the organisation look to bring on-board a new provider specialising in the sector? Is latency being chosen at the expense of cost or general reliability?
There is usually a middle ground to be found between these considerations, however what rarely changes is the demand for faster speeds. The rise of high frequency trading only accelerates this shift in the marketplace as sub-one-second numbers are now as critical as an investment opportunity’s annual yield, a newly publicly listed company’s growth rate or the long-term potential of a strengthening currency.
Understandably, many of the real decision-making actually falls to the IT department and its collaborative design of a global network via suitable providers, however more than ever those on the trading floor are influencing how the CIO invests in its connectivity. This trend is likely to continue for some time yet and it truly shows the importance of latency on a global scale.
By Michael Ourabah, CEO, BSO
