By Jeff Mezger, Vice President, Product Management, TNS Financial Markets
As data center migrations accelerate in financial markets, financial exchanges and data centers must embrace single source relationships to serve global traders.
In recent years, capital markets have grown increasingly complex, with rapid cloud migration challenging traditional exchange protocols and trading behaviors. As a result, modern high-frequency trading demands redefined network connectivity between data centers and endpoints.
Financial exchange data center managers face significant challenges, as few institutions possess the in-house resources and talent to execute effective strategies. Post-pandemic cloud migration requires choosing a data center colocation strategy, with the decision boiling down to a DIY (do-it-yourself) versus managed service approach.
The evolution of colocation
Colocation involves organizations placing their computer equipment in self-owned or third-party managed data centers. Originally, colocation was sought for ultra-low-latency trading benefits. However, it has evolved to include achieving deterministic latency, accessing accurately time-stamped market data, and connecting to various venues, exchanges, and cloud services.
Low latency remains crucial for algorithmic trading, where nanoseconds matter for data transmission speed between network endpoints, and for traders to respond quickly to market changes and news. Hardware location and network connections significantly influence latency, and optimized links and locations provide a competitive advantage.
Colocating at a trading venue’s data center reduces overall latency and provides direct access to matching engine, trading network, and data. This offers advantages over a DIY approach, where a company independently manages the installation, configuration, connectivity, and monitoring of their equipment within leased space from the exchange. Data center professionals managing in the DIY mode are under pressure to make fast, well-informed decisions around additional issues including business continuity, risk mitigation, market data feeds, bandwidth, reduced time-to-market, staff, space, and cost savings.
The advantage of managed services
Moving into a data center in a new market involves numerous considerations. To ensure a smooth transition, it’s crucial to collaborate with an expert familiar with local regulations. Financial markets rely on outsourced providers to swiftly access various services in a new location, including order routing and trading infrastructure procurement. Managed service providers (MSPs) simplify the process with a single point of contact and 24/7 access to technical and capital markets expertise.
Cloud providers have become essential partners for exchanges aiming to migrate their services while staying connected to global capital data centers. For example, Nasdaq’s multi-year partnership with AWS employs on-premise private cloud infrastructure, providing ultra-low-latency edge computing capabilities. Similarly, the Chicago Mercantile Exchange (CME) has chosen a 10-year partnership with Google to transition their trading platform to the cloud.
It is unclear what this cloud transition will mean for the established operating model. Exchanges will select different cloud providers in different regions, which presents challenges similar to the historical colocation-based model, where firms will need to build infrastructure that knits these disparate platforms together and transmits data between them, all without sacrificing performance.
The MSP’s job is to help navigate this transition by minimizing latency and optimizing performance, regardless of whether the exchange is in the cloud or in a colocation facility. As they have done historically, MSPs can provide a single solution combining both cloud and dedicated infrastructure, regardless of how the transition to the cloud plays out.
The success of data center management in capital markets hinges on maintaining trading performance in the face of rapid technical advancements. Optimal trading requires access to powerful servers, top-notch data lines, and close proximity to the trade’s physical location. Processing data near its source minimizes network infrastructure impact, reduces latency, and increases speed – critical factors where microseconds can translate to millions gained or lost during trading.
A report from industry analyst firm Celent compares in-house DIY management with a managed service model for financial markets trading infrastructure. It found that value-added services lead to cost savings, improved trade efficiency, and simplified data and network infrastructure access. MSPs are enabling trading firms to focus on core competencies.
Staying ahead of the curve
To stay ahead of the technology, firms must ensure their data center infrastructure meets the increasing demands of traders and market volatility. Financial exchanges are achieving this by partnering with colocation service providers experienced in handling vast amounts of raw market data, supporting multicast needs, and scalable bandwidth solutions.
As traders diversify portfolios, their data requirements strain exchange infrastructures. Competitive advantage lies in partnerships with providers capable of accommodating these demands and managing high-volume data bursts caused by various factors like political events, economic shifts, and cyber disruptions.
According to a survey by Frost & Sullivan, by 2025, around one third of global market CIOs will move components and workloads to MSPs to simplify complexity and reduce costs.
As data center migrations accelerate in the trading community, financial exchange and data center managers should embrace single source relationships to access multiple feeds, ensure continuity, and benefit from economies of scale to serve worldwide traders operating around the clock.
About Jeff Mezger
Jeff Mezger is a product development professional with 20 years experience in derivatives and financial technology. He is currently Vice President of Product Management at Transaction Network Services (TNS), a leading managed services provider of global networks, market data and managed services for financial firms.
