The mantra in real estate historically has been location, location, location. In trading, its largely connectivity, connectivity, connectivity. Those who connect fastest, most efficiently and securely can reap huge gains versus those who dont.
In recent years, the choice in offerings for the buy-side has exploded, providing a bevy of options for connecting to the markets.
Starting in the early 2000s, connectivity for the buy-side trader mainly consisted of using a peer-to-peer network (P2P) to connect to their broker counterparties. These networks, often provided as part of the OMS offering, were reliable but costly and difficult to manage.
But by the middle of the decade P2P gave way to a new and unique way of order routing and transmission – the hub-and-spoke method – where the buy-side could plug into a single central distribution channel point and let it transmit orders to multiple sell-side destinations. Pioneered by NYFIX, the hub-and-spoke model provided a cheaper, faster and more uniform and secure method for trading.
These days, the buy-sides needs have gotten more complex – sending out thousands of orders per second, to myriad brokers and lit and dark destinations – forcing networks to become faster, more technologically advanced, secure and reliable. NYFIX, now owned by technology provider Ullink, remains a major player, but the systems it and others offer have evolved tremendously.
Not Your Fathers Network
Todays connectivity networks are multi-service and multi-asset, making them a one-stop shop of services catering to the needs of the buy-side trader. Think of these new networks as a Wal Mart for the buy-side; not only is there routing, but additional services such as trade cost analysis, network analytics, managed support and a bevy of others.
The buy-sides demands have changed as well – stringent performance, reliability, transparency, ease of use and customer support requirements must be met by providers of these services. Today NYFIX is joined by a slew of other providers, including Itiviti, Thomson Reuters Autex, FIX Flyer and LiquidityBook, seeking to meet the buy-sides FIX connectivity demands, which have never been greater.
The buy-side typically dictates the network vendor to use for connectivity, George Rosenberger, Senior Vice President, Global Head of Managed Services at Itiviti, told Traders Magazine. That decision can be based on several factors such as the buy-sides view on network security, their OMS provider and its affiliation/relationship with the network and now more than ever, most OMS vendors also provide a their own private-labelled version of a network. Those OMS vendors make it commercially attractive for the buy-side to also use their network, which is subsidized by charging the brokers for each connection.
Itivitis Rosenberger explained the move to the new single hub model versus P2P connectivity offers quicker onboarding of clients, client -centric security (think transport layer security), no firewall changes and there are less sessions to monitor from an operational perspective.
The point-to-point networks do offer more flexibility when it comes to customization and security of the connection, Rosenberger began.The cost difference between the two models is very subjective based on the broker dealers commercial agreement with each provider.Often, the vendors introduce price tiers based on the overall number of connections to that broker so the more connections you have with the vendor, the cheaper the unit cost gets for each counterparty. This is especially true with the spoke-and-hub providers.They typically start at a higher rate per connection than the point-to-point providers but based on the overall number of connections, the rate drops as they work through various volume tiers of connections and often the blended rate can come close to if not surpass the cost of the point-to-point provider.
The Road Ahead
So, what are the biggest challenges for todays connectivity providers?
Rosenberger explained that the key metric for a spoke-and-hub provider is how many counterparties are on their network.
Network providers work hard to add counterparties because someone would certainly be more comfortable doing business with a vendor who has 500+ counterparties on their network vs 100 counterparties. Expanding their network is always a business challenge.
Beyond that, he added that it is ensuring that their platform is leveraging the latest technology so that it is performant and flexible enough to adhere to the ever changing business and regulatory environment. NYFIX, Itiviti and others claim few if any service disruptions in recent years, and turnaround for new connections has been reduced to days if not faster.
Security is also paramount, and Ullink stresses that it is a key component to delivering the best experience. In a conversation with Traders Magazine, Richard Bentley, Chief Product Officer at Ullink, explained that NYFIX ensures both the physical and digital security of its platforms and data through leading-edge security technology and processes. It employs a multi-tiered network architecture, use of private networks, encrypted VPNs, secure sockets layer encrypted FIX, firewalls, intrusion detection systems, and application layer load balancers to protect the NYFIX Platform and its users.
So where does this leave these connectivity providers now?
The cost of the technology arms race continues to escalate as networks continue to complete for not only the buy-sides dollars and trades but the sell-sides too. But investment in added capabilities must be made deliberately and carefully to ensure providers are not spreading themselves too thin. FinTech providers, like all tech companies, must determine where to draw the limits of their breadth of coverage so they can focus resources on their core competencies, said Allan Goldstein, Chief Financial Officer and Chief Operating Officer at analytics provider Trade Informatics. Consumers of fintech, particularly the buy-side, certainly have a desire to leverage scale and efficiency of multi-product offerings such as multi-asset OMS and EMS. However, quite often breadth of coverage does not always deliver best-of-breed offerings, so consumers must decide when their return on investment is enhanced by choosing from the ala carte menu versus prix fixe.
