TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.
In trading’s ever-evolving ecosystem, growing fragmentation in equity markets has underscored the need for streamlined access to liquidity. Volatility and wider dispersion among stocks are meanwhile prompting buy-side firms facing fierce competition to embrace strategies that benefit from direct access to liquidity and data without compromising prudent risk-management philosophies.
The twin trends are stoking demand for Nasdaq’s direct connectivity and data-center co-location offerings, which give traders greater optionality for reaching the exchange thanks to new products and services now available directly on Nasdaq equities exchanges.
Handling Hops
At Nasdaq’s 113,944 square-foot primary data center in Carteret, New Jersey, a shift is underway. For market participants, the long-running model of accessing the exchange via a broker-dealer is evolving, with some seeking a direct connection.
This change is afoot for a few reasons. With the traditional sponsored access model, the flow of information to the exchange involves several “hops” along the way. For example, when an asset manager initiates a trade, it may go through a broker-dealer’s ecosystem before coming to Nasdaq. Each touchpoint a message traverses adds complexity to the message’s journey.
Further, broker-dealers often employ third parties to conduct mandatory pre-trade risk checks before executing a trade, adding another hop. Other variables could introduce even more hops.
Broker dealers increasingly endorse co-location and direct connectivity because they shift technology management to Nasdaq’s hardware and software experts. Clients can even request on-site engineers to perform remote-hand tasks when needed.
Broker-dealers can thus free up resources for other critical tasks like onboarding new clients and honing trading strategies instead of managing exchange connectivity as middlemen. The economics don’t change, but the efficiency does, generating a win for everyone involved.
“Recently, several market participants have come to us at their broker-dealer’s suggestion to explore connecting directly to Nasdaq,” said Nasdaq Global Head of GCS Sales Mickael Avedissian. “They are looking to have fewer vendors and relationships to manage and more transparency into their trades through a simplified toolkit.”
Nasdaq’s co-location services allow participants to reduce network complexity by utilizing a single hand-off to access the markets. Subscribers can also tap into all Nasdaq and third-party data feeds. And they can connect with more than 100 leading financial firms in Nasdaq’s data center.
Minimizing Hops Is Back
While the arms race that obsessed high-frequency trading for a decade may be over, the case for connecting directly to the exchange has only broadened of late.
An era of higher interest rates and continued economic uncertainty is creating new opportunities for trading firms. Rate hikes have also widened dispersion among stocks. The shifts have spurred asset managers to develop more active funds, which has led them to revisit their exchange connections, opting to be closer to the Nasdaq ecosystem.
The multi-manager model has meanwhile swept through the industry, encouraging firms to diversify and invest in more sophisticated technologies like AI and other differentiated approaches, which can be deployed within their footprint at Nasdaq’s data center when they co-locate.
The ease of establishing co-location and direct connectivity has only bolstered that trend. Direct connectivity to the exchange occurs via a dedicated port or ports — a simple switch that can take less than two weeks to execute.
Co-location clients meanwhile establish owned hardware within Nasdaq’s data center, giving them the flexibility to choose from a range of connectivity options to meet their unique requirements at competitive prices, including a high-throughput network and multiple Telco providers. Customers can also select low- or high-density cabinets ranging from 2.88 KW to 17.3 KW.
“Recently, we’ve been having a number of discussions on giving market participants greater optionality for reaching the exchange,” Mr. Avedissian said. “We’re always happy to provide advisory for those seeking better performance and experience when executing on Nasdaq exchanges.”
Nasdaq’s technology expertise has evolved rapidly in its 50 years as an electronic exchange. Today it offers a range of connectivity, hardware, and configuration services for just about every investor’s needs.
Further, its move to the cloud, with its MRX options exchange moving to AWS cloud-based architecture last December, has shown a 10% performance improvement over its legacy technology, suggesting its co-located trading services will continue to deliver outstanding performance in a cloud-based future. The exchange has a multi-year roadmap to move to the cloud, with options exchange GEMX up next in December 2024.
Reining in Risk
Traders’ improved experience on Nasdaq extends to pre-trade equity risk checks, which Nasdaq launched on its three US Equities exchanges in Q1 2023. The new functionality allows risk checks historically conducted at a broker-dealer or via a third-party provider to occur on exchange instead.
Nasdaq has already seen good traction with the capability, built as part of a broader push to modernize market-infrastructure services and facilitate more system interoperability.
“We’ve been excited to see strong early adoption of our pre-trade risk checks,” said Nasdaq US Equities Product Manager Erin Sheehan. “It’s enabled clients to solve existing challenges within the sponsored-access model framework on exchange, minimizing performance impact.”
That long-standing commitment to providing technology solutions spanning the full trading lifecycle has made Nasdaq the global leader in exchange technology — a role it continues to embrace by helping market participants achieve superior outcomes even as trading conditions change.
To learn more about Nasdaq connectivity services or connect with a sales representative, visit the connectivity services page on Nasdaq’s website.
Jason Dibble is Co-Founder and Editor in Chief at Curatia.
This column was originally published by Curatia LLC, a subscription-based news and analytics platform for traders and technologists. To sign up for a free trial of Curatia’s service, visit https://account.curatia.com/register.
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