BEYOND SPEED: FUTURE‑PROOFING YOUR NETWORK STRATEGY.
By Matthew Lempriere, Global Head of Financial Services at Telstra
Speed has always attracted a premium in financial markets. In the 19th century that might have involved carrier pigeons and telegraphs. In more recent times it has meant fibre optics and microwave technology. Either way, the proposition is simple: the faster you are, the more likely you will be to have an edge over others competing in the same space.
But achieving the lowest possible latency is no longer the be-all-end-all priority for market participants that it once was. Financial services firms are competing on a number of different levels and are facing a much wider array of challenges than they have in the past, from regulatory requirements to disruptive business practices that have resulted from new technology.
All of this has made network strategy a far more complicated endeavour. The penalty for getting it wrong can be huge, with high costs, resource-draining projects and locked-in limitations due to the long-term nature of network contracts. But the rewards for getting it right are even bigger, with business agility, client loyalty and a reduced cost base all becoming more attainable.
A new set of priorities
It was not that long ago that the most tech-savvy of trading firms would pay just about anything to shave off milliseconds or even microseconds from roundtrips between financial ecosystems. Network providers would blast through mountains and dig under waterways to make fibre-optic cable connections between financial centres as straight as possible. They would snap up the rights to use towers or build their own ones to create microwave networks that sent data even faster than cables.
They’re still doing all of that, and they can still command premiums from those firms whose business models absolutely depend on being among the very fastest to get their orders from one location to the next. But the speed game is no longer as lucrative as it once was and a number of factors such as technological change, cost pressures and an industry-wide focus on best execution are changing the landscape for what network users want and need. For many financial services firms, key considerations such as bandwidth, flexibility and even network maintenance are now rivalling latency as top priorities.
At a time when new applications are being developed at lightning speed, many banks have been struggling with the challenge of rolling out new digital services globally. These applications can take up large, or in some cases unknown, amounts of bandwidth. The last thing financial firms want to have to do is tinker with their networks every weekend. It means downtime and it can be resource-intensive, all of which can be costly. And that’s not even taking into account the risk of failure.
What this translates into is a need for high bandwidth, high performance and network scalability. As banks and other financial service providers expand their offerings, their network requirements change as well.
One way to see this in action is to look at what’s been happening with Asian markets and new pools of liquidity. In the early days of the low latency revolution, most of the attention was focused on the main US and European centres, with Chicago-New York, London-Frankfurt and London-New York routes getting the bulk of the development. Put simply, where there was liquidity there was demand for more network speed. In recent years, as trading firms have sought to exploit new opportunities, Asia has come more into focus. Often that means long-haul routes where the millisecond roundtrip times can run into triple digits on fibre optic lines, say from Singapore or Australia to the United States. In this respect, network connectivity design can make an enormous difference.
Network connectivity also is taking on greater importance because of the spotlight on best execution. Latency is certainly important in terms of achieving the best available trades, but a certain degree of low latency performance is now considered a given in most markets. What can matter even more, however, is the ability to connect to different venues and financial ecosystems. Think of it this way: the wider and more efficient your network, the better the chance of having access to the best quotes and ultimately achieving best execution.
One way companies can quickly try out different liquidity centres is via software-defined networking (SDN). For instance, a company such as Telstra, which operates a global network that features connections to many hundreds of locations, can use SDN to allow firms to try out different exchanges. Using SDN, a network provider can control data flows across its network, giving priority to different data. That provides the performance guarantee that financial firms require with the added bonus of flexibility. For instance, a firm can try out a new venue for a short period of time without being locked into a multi-year network contract.
Flexibility is particularly important for firms that are looking to transition into new markets or to upgrade to new technology. This is where an optical transport network, or OTN, comes into play. An OTN is an industry standard protocol. At a networking level, an OTN can work with many kinds of legacy protocols. That allows a provider to build a network that can carry diverse data types, potentially providing firms with high bandwidth and high performance.
Having that bandwidth and performance produces savings because that’s what allows firms to roll out applications more easily and by reducing network maintenance. For banks, lowering the total cost of ownership and cutting costs in general is without doubt one of the top priorities. In fact, many of the new applications that they’re looking to roll out are actually part of wider efforts to trim costs.
At the same time, financial services firms need to be able to offer their clients iron-clad service. To do that, they need back-up networks. Trading firms can’t rely on one link or one provider. When the fastest networks can command massive premiums, coming up with cost-effective redundancy strategies becomes all the more important. In some cases, a single millisecond or two can inflate the price of a network enormously.
Focus on strategy
Hardware and software are by no means the whole story. What can make all the difference is having a cohesive strategy. When considering network requirements, a huge number of factors come into play. Firms need to think about what markets they’re likely to want to trade in, what venues they may want to do business on, what trading styles they may want to adopt, and a raft of other considerations in terms of not just the firm’s current activities but its business in the future. And in addition to long-term planning, firms can take a more tactical approach. Being able to dip a toe in the water in terms of a new market, a new activity or a new type of technology only makes sense.
Networks by their very nature involve numerous entities, whether that means trading firms, vendors or venues. Getting the right access and deciding on the best technological means of developing your network involves planning and partnerships with firms that can help develop a strategic approach. To borrow from an old phrase, a network strategy is a journey, not a destination.
To learn more about Telstra’s offerings for financial firms, including global network capabilities, consultancy services and the low latency EPL Express service, visit www.telstraglobal.com