How Market Connectivity Issue Damages Capital Markets

wm MarketConenctivity - Infographic

3rd July 2014

BSE had to shut down, and trading got halted for three hours, leaving traders specifically arbitragers and intra-day trader’s panic, fearing their positions are at risk.

17th April 2015

Bloomberg systems going down at around 0720 GMT and the screens were blank for most of the following two hours; market participants said, adding that prices were unavailable and the news feed intermittent.

08 July 2015,

 NYSE had to shut down due to technical configuration problem for almost three hours.

The incidents mentioned above highlight an important fact about “market connectivity in a time pressured trading environment” that in an ideal world is suppose to be flawless and always GREEN. But is it the case? Interruptions’ and glitches in connectivity are blowing client relationships and trading desk revenues across the US, Europe, and Asia. Could improved focus on employing faster and much more dependable connectivity enhance overall infrastructure and facilitate financial institutions to be competitive enough? Let’s take a sneak peek-

The Problem Statement

The new race of offering reduced latency has been “talk of the town” in the financial industry. Where a delay of millisecond could snap away the deal, think about a situation when you completely lost the connectivity. So the connectivity strategy adopted by your trading firm has to go beyond latency.

The Adverse Effects of Market Connectivity on Capital Market

A study custom-built by Colt reveals that almost half (49%) of Buy-side and sell-side traders in US, Europe, and Asia deem that delay in connecting to new markets are resulting in missed trading prospects, and a quite similar number (around 47%) accept the fact that it impacts their client relationships and is resulting in loss of clients.  The survey reveals that resulting losses at investment banks can be as high as $5 million in trading revenues per trading desk each year.

Asia and India – Is it too early for Technology Failures?

 

Asia is considered to be a flourishing market, where the technology providers have seen the scope of expansion and growth. So could it be too early to deduct technology failures? Not really! A report of Waters Technology which surveyed across Hong Kong, Singapore and Japan had fascinating results to publish out. Around 50 % respondents of various trading firms across Asia agreed that it takes more than a month to connect to a new liquidity source and get live [This is after a business decision is made], resulting in loss of new clients and missing trading opportunities. In Singapore when a survey was conducted to know how often technology failure happens? Around two-third of the professional said less than once in a month. In India,unfortunately, the survey was not conducted, however given the market complexity and density of Indian market, the same kind of factors would affect India as well.

 

Europe and the US – What they say about the Connectivity Issue?

 

The global view of trading and technology professional is quite in-line with Asia professionals, 43 % respondents stating that a delay in connecting to new markets could result in missing trading opportunities’ in the UK. In U.S, almost 50 % of respondents agreed that ineffective connectivities prevent them from diving into the new markets.

 

How often do technology failures prevent you from accessing the markets you need to do your job?

pie chart

(US, Europe, and Asia)

Source – Colt Technology Services

Is Connectivity all About Speed?

 

Connectivity is not all about speed. As the trading objective differs in the capital market, even the requirement of low latency may get altered. Quoting an example would be best here, so for instance an arbitrager views low-latency as a critical tool to snap deal, however for some traders who play with minimizing impact and delaying the cost may not need low latency at all. As these traders place the orders that may stay in the order book for a specific period, capturing best execution and liquidity at the best price available. So the demand is just not about speed, but a more managed network is the solution.

A Handshake Will Shed Away the Glitches

 

An ideal scenario with “no delay” is hard from reality and so one must accept the fact – there would be some delay and failures. But what are the acceptable limits? A day? A week? Or a month? Or more? With the modern technology and innovations, a month or even a week’s time seems to be unreasonable. The firms and trading desk work under high pressure and with a slow setup process, the losses could manifold for them. The firms need easy plug-in-play model to set up new connections to liquidity venues; they are looking for an optimized connectivity with minimal delay and failures so as to meet revenue targets.

 

A managed network dedicated solely to the financial services industry, crafting trading ecosystem that offers a handshake between buy side firms, liquidity venues, sell-side firms, independent software vendors, inter-dealer brokers, and market data providers. Involving different stakeholders in advance and streamlining the connection process earlier could make things a lot easier in terms of setting the expectations right. The connection strategy needs to be planned in a way that each team could execute parallel tasks and processes are collaborative involving the firm, venue and also the service provider. A connection to new clients and the market is an integral part of the capital market, and with customary market conditions firms and trading risk are being forced to look for more “apt options”. If the connectivity issue prevails, it could lead to hindrance in expanding firms into new asset classes or geographies. The challenge could go much deeper as each delay/failure causes a good amount to the industry. The only possible solution being different groups to collaborate on that could lead to long-term profits for all.

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