Electronic trading landscape: how to gain a competitive edge

In recent years, the electronic trading landscape has witnessed a significant amount of change. Developments from a market, regulatory, and technological perspective have resulted in rapid growth in both the number and types of venues. Around the world, firms are connected to multilateral trading facilities, alternative trading tools, electronic communication networks, crossing networks, and dark pools – privately organized exchanges for trading securities – all of which continue gaining market share.

The market fragmentation has placed greater demands on the trading community, which is reliant upon access to multiple liquidity venues in order to make the most of cross-market arbitrage opportunities, as well as to ensure it acts in accordance with best execution policies. Nevertheless, fragmentation isn’t without its benefits. For market participants, fracturing offers increased liquidity, better price formations, more efficient markets, and tighter bid-offer spreads. Due to these changes, market participants have observed a proliferation in market data volumes, an explosion of lightning-fast algorithms, and the rapid development of ultra-low latency connectivity and technology.

The importance of latency

As new trading possibilities begin to emerge in the global capital markets, companies with the ability to access and utilise modernised connectivity solutions have put themselves in a position to take advantage of the best routes to market. In an attempt to capitalise on this, firms are becoming increasingly focused on reducing latency, particularly given the rise in prominence of algorithmic traders and statistical arbitrage desks. By investing in ultra-low latency trading infrastructure tools, businesses can ensure they continue to maintain an edge over competitors.

The objectives of each individual trading firm determine how valuable ultra-low latency is to their business, with no two market participants being identical. Looking at arbitrage-driven trading – which exploits pricing differences between identical assets in two or more markets – speed is invaluable since the overall aim is to capitalise on alpha, which can disappear almost instantaneously. In a situation like this, being able to swiftly uncover and source the right opportunities becomes vital. For these organisations, ultra-low latency connectivity must be considered one of the most essential pieces of weaponry.

Building the best allies

While latency is viewed as being an important feature of an enterprise connectivity plan, successful trading firms tend to consider a more holistic approach. This requires companies to pay close attention to other elements which they view as being equally essential, including dedicated bandwidth, high availability, resilience, and low total cost of ownership (TCO). In addition to trading speed, companies require the best connectivity solutions obtainable so that they can interact with their counterparties and other market participants in the ecosystem throughout the trading day. Examples of participants in the ecosystem include both buy- and sell-side firms as well as liquidity venues, market data providers, and independent software vendors. Those trading firms who have full confidence in their ability to operate in an established and diverse community of market participants, can spend an increased amount of time focusing on developing their business strategy and growing the company.

A connectivity provider offering the opportunity to make use of a diverse and full-scale trading ecosystem is also capable of delivering significantly reduced TCO with respect to infrastructure. Choosing the right connectivity provider puts trading firms in a position to ensure they’re able to fully capitalise on arbitrage, hedging, and other trading opportunities, while also enabling them to access new markets and liquidity pools, with limited delays and overhead.

Selecting the right connectivity solution

Nowadays, all connectivity providers offer various versions of ultra-low latency solutions. As such, it’s important for market participants to look out for some key differentiators between managed network providers. The consummate provider should not simply meet a trading firm’s current needs – they should also deliver a flexible and scalable platform which enables growth and expansion. That way, organisations can anticipate the arrival of new products and markets, all while they expand their global reach as their business continues to grow.

If a managed network community is to be successful, it should provide its market participants with a diverse, global financial ecosystem which has already been constructed. One that features a wide range of counterparties for price discovery, liquidity, and execution – for example, brokers, exchanges, other trading venues, hedge funds, trade lifecycle services, and market data providers. Simply put, the community should have the information that trading firms require in order to find and access liquidity.

The right provider will supply firms with an established community of liquidity venues, market data providers, and trading counterparties, not to mention a thorough understanding of trading routes and a level of agility necessary to adapt to an ever-evolving regulatory environment. Partnering with the right managed network provider enables trading companies to realise their competitive edge through high-speed price discovery and trading, guaranteeing best execution, and low TCO when it comes to end-to-end performance and ownership.