India has taken a big step forward in widening its low-latency trading community.
The Securities and Exchange Board of India (SEBI) in March announced regulatory changes designed to let more firms trade via shared managed colocation services. The move, SEBI said, would benefit small- and medium-sized firms that may have been prohibited from such trading previously due to costs and lack of expertise.
Ahead of the 2018 FIX India Conference, The Realization Group spoke to some of the panellists of the morning session ‘Taking a Closer Look at Low Latency Trading – Technical Perspectives’, to find out why this is such a promising development and what issues market participants need to consider as they enter the world of colocation.
We hear from Matthew Lempriere, head of Asia-Pacific and Middle East at BSO, Sammy Ho, Managing Director at FIX Trading Community Events and Plus Concepts, Denis Sweeney, Business Development Director, Asia Pacific at Metamako, Jean-Arnold Chenilleau, Program Manager at Orolia, and Anshuman Das, CTO of Treasury and Global Markets at Edelweiss.
WITH GREAT SPEED COMES GREAT RESPONSIBILITY
As India’s markets have matured and grown more sophisticated, demand has grown for wider access to colocation facilities.
In 2016, SEBI asked market participants to give their views about what was needed to develop the country’s algorithmic and colocated trading environment. They spoke and SEBI listened: Going forward, a much larger group of firms would be able to colocate via managed services beyond the existing broker community.
Matthew Lempriere of BSO expects a variety of changes that will benefit the market. He said:
“It could bring all sorts of new liquidity in. More proprietary high-frequency traders will want to enter India’s markets, which means there will also be more business for the brokers.”
Anshuman Das at Edelweiss also sees a boost to liquidity.
“Probably this will result in a reduction of overall colocation costs and hence far more people may enter. The colocation business will scale and it will move towards higher liquidity, which will be overall beneficial to the market.”
As firms consider the benefits of colocation, experts say there are some technical issues to navigate. Sammy Ho of FIX sees three broad areas of focus: infrastructure, timestamping and security. For smaller firms, some of these challenges may be new.
CONNECTIVITY AND INFRASTRUCTURE
One of the big areas of activity will be in providing connectivity to colocated services as more firms look to get in on the act.
In fact, as this part of the playing field is levelled, fresh emphasis will be put on a wider spectrum of a firm’s trading infrastructure. Das said:
“Proximity is one thing but there are several other aspects. What type of servers we use, what type of software we use. Everyone is trying to figure out the optimum mix.”
Beyond that, there are some big questions at a network level raised by India’s low-latency development. For instance, the National Stock Exchange is looking into microwave technology. Ho of FIX said:
“At the moment, we don’t know whether it will be as an alternative or as a backup.”
India will need to consider the experiences of other countries that have ushered in microwave technology, such as Australia.
Lempriere believes that radio frequency trading opens up the potential for links into centres such as Dubai, Singapore and London, which will provide the possibility of arbitrage trades that have not been feasible before for India-based firms.
In a separate move, to help pave the way in attracting more international interest in its markets, India has been developing global financial hub GIFT, or Gujarat International Finance Tec-City, aiming to establish a financial and IT services hub that offers the same level of infrastructural excellence as world-leading centres such as London, Paris or Tokyo.
Precision timestamping is an issue that will loom large in the new era. The increase in colocated trading will bring with it a rise in high-speed trading volume, which will require much more precise timestamping for a range of activities in the trade lifecycle, from traceability of trades to backtesting and compliance.
As firms roll out new technology as part of their move into a colocated trading environment, they also need to think about how they will synchronise their networks.
That will generally mean making the transition from Network Time Protocol (NTP), which achieves microsecond-level synchronisation for a network, to Precision Time Protocol (PTP), which gets down to nanosecond-level accuracy.
Jean-Arnold Chenilleau of Orolia says that this involves more than just adopting a new protocol. Many of the firms he has dealt with needed to go back to the drawing board and think about how to synchronise with high precision when adopting PTP. Jean-Arnold said:
“The first step is to lay down the network mapping, and to rethink where you need to have your clocks, how you build your network.”
Denis Sweeney, whose firm Metamako has been working with colocated market participants in India for some time agrees that two of the key issues are trading latency and time-stamping, “for both domestic and international clients that trade at the colo sites in India”, he says.
“In addition, exchanges are also looking to improve and augment their internal timestamping capability so that they can plan infrastructure changes effectively and therefore provide improved services to their trading participants.”
Precision timing relies on the Global Navigation Satellite System (GNSS), which brings with it additional concerns in terms of GPS jamming. Chenilleau says he knows from work with clients in the past how big an impact GPS jamming can have on time precision networks.
“That’s something we need to raise awareness about, because it is happening. We need to fight that.”
NOT AN ENTIRELY NEW PROPOSITION
The move to colocated trading may be a new proposition for some trading firms in India, but that doesn’t mean they need to go into it cold. There are experienced companies already in place to work with the kind of firms SEBI had in mind when it made its announcement.
Lempriere says BSO, for instance, is highly experienced in supporting emerging markets solutions and developing the ecosystem that comes with low-latency infrastructure. This can also involve radio frequency and fibre connectivity.
“I think it’s a very exciting time for companies wanting to go into India, or looking at alternative markets. And equally exciting for BSO!”
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