TF: What are some of the objections you hear from potential clients?
MO: The first big objection often relates to the sovereignty of the exchange. It has to do with pride in your country – it’s an emotive issue. But when you have your exchange or platform hosted, you still have all the physical presence of a stock exchange headquarters for events such as the bell ringing and things like that. That’s all agnostic to where the servers are.
Also, many trading venues, especially incumbent exchanges, have a perceived view that regulators wouldn’t approve a technical hosting service and that their IT infrastructure must be hosted locally to the exchange, for regulatory, data protection and security reasons. But this is becoming less of an issue – with exchanges in the U.S. and Europe at least – as exchange trading is progressively viewed as a utility by many of its participants. From that point of view, people can understand how hosting technology allows them to focus on cost, speed and liquidity.
Ongoing discussions are starting to happen as exchanges realize that they can retain full control over all the business aspects of their markets while leveraging the technical expertise and cost effectiveness of an exchange group that has successfully built and run their own trading engines across the world.
TF: So what about the safety and security issue? That sounds like a legitimate concern.
MO: Well for us, our global hosting infrastructure is based on the original Secured Financial Transaction Infrastructure (SFTI) network, which is the industry standard for one of the highest-performance, lowest-latency global networks. It provides maximum security. So, in some cases, the security we provide can be even greater than the exchange or platform has in place.
Another related issue is that often people think that by hosting their platform elsewhere, they’re giving up control but that’s not really the case. The key concern as a hosted client is that they may be viewed as a secondary business line by the hosting exchange and their technical requirements may come way down the priority stack, especially when it comes to some business critical functional changes to the matching engine, for example. This can be a major hurdle to overcome for the hosted market and is something we recognize as a major concern at NYSE Technologies.
When exchanges or platforms host with us, they don’t piggyback onto our core trading systems and become reliant on us. They get their own matching engine that they can customize within a technical infrastructure that shares some of the non-core components, thus allowing them to determine their business critical applications. It’s just that their servers aren’t downstairs; they’re in, for example, our liquidity center in Basildon.
TF: What about competition?
MO: Competition is fierce for exchanges around the world and that’s one of the challenges they face. Technology is constantly improving, so do these exchanges have the skill and financial resources to keep up with constant innovation? Or should they focus on being a stock exchange while outsourcing their technology to a provider that is consistently investing in industry-leading initiatives?
I also think that the concentration of markets provides more shared liquidity, which is often a compelling reason to host. If an exchange has not concentrated on building up a large IT division, then it will often want to outsource this – and who better to know how it’s done than a provider with real experience of the levels of scrutiny and regulation our industry faces every day?
TF: Are there specific areas in technology where they might be able to gain efficiencies of scale and expand?
MO: First, incumbent and start-up exchanges may consider, for example, locating their core trading engines and applications in NYSE Technologies’ liquidity centers, which house trading engines for the NYSE Euronext group and other markets. These platforms are leveraging the technical services of a world class data center.
Second, they can potentially expand their trading community by tapping into an established co-location client base consisting of a broad range of major international investment banks and brokers, allowing HFT and algo traders to access those markets within the same facility.
Third, start-up exchanges or incumbents that are seeking a low latency, high performance trading platform can outsource the technical operations for their trading service. At NYSE Technologies, for example, we can provide full managed service and technical hosting.
Finally, if they want to launch new exchange initiatives such as multilateral trading facilities, dark pools and the like, they can test launch these new initiatives to an existing trading community without the risk of a negative impact on the trading platform infrastructure powering their core markets.
TF: Thanks Mike.