Colocation companies are targeting the financial services capital markets by employing sector experts with backgrounds in firms such as Goldman Sachs and NYSE. While colocation primarily remains a space, power and connectivity play only those who understand fragmentation, HFT, liquidity, venues, asset classes, emerging market exchanges and global regulation will succeed.
 
Stewart Orrell, global MD of financial services at Equinix: “For Equinix latency has not been the focus for a while – even though we have a lot of matching engines, it is a standard piece of the tool kit but not the defining strategy. People are trading in different ways. The more interesting thing is the fragmentation of different venues. As well as different trading venues people are trading across different asset classes.”
“We recently brought CBOE’s Volatility Index to London but that is not a latency play. People are looking at all sorts of data sets and looking at markets in all sorts of different ways. The latency play is commoditized and has no barrier to entry.

Anyone can come onto our site and get the speed they want.”
“Dodd Frank in the US and the regulations around Over the Counter (OTC) are keydrivers. The move from voice to electronic has been in foreign exchange (FX) for a while and for other classes such as OTC derivatives it is pretty clear what the framework is going to be. The mandate for electronic trading of more asset classes will happen.”
“There is a good deal of strategic positioning going on both in terms of the markets and how they deploy infrastructure. The challenge is connectivity. In OTC terms as well as tradingthere is clearing and swap depositories. All of these have to be connected to. When you talk about pools of liquidity you are talking aboutpools of connectivity.”
“In the OTC space we‘re talking to trading platforms and brokers and clearing providers and service providers. These are the guys who understand the mechanisms. Within this space trading venues generally don’t have their own data centers and are most interested in asking: How do we connect to these counter parties? And many of these players in the OTC space are already big in FX and are in our sites already.”

The Exchanges

“NYSE is not really a competitor. They, like other exchanges, have a certain set of constituents with a particular requirement for operational latency. The difference with Equinixis that we have various exchanges in our sites because we are the hub site. For example NYSE has SFTI nodes in all our sites. We view the exchanges as very complimentary.”
“We’re very focused on what we do within space, power and safe hands. We don’t do software or go into the machine and we don’t do managed services because we want the managed service companies to come to us. Once you have managed services there is a conflict no matter how hard you try.”

Internationalization
“Regulation has driven internationalization. In the US there are two regulators and in Europe, one and the national regulators. That gives a generally consistent framework which drives competition. The challenge in Asia is every market has different regulations. It depends on the asset class. For example, foreign exchange is obviously a global market but that’s the nature of the asset.”

“We’re pretty much the only global player. If you are starting up a new venue then clearly you don’t want to build your own data center. Even just the capital lay off is attractive and as we’re global you want to come to a venue where all your potential customers are already present.”

Read more about how colos are addressing the financial markets in the May/June 2013 issue of FOCUS magazine.