Global financial markets are coming to terms with the impact that EU legislation, Directive 2014/65/EU, known as MiFID II (Markets in Financial Instruments Directive), will have on their trading operations. The rules are effective 3rd January 2018, and this new directive fundamentally changes the way capital markets operate in Europe. However, do not be misguided, this legislation has global bearing, so the question is…are you prepared?
MiFIDII requirements are extensive and far-reaching, fundamentally accelerating the requirement to raise transaction transparency levels, extend investor protection and demonstrate best practice in trading venues.
The need for low latency, high speed data transport and large storage capacity has propelled financial institutions and capital firms to redeploy to colocation data centres, close to key financial centres.
Algorithm based high frequency trading (HFT), has been a driver for these organisations moving operations from the physical trading floor to the data centre. Decentralized trading created the opportunity for the upwards of 150 potential trading exchanges in London alone (KTN: The Big UK Data Centre Equipment Opportunity, V9, Pg 16). These exchanges are highly dependent on low latency systems to maximize business advantage.
Latency is specifically relevant to MiFID II as it relates to how trading venues provide fair and non-discriminatory colocation services…‘to all users which have subscribed to the same colocation services access to their network under equivalent conditions including space, power, cooling, cable length, access to data and market connectivity’.
Need for low latency has been long discussed, however, MiFIDII brings more defined legislation that drives greater demand for latency equalization solutions. Latency equalization is a very different perspective to ‘low latency’ in the fact that latency may need to be increased to ensure fairness of trade. For example, an exchange has two finance clients who are hosted in the same exchange colocation – where the exchange colocation owner will look to align ‘access to network service’ time (latency) between both clients.
When we discuss time in terms of ‘equalisation’, the scale commonly referred to is nano-seconds (ns), or billionths of a second. For the past decade algorithmic trading has grown to dominate high frequency trading (HFT), with reliance on sub micro second speeds. This has driven the transfer from manned trading floors to data centre solutions. The latest ultra-low latency switch technology can operate in 20ns – 200ns latency range. With a human response time of around 0.3 seconds, or 300 milliseconds (ms), it’s clear why the algorithm has taken over in the world of HFT. In European equity markets, it is estimated that 55 percent of all volume traded is attributable to HFT, with total volume traded by HFT strategies nearing a value closer to 40 percent (FXCM Market Insights data).
All things being equal?
In simple terms, we have a new ‘legal force’ in the EU Directive/MiFIDII, which has set out to ensure there is the highest transparency and a level playing field in terms of fair financial trades.
Using the analogy of a road (path for data to travel) and vehicles (the data being transported) – latency equalisation introduces traffic signals or speed bumps - with a view to ensuring ‘trader A’ has no unfair advantage to ‘trader B’ in terms of time of travel/flight (latency).
Introducing such a metaphorical speed bump (which may require additional fiber infrastructure deployment) ensures multiple trading clients accessing the same platform will have an aligned ‘tick to trade’ time within a given tolerance. Nano second differentials could make a significant difference in terms of thousands of pounds or euros profit per trade.
Few trading firms would consider investing in colocation data centre space based on the knowledge they could have significant time difference between themselves and a competitor (accessing the same service or platform), or that there is increased risk in terms of performance or downtime. Under MiFIDII and associated standards ESMA (RTS-10), trading venues will need to publish data including cable length(s), this is further to guidance that pertains to provision of network access under equivalent conditions… including cable length.
In today’s financial markets, generating turnover is essential and HFT venues are known to operate at around 100,000 trades per second with average latency of 40µs (NASDAC data). Taking fibre cable latency at 5ns per meter as a reference, if there were two identical trades taking place simultaneously, with trader [A] on server ‘1’, being 50 meters closer to the exchange switch than trader [B] on server ‘2’, the trade instruction for server ‘1’ would reach the switch 250ns before the server ‘2’ instruction.
Now imagine that process repeated many thousands of times per day and the impact this has on the trading venue’s business. Under MiFID II direction, fiber cable run(s), between active equipment must be of equal length, so that no advantage is given wherever the devices are situated in the data center.
Fibre infrastructure latency design challenge
Cable lengths in a data centre can extend beyond 200m (twice the length of a football pitch), an example is access between disparate floors or server halls. Equalisation, typically involving 1000’s of fibre cable channels is a physical layer design and cable management challenge.
Colocations data centres impacted by MiFIDII are defining aggressive new tight length tolerance fiber cabling standards. These are pushing the boundaries of fibre manufacturing processes and initiating new methods to validate optical length measurement, not only for the manufacturer, but also on-site installer deployment. It should be noted that there can be a significant difference between ‘physical/mechanical’ and ‘optical’ cable lengths.
Infrastructure suppliers, partners, trading exchanges, and data centre operators have been investigating solutions to guarantee latency equalisation within the letter of the legislation and maintaining the requirement to improve infrastructure resilience and capacity. Several physical layer solutions that solve the fiber latency equalization challenge have been developed and implemented, dependent of client requirements, including server density, cabinet utilization, fiber characteristics and cable run capacity, and these are currently being implemented at client sites.
Panduit has firsthand experience supporting MiFIDII latency equalised deployments, most recently within a leading European exchange. Supporting new and legacy installations with a MiFIDII complaint physical layer solutions requires meticulous planning, support and alignment between customer, manufacturer, infrastructure designer and installer to ensure projects are deployed on-time and on-budget.
The latest multimode fiber (MMF) grades including OM4 Signature Core (OM4+) and more recently, OM5 Signature Core™ (OM5+) enable solutions that offer the highest level of performance certainty, longest MMF reach (meters) and lowest risk in terms of data packet errors, which can be a contributory factor to latency.
This European legislation sets out to ensure customers of exchange venues are offered equal trade opportunities, in a transparent process and is a major consideration to global financial markets.
The previous race to be quickest to the deal, now must incorporate trade equality in an increasingly demonstrable and more highly transparent process. Cabling infrastructure in financial exchange colocation environments may require increased fiber lengths to accommodate latency equalization strategies, which drives the need for new, innovative solutions.
Either way, the impact of MiFIDII on HFT organisations will be significant, however, improved transparency and traceability at all levels of the trading process will guarantee investors’ confidence in the efficacy of the trading venue. And confidence in the stock market is an absolute to maintain the global positive up-tick in trading and its beneficial effects on economies.
Stephen Morris is senior product manager for EMEA at Panduit