Patrick Lastennet, Interxion
"A level playing field for network speeds options is the problem, not the availability of colo space."
In the latest sign that regulators are serious about market structure, the UK's FCA has sent out a call for inputs as part of its wholesale financial sector review.
The review comes at a time when US legislators are holding hearings with industry players to get a better understanding of how colocation facilities operate.
Patrick Lastennet, director of business development in financial services for Interxion, a European data centre provider, said the call for inputs is timely considering the level to which exchanges have latched on to this area of the business.
"Five or 10 years ago, exchanges offered colocation in their own data rooms, just improvising an easy access to a select few customers," he said. "Quite quickly they realised that they needed to scale and it needed to be a level playing field."
All of the major European exchanges now offer colo facilities, with huge state-of-the-art data centres becoming a major expense. Lastennet said that a level playing field for network speeds options is the problem, not the availability of colo space.
"Standard used to be 100mb and 1 gigabit. Now, exchanges are offering 10Gb and microwave for a very few (and) soon we could see 40Gb and laser for even fewer," he said.
Exchanges, he added, need to think very carefully about how those services are distributed.
Interxion has a major finance hub close to the London Stock Exchange, some 25 miles from BATS Chi-X Europe and Basildon, where NYSE Euronext's data centre is located. The location, said Lastennet, is ideal for aggregating EBBO.
"Whilst the bulk of industry and Interxion customers don't want a latency arms race, it is important (that the) regulator does not impose specific speed countermeasures," he said. "Which are bound to have unintended consequences."
The firm's financial services customers are split about evenly between prop trading firms with HFT strategies; big brokers and investment banks; and traditional hedge funds.
"Buy side needs to step into the discussion and weigh in on it, say how they view a fair market because ultimately they are the ones who invest money that drive the market," he said.
He pointed out that a market-driven solution such as IEX could find a similar positive reception in Europe as it has in the US. "The whole industry is evolving towards fair access and best execution rather than one particular venue being more competitive in terms of latency," he added.
Market infrastructure expert Graeme Burnett said that fair access is impossible using current aggregation switch technology, which can have a jitter delay of between 0.8 microseconds and 2 milliseconds per switch.
"The latency experience depends on the load of the particular switch you are connected to. This is the major source of latency and jitter," he said.
In other words, firms can find that their messages are subject to delays depending on which switch they are connected to in competition with other firms, which is within the purview of exchanges.