The mantra in real estate historically has been location, location, location. In trading, it’s connectivity, connectivity, connectivity. He who connects fastest, most efficiently and thoroughly trades first – and presumably wins.
It’s all about connectivity for the buy side -- plain and simple.
In the beginning, trading connectivity for the buy-side trader consisted of joining a peer-to-peer network, who took the institutional order and assisted in the routing of it to others within the P2P network – broker dealers, exchanges or ECNs. They in turn would shop the order and help it get filled.
P2P gave way to a new and unique way of order routing and transmission -- the hub-and-spoke method – where the buy side could plug into a single central distribution channel point and let it transmit orders to multiple sell-side destinations -- even if they spoke a different variant of communication language. It provided a cheaper, faster, uniform and more secure method for trading. Thus, the first network was born.
These days, the buy side's needs have gotten more complex -- sending out thousands of orders per microsecond, to a myriad of brokers and lit and dark destinations -- forcing networks to become faster, more technologically advanced, secure and reliable. And a few have managed to survive, such as NYFIX, now owned by technology provider Ullink. But for today’s trader, these new systems barely resemble those of the past.
These new systems are not your father’s NYFIX. They are multi-service and -asset, becoming a one-stop shop of services for the buy-side trader. Think of these new networks as a Amazon for the buy-side trading desk; there’s routing, services such as TCA (Transaction Cost Analysis),trade flow analytics, support and even post-trade matching functionalities extending STP to the full order flow.
Richard Bentley, Ullink
And the buy-side trader has certain demands that must be met by today’s connectivity providers, such as performance, reliability, transparency, ease of use, broker neutrality, security and customer support. NYFIX and other providers, such as SunGard, SS&C, Thomson Reuters’ Autex, and ITG , have evolved or formed with these changing times and five needs in mind.
Take for example NYFIX. A neutral, flexible, and fully managed electronic trading solution staffed by FIX Protocol specialists, included more services designed to help the buy-side do its job better. Aside from FIX order routing, they offer IOIs, certification, version translation, and extensive training and educational programs. It was acquired in 2014 by Ullink, a global provider of multi-asset trading technology and infrastructure for buy-side and sell-side market participants. With NYFIX under Ullink’s ownership, the platform has been able to expand its reach further into the buy-side and internationally as Ullink enables its customers to build their own custom trading environments. The combined company manages over 450 trading platforms daily, is connected to more than 100 exchanges and offers over 700 different FIX and API adapters.
“NYFIX has evolved since inception, both in technology and services,” began Richard Bentley, Chief Product Officer at Ullink. “In 2010 the patented Order Routing Direct (ORD) capability was added, providing low-latency point-to-point messaging in addition to the traditional hub and spoke model. NYFIX also launched Managed Connectivity Services (MCS) around this time, allowing firms to outsource their FIX infrastructure completely. New message types like Indications of Interest (IOIs) and exchange and broker drop copies have also been added, alongside new services for message validation, translation and normalization across many different versions and flavors of FIX.”
The other connectivity providers mentioned, have also either evolved or come into the market ready to meet today’s trader’s needs.
So, is the buy-side trader is driving the connectivity bus?
Spencer Mindlin, Aite
Yes, according to a recent report from Greenwich Associates. In its study, “Control and Transparency: How the Buy Side Seeks to Manage Their Broker Network,” the consultancy interviewed 31 head traders and examined how institutional trading desks are using these tools and allocating their flows. The traders participating in the study said they are demanding a new level of control and transparency over their order flow, even when routing via their high-touch sales trader.
Spencer Mindlin, research analyst at Aite Group, agreed, saying that the buy-side indeed has driven many of the changes that connectivity providers face.
“This has been very much a buy-side-driven change,” he told Traders Magazine. “While not forgetting the sell-side’s role in this ecosystem, the buy side decides in the end who it is going to use.”
The Road Ahead
So, what are the biggest challenges for today’s connectivity providers like Ullink’s NYFIX and the others?
The top metric according to market professionals, when examining the performance of the hub and spoke provider, is how many counterparties are on their network. Too few and a trade fails to get executed and quite possibly at an inferior price.
“If you measure success for the connectivity hub and spoke providers, then it would be largely defined as offering the most secure places for a buy-side trader to trade,” Aite’s Mindlin said.
In addressing the issue of trading destinations, Ullink’s Bentley explained that NYFIX is always looking to add to its global network of providers – which currently stands at over 1,500 investment firms across more than 10,000 managed channels (700+ buy-sides, 800+ sell-sides.)
Beyond that, he added that it is ensuring that their platform is leveraging the latest technology so that it is flexible enough to adhere to the ever changing business and regulatory environment. NYFIX, and other providers, strive for zero service disruptions or outages. Also, service providers need to ensure that their turnaround for new connections is fast enough to satisfy the requirements of both the buy-side and the sell-side.
Providers also stress security as a key component to delivering the best experience. All systems, including NYFIX, must ensure both the physical and digital security of their platforms and data through leading-edge security technology and processes. NYFIX employs a multi-tiered network architecture, use of private networks, encrypted VPN’s, secure sockets layer encrypted FIX, firewalls, intrusion detection systems, and application layer load balancers to protect the NYFIX Platform and its users.
“Role-based access controls are in place internally to restrict system access to only authorized users,” Bentley said. “Also, periodic penetration tests are performed against our Internet facing addresses.”
So where does this leave these connectivity providers now?
For one, the cost of the technology arms race continues to escalate as networks continue to complete for not only the buy-side’s dollars and trades but the sell-side’s too. Investment, whether it be in hardware or software must be made deliberately and carefully. Also, changing with the times is a must. Providers, in order to thrive, must remain committed to meeting the buy-side’s needs for transparency, security, broker-neutrality and multi-asset capabilities to keep their place on a trader’s desktop.
