As FX managed services move towards ever-greater flexibility and ease of access to applications, Euromoney considers the key elements in a managed services offering and how it benefits buy-side and sell-side firms.
When it comes to managed services in FX, there are many flavours on the menu. But increasingly, unless they include flexibility and ease of access, you’re not going to get very far. FXecosystem offers three options — managed connectivity (including hosting and cross connects); circuit provision; and flow monitoring. The different elements can be selected individually or as part of a full outsourced offering.
James Banister, the company’s CEO, observes that the first step is gaining an understanding of the liquidity providers that the client needs to be connected to. “We can also manage the procurement of hardware and provide a dedicated cabinet for the rack and stacking of their equipment, which we set up on their behalf. In addition, we monitor the lines and use forensics when required to understand where data flows are causing issues.”
In a perfect world all FX services would be outsourced, says Jock Percy, CEO of Perseus, another service provider that would certainly have plenty to gain from that scenario. But even he concedes that firms will always be hesitant to outsource their proprietary strategies and algorithms.
“That said, the connectivity and infrastructure piece is the most logical first step in outsourcing as it requires large capital expenditure and has already been commoditised,” he adds.
Beyond global capabilities, vendors must possess an in-depth understanding of the marketplace and offer high speed connectivity into key FX markets and beyond, with a track record of serving clients from small hedge funds to the world’s biggest banks, adds Percy.
Jay Hibbin, regional sales director financial services EMEA at CenturyLink, another connectivity provider, suggests that FX trading firms need a clear understanding of what is driving the decision to engage a managed services provider and give some thought to the relative importance of cost, service breadth, redundancy, market venue access and latency/performance needs.
“There needs to be a very clear service demarcation so that the roles and responsibilities of the service provider(s) and the trading firm are clear,” says Hibbin. “Firms also need an understanding of the risks that [UK regulator] the Financial Conduct Authority has identified as needing to be addressed in outsourcing managed services and the requirements for regulated firms.”
Another vital element in the selection of a managed services provider is testing the service, says James Maudslay, senior manager financial services & insurance at Equinix, a data centre and co-location firm. ” Co-location suppliers should be members of relevant internet exchanges and use high quality network equipment and the service provider’s location should have a critical mass of market counterparties.”
Banister adds round-the-clock access to customer support to the wishlist. “FX trading firms should check that their outsourced provider offers 24/7 service — having a team available to do specialist engineering work in real time across all time zones is key.”
Chris Bates, chief commercial officer at Abide Financial, a transaction reporting firm, notes that specialist service providers work with firms to advise and guide on the specific and collective impact of impending regulation and physically manage the transaction reporting process across multiple regimes, from reporting counterparty to regulatory end destination.
“A particular benefit of regulatory reporting as a managed service is that the service offering for buy-side as well as sell-side clients is enhanced continually to anticipate and accommodate changing regulatory requirements,” Bates continues. “Once connected to the managed service hub, all clients benefit from enhancements and are insulated from future change.”
According to Maudslay, specific benefits of FX managed services for buy-side and sell-side firms include low latency; physical proximity to counterparties allowing for high speed execution; potential to expand into new markets; and access to IT skills that may not exist internally.
Hibbin at CenturyLink adds the ability to focus on trading strategy rather than infrastructure, tools and networks and reducing the costs of accessing liquidity to the list of benefits. “For sell-side firms the benefits tend to be reducing the overhead of operational management of infrastructure (particularly if co-located in a third party data centre), consolidation of liquidity venues and reducing the cost and particularly the speed to market of on-boarding clients.”
Banister says that independent service providers can provide unbiased and objective advice on which routes, carriers and solutions best suit their clients’ needs and can offer clients access to other parts of the world without the need for them to procure fibre links.
Outsourcing provides significant cost savings for both buy-side and sell-side firms, according to Perseus CEO Percy. “The buy-side can completely avoid hiring network engineers but still benefit from maximum liquidity options made available with a global connectivity provider. Sell-side firms can leverage an established platform to reach and easily connect to new clients around the world.”
Looking ahead, Maudslay expects further improvements in reliability (uptime and execution guarantee), speed and flexibility, while Hibbin anticipates greater adoption of pay-as-you-go service models that allow infrastructure and services to be consumed on demand and a continued shift by providers of software tools towards a managed service model inclusive of infrastructure and venue market data and execution access.
Banister’s prediction for the future of FX managed services is that it will move to software defined networks (SDN) provision. “This means that we will have one stack of equipment that contains everything, as opposed to separate servers, switches and firewalls,” he explains. “This simplified approach means that clients will be able to take managed services much more quickly and on-demand globally in real time.”
Percy concludes that below the application level there will be complete outsourcing of infrastructure. “At the application level, I expect we will see more options for FX platforms into which trading firms will be able to plug and play different trading strategies.”