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Capital Markets Outlook 2012

Battered and bruised by a difficult 2011, Wall Street faces another challenging year. We examine 10 critical issues that will set the agenda at capital markets firms in 2012.

Liquidity Centers

The ever-instensifying low-latency arms race is driving increased competition for limited colocation space in heavily populated liquidity centers for exchange-traded products.

By Ivy Schmerken

Why It's Important: Liquidity centers have become the new financial ecosystems for electronic market makers, high-frequency traders and hedge funds running automated strategies. The need for low-latency connectivity to multiple venues is driving more and more of these firms into colocation facilities, where space is becoming increasingly scarce. "People are desperate for new liquidity centers," contends Mike Persico, CEO of Anova Techologies, a provider of high-speed networks. Though it is common to trade among Direct Edge, BATS, NYSE and Nasdaq, only a couple of firms have the multiple connections to trade at the top of book at all of these exchanges, he explains.

Where the Industry Is Now: NYSE Euronext, operator of the New York Stock Exchange and other U.S. equities and derivatives markets, built its own 400,000-square-foot data center in Mahwah, N.J., to house trading firms' low-latency strategies near its exchange matching engines. About 18 months ago Nasdaq OMX expanded its facility in Cartaret, N.J., which it rents from Verizon. Most recently, CME Group built its own 428,000-square-foot data center in suburban Illinois where it will launch colocation services for derivatives products traded on its Globex platform.

Meanwhile, smaller U.S. stock exchanges, dark pools, brokers and financial firms are moving into third-party liquidity centers located midway between the exchange data centers in Mahwah and Cartaret. Direct Edge moved into Equinix's data center in Secaucus, N.J.; and the BATS Exchange operates multiple electronic platforms from Savvis' data center in Weehawken, N.J., where Barclay's Capital colocates its dark liquidity pool. Options exchanges (BOX, CBOE's C2 and the International Securities Exchange) also have colocated their trading platforms at the Equinix facility in Secaucus, to reduce the latency of calculating options prices based on underlying equities feeds.

"These network-neutral locations that are strategically located in New York, Chicago, London, Frankfurt and Hong Kong are the most ideal places to position their infrastructure," asserts Will Speck, senior vertical marketing manager for global financial services at Equinix. "A firm with low-latency requirements will locate some of its infrastructure at a specific exchange's colocation site, but then centrally locate its smart order routers and complex event processing at a hub location [such as Equinix], where they are able to interconnect with other data centers as well."

Focus In 2012: Data center operators and exchanges will open new liquidity centers to meet the demand for low-latency trading in alternative asset classes. CME Group plans to launch trading at CME Colocation Services in Aurora, Ill., on Jan. 29, 2012, promising to offer the lowest latency possible for trading futures on the CME Globex trading platform. Meanwhile, Equinix broke ground on NY5, a new data center slated for completion in Q2 2012 located next to the 600,0000 square feet it already operates in Secaucus (NY2 and NY4). "Firms are increasingly connecting to more markets, trading more asset classes, while strategies we're seeing are becoming more complex," says Equinix's Speck.

As a result, there also will be an emerging appetite for liquidity centers for alternative assets, such as foreign exchange, predicts Anova's Persico. "It's been mostly unregulated, highly liquid and volatile, so it meets the profile of what people are looking to do with their high-frequency trading," he says.

Industry Leaders: Equinix, Savvis and Telx are among the leaders in building and operating third-party, carrier-neutral data centers that have evolved into massive liquidity centers. Fiber Media provides colocation space and data centers in Manhattan, Brooklyn, Westchester, Secaucus, Jersey City and Cleveland. Interxion is a leading European provider of carrier-neutral colocation data center services.

Technology Providers: Anova Technologies is laying fiber optic networks to build the shortest paths for various trade routes. Hudson Fiber and CFN provide a managed service for high-frequency traders, packaging fiber and equipment from other providers. Both Hibernia's Global Financial Network and Spread Networks offer ultralow-latency fiber optic networks.

Price Tag: The cost of colocation can range from $2,000 to $10,000 per cabinet per month, according to a source in the colocation sector, and firms typically need more than one cabinet -- for the largest liquidity centers, firms may need as many as 10 cabinets. Other sources in the automated trading market confirm that it can cost $20,000 or more per month to run high-frequency strategies in U.S. equities from a single third-party liquidity center. And a proprietary trading firm with high-frequency, multi-asset futures trading strategies, for example, might need to colocate in Chicago, London and Singapore.

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