KVH Whitepaper: Financial Extranets


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This whitepaper aims to outline the key considerations that should factor in the assessment of financial extranet service providers and discusses the benefits expected of such considerations particularly in Asia.

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KVH Whitepaper: Financial Extranets

  1. 1. WHITE PAPER: KVH Financial SolutionsFinancial ExtranetsThe Global Financial Community at Your Fingertips Table of Contents 2 Introduction: The Connectivity Challenge 2 Factors Driving Demand for Increased Connectivity 4 Key Considerations: A Wide Community Encompassing the Entire Trade Life Cycle Value Stack Low Latency Reliability Customer Service Global Reach, Local Knowledge Language Capabilities Agility Security Value Added Services (Total Packaged Solutions) 6 Conclusion 8 About KVH Copyright© 2012 by KVH Co. LTD All Rights Reserved. Not to be copied or reproduced without express permission of KVH Co LTD Page 1 of 8
  2. 2. Financial Extranets – The Global Financial Community at Your FingertipsIntroduction: The Connectivity As deregulation allows more execution venue competition, liquidity is spread over an everChallenge increasing number of pools (Exchanges, ATSs, PTSs, ECNs, Dark pools, etc). Trading firms can gainThe advent of electronic trading and increasing advantage by spreading the trading activitymarket/trading venue fragmentation has started across these multiple pools. However, thisto expose the significant shortcomings of advantage is quickly negated by the complexitytraditional leased line infrastructures. Trading firms and cost of the connectivity required.today are forced to seek connectivity to multipletrading venues to ensure they have the widest 2. Adoption of Electronic Trading in Fixed Incomeaccess to liquidity and opportunities. As electronic OTC Marketstrading gains a foothold in trading of fixed income Fixed income markets, particularly in Asia, haveasset classes, which traditionally were traded using been slow to adopt electronic trading. Withvoice systems, the data line connectivity increased use of algorithms and the need torequirements are growing at an exponential rate. enable regulatory compliance, gradual adoptionThe post-trade processes are also requiring of electronic trading methods is gaining a foothold.automation. As transaction volumes grow, the Traditionally, the fixed income markets tradesettlement cycle shrinks and regulators demand through (dealing) voice networks which offeredtransparent and structured trading of OTC asset an endless array of counterparty connectivity.classes like bonds and swaps. Brokers report they Replacing these hitherto voice networks withcan be connected to hundreds of clients or more internally managed point-to-point or MPLS datawith every connection backed up with a connectivity soon becomes an unsustainablesecondary line for diversity with a further diverse endeavor due to scale and complexity.link to a remote DR (disaster recovery) site. For 3. Automation or Straight Through Processingglobal multi-venue and multi-asset trading (STP) for the Post-Trade Processesstrategies, such network topology quicklybecomes very complex and costly to manage. The drive to achieve efficiencies in the post trade cycle requires increasingly ubiquitous connectivity with all manner of post-trade value stackFactors Driving Demand for counterparts. Further, a lot more of the post trade processes are increasingly being executed via theIncreased Connectivity: “Application as a Service” operating model rather than via in-house application deployment1. Deregulation and Liquidity Fragmentation operating models. Again, deploying the necessary Copyright© 2012 by KVH Co., Ltd. All Rights Reserved Page 2 of 8
  3. 3. Financial Extranets – The Global Financial Community at Your Fingertipsconnectivity via internally managed point-to-point counterparties which in turn expands the numberor an MPLS data network soon becomes an of counterparties a trading firm requires to beunsustainable endeavor due to scale and connected to in order to complete the post-tradecomplexity. confirmation, matching and settlement processes.4. Increasing Transaction Volumes in Equities and Increasingly, trading participants are seeking toExchange Traded Derivatives mitigate their connectivity challenges through partnerships with financial extranet providers.The adoption of algorithmic trading has generally Financial extranet platforms enable trading firmsled to decreased order sizes and consequently an to access numerous liquidity pools and numerousincreased number of trades necessary to fill the trade life cycle value stack service providerssame number of securities purchases. These trades through a single point of access without sacrificingare likely to be executed with many different Simplified Connectivity to Ecosystem Partners Copyright© 2012 by KVH Co., Ltd. All Rights Reserved Page 3 of 8
  4. 4. Financial Extranets – The Global Financial Community at Your Fingertipsthe speed, reliability, security and exclusivity that outsource rather than internally source manyfinancial transaction communications require. The processes that are necessary but do not addbenefits of financial extranets are in the differentiation in their line of business. The ability tostreamlining of communications between a given seamlessly access these support services ismarket participant, their trade life cycle service essential for the success of the new operatingproviders, the trading venues, their counterparties models. The financial extranet community needsand the designated reporting entities and to connect to ecosystem hosting environments,regulators, as well as the inherent cost efficiencies such as colocation and proximity hosting centers,of not having to manage the complex with service providers that offer on-demand tradeconnectivity portfolio. life cycle support services.A key challenge for connectivity solution Low Latencyarchitects is understanding which extranet serviceproviders can best meet their current and Although ultra low latency is not a primary driveranticipated business needs as the markets and for connectivity achieved via a financial extranettheir customer demands evolve. This whitepaper platform, some measure of acceptable lowaims to outline the key considerations that should latency is now expected. As algorithmic tradingfactor in the assessment of financial extranet becomes the norm for capital markets trading,service providers and discusses the benefits prices in all asset classes are moving much fasterexpected of such considerations particularly in than previously seen. Thus, the ideal extranetAsia. service should be built on a high throughput, low-latency backbone to match the evolving speed requirements of traders. A provider with anKey Considerations extranet service layered on top of a legacy general purpose carrier network will not suffice.A Wide Community Encompassing the Entire TradeLife Cycle Value Stack ReliabilityThe extranet service needs to be able to reach a Because the financial extranet connectivity formswide community of trading participants, execution a critical foundation in the business processes ofvenues and ECNs. In addition, the connectivity trading firms, reliability is of utmost importance.requirements of most trading firms increasingly When an extranet is used to connect post-tradeinclude access to all trade life cycle value stack processes, direct financial repercussions can beplayers. In a bid to bring cost efficiencies to their incurred if settlement is not effected within thebusiness models, many trading firms are opting to stipulated time limits. To meet the needs of the Copyright© 2012 by KVH Co., Ltd. All Rights Reserved Page 4 of 8
  5. 5. Financial Extranets – The Global Financial Community at Your Fingertipsfinancial services industry, financial extranets provider has a track record of excellent customershould be built upon highly resilient networks that service and is able to respond to yourare professionally monitored on a 24 x 7 basis. counterparty’s needs with the same level ofFinancial firms should thoroughly assess their SLAs service as would be expected of an internal team.(service level agreements) in order to guaranteethey receive the level of service and performance Global Reach, Local Knowledgequality they are paying for. Asia Pacific is a unique market with a range ofCustomer Service different market structures, regulations, corporate rules and infrastructure maturity levels. ExecutionUsing an extranet service to connect with your venues, ECNs and regional service providers havecounterparties and other partners, substitutes a an array of connectivity architectures for financialfirm’s own interaction with the said counterparts firms operating within Asia and internationally, it isand partners with that of the extranet service critical to leverage an extranet service providerprovider. It is essential that the extranet service that offers global reach and yet has enough local Multipurpose Access via a Single Network Link Copyright© 2012 by KVH Co., Ltd. All Rights Reserved Page 5 of 8
  6. 6. Financial Extranets – The Global Financial Community at Your Fingertipsexpertise and experience to navigate through can also ensure they are benefiting from thecomplexities inherent across the region. services of highly specialized network security professionals, without needing to make theseLanguage Capabilities internal staff hires.For international firms extending their connectivity Value Added Services (Total Packaged Solutions)across Asia, multilingual support is vital during andfollowing service implementation. Service The range of value added benefits offered by theproviders with multilingual capabilities throughout extranet service provider can also be important.the organization will be able to resolve As well as network connectivity, financial firmscross-border operational issues much faster. today rely on highly secure and robust data center facilities and, increasingly, private cloudAgility and managed dedicated server infrastructure environments for the storing and processing ofThe ability of financial extranet service providers to their vital business information. For financial playersprovision connectivity in the shortest possible time wanting to leverage a financial extranet service(usually 1 or 2 days) can make a big difference to provider, it would be significantly morea trading firm’s bottom line. Each day spent cost-efficient to use a service provider that alsowaiting for network connectivity translates to offers data center and cloud services as part of amissed opportunities. In Asia, where the maturity of total end-to-end solution.infrastructure and the service expectations varygreatly from one jurisdiction to another, having an Consequently, the more customizable and flexibleextranet service provider that brings predictability service providers will be able to more effectivelyto the provisioning process is critical for business meet the customer’s needs and develop optimalplanning. solutions for their trading strategies.Security ConclusionFinancial extranets that use privately managed, Financial extranets offer financial firms a low-costpurposely built networks will ensure optimal and highly effective way of connecting with othersecurity as all participants with access to the market players globally at the fastest speeds andnetwork are vetted community participants. It is within a highly secure environment. For firmsdesirable that the extranet has very restricted or trading in or with Asia, it has become necessary tono gateways to the public Internet. Further, by leverage a financial extranet service that offers ausing an extranet service provider, trading firms rich ecosystem of financial market participants Copyright© 2012 by KVH Co., Ltd. All Rights Reserved Page 6 of 8
  7. 7. Financial Extranets – The Global Financial Community at Your Fingertipsand service providers over an internationallow-latency network, as well as Asia-specificexpertise and professional services, reliable SLAs,multilingual support, and a broad menu of ITsolutions that can be flexibly integrated into anend-to-end solution to support ever evolvingtrading strategies. Copyright© 2012 by KVH Co., Ltd. All Rights Reserved Page 7 of 8
  8. 8. Financial Extranets – The Global Financial Community at Your FingertipsAbout KVHKVH is an Asia Pacific IT Services and Data Center Services Provider established in Japan. KVH’sInformation Delivery Platform delivers integrated cloud and network solutions and best-in-class service toits customers. KVH owns infrastructure and provides services that enable clients to store, process, protectand deliver their vital business information. KVH provides IT Services, Cloud Services, Data Center Services,Managed Network Services, and Professional Services.KVH has a presence in Tokyo, Yokohama, Osaka, Hong Kong, Shanghai, Singapore, Seoul/ Busan, andChicago, and serves over 1,900 customers in broad industry segments such as financial services,manufacturing, media, gaming, and e-commerce. More information on KVH can be found atwww.kvh.co.jp/en/ Copyright© 2012 by KVH Co., Ltd. All Rights Reserved Page 8 of 8