Frankfurt: European Gateway to Global Trading

 

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Frankfurt is home to the Deutsche Börse including Eurex, the world’s largest derivatives exchange by open interest, and the second largest after the Chicago Mercantile Exchange by volume traded or cleared. In recent years Eurex has forged innovative partnerships with exchanges in India, Russia, Korea, Singapore and Taiwan, making it an attractive offshore trading hub for those key emerging markets as well.

This has placed the city firmly in the top 10 ranks of global financial centers. It has also created a magnet for electronic trading firms that cluster their liquidity engines in multi-tenant data centers, such as Equinix’s Frankfurt FR2 data center. Not only does this facility act as the primary trading hub for the Deutsche Börse Group platforms, but it also hosts more than 20 additional trading venues along with 200+ global financial services firms.

It is important to understand that financial centers are more than just trading engines. To be efficient they also need world-class post-trade and payment services. Frankfurt hosts the European Central Bank, the Bundesbank and a key node in the Target 2 real-time gross payment system for euros, the second-largest reserve currency in the world after U.S. dollars. It will also host a Target 2 Securities hub that will offer efficient, real-time equities settlement and auto-collateralization across the euro zone to facilitate pooled liquidity management.

Along with Eurex Clearing and Clearstream, the Deutsche Börse’s own clearing, securities depository and tri-party collateral services facility, Frankfurt provides some of the most highly automated post-trade and risk management capabilities in the world. Moreover, local service providers are already extending their post-trade services beyond the European region, as Clearstream is doing in Asia, for example.

A GLOBAL MARKETPLACE FOR ELECTRONIC TRADING

To understand the implications for electronic traders we need then to think quite separately about those that thrive on speed and the majority of short- and long-term traders who are not latency dependent at all.

Market-making and statistical arbitrage are both focused on speed. They need to colocate their servers either at or near to all the key liquidity venues, including, of course, Frankfurt. For them, network-rich data centers used by exchanges and their members, like Equinix’s FR2 hub, have provided an efficient enabling technology for the high-speed market. Brokers too are installing their algorithmic trading engines (“algos”) close to the action to keep pace or react promptly to sudden shocks. Long-only firms rely on their brokers to deal with these speed issues for them.

Frankfurt is becoming a hotbed for a new breed of algos that, instead of operating using a few sets of data, now consume hundreds of market data points to gain competitive advantage and better predict future market movements. New services are spawning, allowing these algos to grow, ranging from high-quality, deep historic market data to on-demand compute and storage capacity that integrate with the already established, rich market data ecosystem to deliver big data capacity for unparalleled levels of data processing.

Frankfurt is a mere 5 to 8 milliseconds from the London markets, over the latest microwave and high-speed fiber links. For many trading strategies this level of latency is sufficient. For ultra-low-latency players, multiple colocation hubs in both London and Frankfurt are the only solution.

Frankfurt is also closer to Asia and to the Russian or Middle East energy and commodity markets that have become crucial to global growth. Frankfurt-based trading engines, therefore, have advantages in collaborating with these markets. Since Europe relies on imports for more than half of its energy needs, developments in these regions are also vital to European recovery prospects and will no doubt continue to grow in importance for traders. In that sense Frankfurt provides an effective gateway to both established and emerging or frontier markets.

That leaves the vast majority of the trading community of institutional and private investor-traders who are not latency dependent and don’t need microsecond-level access. However, these short- or long-term traders do rely on diverse data feeds to power their portfolio models and on cost-effective connectivity to reach their brokers, multi-dealer trading hubs, clearing agents and custodians around the world.

We live in changing times. Portfolios evolve, risk appetites shift from risk-on to risk-off and back again, and policy shifts completely change the rules of the game. With thin trading volumes, increasing correlation and fitful volatility, traders need constantly to explore new strategies and marketplaces in their search for alpha. That means they need to keep finding new brokers and liquidity venues, new data vendors and supply chain solutions to support trading efficiency, easy data access, time-to-market and shared infrastructure costs. For them, agility is crucial.

Since most of the relevant data feeds are already plumbed into such network-rich data centers, and since overall trading costs grow with the number of feeds, data volumes and distances, choosing a multi-tenant hosting provider in a central location such as Frankfurt will optimize costs and ensure that hundreds or even thousands of potential data and supply chain offerings are only a cross connect away. Trader agility and buying power to support new short- and long-term strategies are thus hugely enhanced.

efs-issue2So while brokers, low-latency traders and short- or long-term traders all have quite different requirements, they can find common cause to share facilities and costs. The more firms that cluster, the greater the attraction for new supply chain partners. It becomes a win-win situation.

Read more about opportunities in Frankfurt (pp. 18-21) in and around the world in our Financial Services Exchange Review.