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Tabb Report: Capital Markets Trading Activity Consolidates in 10 Datacenters

After a 10-year building boom that led to excess capacity, datacenters with access to matching engines and liquidity are gaining the edge, Tabb Group reports.

Stay tuned for a shakeout in the datacenter landscape. A re-engineering of the global capital markets trading business has repercussions for datacenter use, according to a new Tabb Group research report.

The past decade's datacenter building boom, fueled by high-performance computing and high-frequency trading, is giving way to a new era of efficiency, according to E. Paul Rowady, a Tabb principal, director of data and analytics research, and author of the report.

Global capital markets trading activity is now taking place in only 10 datacenters located in the New York metropolitan area, Chicago, London, Frankfurt, Tokyo, and Singapore, the report says.

There are more than 3,269 datacenters in 102 countries, but capital markets trading activity is taking place in fewer and fewer datacenters, Rowady writes in the 18-page report with 10 exhibits, including maps of the world's datacenters. A map of capital markets datacenters in the report shows trading activity is concentrated in exchange-owned or third-party facilities operated by players such as Equinix and CenturyLink.

Location, location
Geography matters to capital markets firms that buy co-location and hosting services. Financial firms favor datacenters located in or near financial market centers. The presence of liquidity venues and matching engines sets these datacenters apart from others. Matching engines draw in different market participants and are progenitors of an ecosystem, Rowady writes.

Tabb said in a press release that the main drivers of this change are "regulation-induced automation, particularly in fixed income and interest rate derivatives trading, new governance, risk and compliance (GRC) requirements and disruptive technical innovation."

In Rowady's analysis, depending on which side of the "velvet rope" they sit, certain datacenters are either strategically positioned for growth or destined for the "boneyard."

One result of the post-global financial crisis era is datacenter consolidation, according to Tabb. Resource-constrained firms are seeking to reduce underutilized facilities, which are expensive to operate and maintain. Some financial firms spent hundreds of millions of dollars building datacenters based on business models and demand for capacity that never materialized.

"Only the most optimally located of these purpose-built facilities will be efficient enough to avoid the similar plight of thousands of aircraft parked in the desert," the report says, suggesting that institutions are saddled with depleting assets that will need to be mothballed.

Tabb says in the release: "There will be winners and losers as more industry functionality is moved into hosting, colocation, managed infrastructure and fully managed services arrangements with lower-cost frameworks."

On the winning side, datacenters built for handling computationally intensive applications are positioned for long-term growth. Those saddled with underutilized geographically "undesirable datacenter capacity that were built for unrealistic expectations" of ever-growing trading volumes are at a competitive disadvantage, according to the report.

The new competitive formula for datacenters will be speed, capacity, efficiency, and ecosystem, Rowaday write.

Some datacenters are using virtualization and blade servers to pack higher densities into smaller footprints, but Tabb Group expects legacy facilities to be mothballed or sold in the drive for efficiency. Newer, cost-efficient architectures using pre-fabricated datacenters and software-defined networks are expected to drive datacenter investment.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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Greg MacSweeney
Greg MacSweeney,
User Rank: Author
10/8/2014 | 3:37:11 PM
Re: The future of Mahwah?
There is definitely a move away from proprietary data centers in financial services, and other industries as well. The facilities are tremendously expensive to build and operate. The only way to make a data center financially viable is to build at scale. And, no one can match the scale of the mega providers (Microsoft, Google, Amazon and so on).
User Rank: Author
10/7/2014 | 1:42:11 PM
Re: The future of Mahwah?
I want to add, the Tabb report discourages financial institutions from building their own (Tier 3 and Tier 4) data centers which require very sophisticated cooling systems, military-grade security, redundant back-up power supplies and public/private cloud facilities, to name a few features. In no uncertain terms, Tabb urges financial firms to leave it up to the professionals. I assume this refers to exchanges as well. I don't think we're going to see another exchange undertake another mammoth datacenter build for the forseeale future.
User Rank: Author
10/7/2014 | 9:06:10 AM
Re: The future of Mahwah?
That is an excellent question. Does 30 miles outside of a metro area still provide proximity? There is a chart for the most critical capital market data centers in the Tabb report and NYSE/ICE datacenters in both Mahwah and Basildon is listed for US equities.  NYSE/ICE is  among the data centers with access to liquidity venues and matching engines. There is a lot of trading activity in Secacus and Cartaret. BATS/Direct Edge is is now in Equnix NY4 in Secaucus, while Nasdaq OMX is in Cartaret, which are closer to one another.

In a different asset class, CME in Aurora, Illinois is located outside of Chicago, and is a strategic data center for the futures and options exchange. You'll see a high concentration of FX ECNs in Equinix Secaucus, NYSE/ICE in Mahwah/Basildon ialong with CME/ Aurora and PHLX Cartare.

Interestingly, NYSE Options is colocated in Cartaret which has the Nasdaq/PHLX options markets including eSpeed, while many others, CBOE, BOX, are in Secacus.


Based on the chart, yes Secacus appears to be have the most matching engines/liquidity venues, but still Mahwah is in every category, so it appears to be close enough  to be a major player and is not beyond the velvet rope. 
User Rank: Moderator
10/6/2014 | 7:51:02 PM
The future of Mahwah?
So where does this place NYSE's expensive datacenter experiment in Mahwah? It is state of the art, scaleable and within 30 miles of NYC. But Secaucus, NJ seems to be the new center of the equities markets. 

Is NYSE beyond the velvet rope, or is it still close enough to play a major role?
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