That said -- and because the clash between performance needs and resource constraints has recently emerged as one of the industry’s most precarious balancing acts -- the increasing need for optimized co-location and interconnectivity has given birth to the concept of capital markets “eco-centers.” No longer just a data center, an eco-center delivers on the promise of concentrated and comprehensive access to a region’s various matching engines and vendor-supplied workflow solutions, all with an eye toward optimizing interconnectivity relative to specific performance and operating cost requirements. In other words, market evolution has arrived at the point where market participants can now plug themselves into a comprehensive array of functionality under one roof, like a supermarket for high-performance trading and analysis.
With those movements as a backdrop, now enters the post-credit crisis hangover and all the mass transformation that it entails for the swaps and other OTC derivatives markets. Whereas the cash equity and listed derivatives markets started off with a relatively centralized framework, the OTC derivative (OTCD) markets are leap-frogging directly into an uncertain yet highly fragmented and complex market structure. As such, trading institutions have to negotiate a far broader menu of connectivity options and requirements to an expanded array of trading platforms, exchanges, matching engines, risk engines, brokers and other solutions.
As the new rulebook forged by the Dodd-Frank Act (DFA), the European Market Infrastructure Regulation (EMIR), and other regulatory efforts around the globe kicks in, the former bilateral paradigm for swaps will be replaced, in large part with a multi-lateral framework, much like the operational and regulatory attributes of the listed derivatives world. Taking these moves a step further, and particularly in an era seemingly starved for new sources of performance, accessing the emerging “futurized” swaps markets within this eco-center concept offers potential for alpha discovery and harvesting at an accelerated pace.
We don’t yet know all that can be found by approaching these new product segments from a high-performance perspective; it is a journey into the unknown that we will all take together. But the insight that can be gained from accessing and managing each of the growing list of hedging products -- including futurized and cleared OTC swaps -- in a highly-automated manner is hard to refute. Computational prowess is and will continue to be a requirement here. Moreover, there is always opportunity in mass transformative events, particularly when the framework allows for new tactics and an evolving diversity of demographics. It is conceivable, if not highly probable, therefore, that optimized co-location and interconnectivity will quickly become just as important in the new swaps market as it is in any other highly-automated market structure.
So where will this eco-center concept first take root? Even though cleared OTC swaps and the new product launches aimed at mimicking them are still very much in their formative stages, it doesn’t take a crystal ball to make a reasonable guess. The major clearinghouses already have a solid presence in the Chicago market, as do the major clearing brokers (aka: futures commission merchants, or FCMs) and much of the futures trading infrastructure, analytics and support solutions. On top of this, new players in the reformed swaps market, such as Javelin (a swap execution facility, or SEF) and other enhanced trading platforms, have already seen the benefits of proximity tactics by establishing their matching engine at the address of the world’s largest datacenter (and the new heart of the Chicago trading community): 350 E. Cermak. Need we say more?
To learn more about the need for co-location and interconnectivity in the evolving swaps market, join TabbFORUM and Telx on Thursday, Dec. 6, for a live webinar on expanding the role of the 21st century data center to meet new market structure demands.