The hidden cost of market connectivity


The capital markets have had a tough time over the last few years. From Lehman’s collapse in 2008, through to the recent FX rate fixing charges it seems that one catastrophe after another has befallen the sector in recent years. Combined with the lack of opportunities in certain markets and asset classes, market participants constantly have to seek out new sources of liquidity. On the other side of the coin connecting to new clients efficiently is more critical than ever to maintaining and growing revenues and to balance sheet stability.

For a firm used to trading established, developed markets, connecting to new markets and clients across regions with idiosyncratic venues can be a headache requiring the investment of millions on trading technology to make sure that these connections are secure, reliable and that the market data they need is delivered in a timely way. It’s common knowledge that new connections can take some time to set up – even if only to fulfil regulatory requirements – but how long? And what impact does this have on trading desks?

Colt commissioned an independent survey of 289 buy- and sell-side institutions across the globe. We asked them how long they usually have to wait to connect to new venues (where the provider already has a connection) and how long it takes to connect to new clients. The results were surprising: on average, investment bank trading desks are losing $5m a year per desk due to delays in market connectivity.

39% of respondents said it took more than four weeks to connect to a new market from the time the decision to connect is made to the connection going live. That’s more than a month’s worth of missed trading opportunities and lost revenues. Clearly this is not a fact that’s missed by traders – 49% of traders believe this leads to loss of trading opportunities and 47% say that this delay impacts relationships they have with their clients and can lead to the loss of those clients.

When it comes to the client side, 26% of survey respondents have to wait over a month to be connected to new clients and 10% have to wait over two months. Again, this fact is not going unnoticed – 59% feel that these delays can be reduced.

Optimising connections to minimise delays needs to become a priority for firms which rely on being able to access global liquidity sources quickly to meet revenue targets.

Part of how participants can streamline their connection processes is by involving both service providers and venues earlier in the connection process, potentially even sharing business roadmaps with their most trusted partners. The connection process needs to be a collaborative one, with the institution, service provider and venue working in advance to lay the groundwork for a potential connection so that it can go live at a pre-determined date.

Connecting to new markets is an intrinsic part of life in the capital markets. Due to the prevailing market conditions forcing everyone to look for new sources of revenue, it is more important than ever. If current practices continue, the benefits of expanding into new asset classes or geographies may be outweighed by the losses incurred when connecting to them. This is a challenge that the industry has to solve together, one that needs all parties to collaborate on and one for which the solution will have far-reaching benefits for all concerned.

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