Low-latency networks and high-performance data centers are bolstering Asian financial markets
NTT Com Global Watch vol.3, Revised March 2015
International financial trading systems continue to operate at ever-increasing speeds. In transactions that require peak performance from computers and networks, even delays of one microsecond (1/1,000,000 second) can have devastating results. As a consequence, demand is rising in fast-growing Asian financial markets for networks that enable fast and reliable high-frequency trading.
This demand has put the spotlight on NTT Communications' backbone network, which links Asian financial centers (Tokyo, Hong Kong and Singapore) with North American exchanges and high-performance data centers.
The microsecond precision of high-frequency trading is spreading worldwide
In the world of financial trading, a moment's delay in decision making can create significantly different results. The information obtained in a moment can lead to a million-dollar profit or loss. The efficient generation of profits in today's financial markets requires swift access to trading data, quick discernment of trading opportunities, and taking action without delay.
In recent years, the speed of decision-making is ever increasing. This is because algorithmic trading and automated trading using computers and networks have become commonplace. Algorithmic trading is an automated trading method that repeatedly places orders automatically after a computer program determines the trading timing based on fluctuations in the stock price and trading volume. To achieve this automated trading, the trading strategy of repeatedly placing thousands or tens of thousands of orders per second, known as high-frequency trading (HFT), is employed.
According to the "JPX Working Paper: Analysis of High-Frequency Trading at Tokyo Stock Exchange" released by the Japan Exchange Group, using the estimates of the "TABB Group cited by World Federation of Exchanges (2013)," approximately 50% of trading on the U.S. stock market and approximately 30% of trading in Europe is estimated to be HFT.
The number of investors using HFT in Japan is also increasing. For example, the Tokyo Stock Exchange built a secure and highly reliable trading system called "arrowhead" that can handle large increases in trading volume and value, which was launched on January 4, 2010. This system succeeded in accelerating the order response time to two milliseconds. It has now achieved an order response time of one millisecond to meet the demands of investors using HFT.
The restructuring of arrowhead is underway, with a start date of September 24, 2015, to handle fluctuations such as large increases in trading volume and value beginning in 2013, the development of electronic transactions, the integration of spot markets, and new investor needs.
Improving trading system performance is not enough to address the issue of speed. Two other components that are critical to success are 1) A high-quality, reliable data center to manage and operate the trading system and 2) A fast, high-quality, network to connects investors and the trading system. On the Tokyo Stock Exchange, a highly reliable, low latency network called "arrownet" takes full advantage of the performance of the arrowhead trading system. In addition, "arrownet-Global" was introduced to provide optimal access for overseas investors.
Providing one-stop connectivity between the Japan market, major overseas markets and investors, high quality, low latency, international network services were achieved.
As trading escalates globally, the linking of exchanges in Asia and North America is gaining the greatest attention. London, New York, and Tokyo were previously considered the three major international financial centers, but with Japan's stagnating economy in the 1990s and the growth of other Asian markets, the three global financial centers are now London, North America, and East Asia including Hong Kong, Singapore, Shanghai, and Tokyo. HFT has even expanded into Asia, and Hong Kong, and Singapore, in particular, are growing as the hubs of Asia.
Hong Kong and Singapore are taking the lead in Asian financial markets
Hong Kong financial markets continue expanding, supported by growth in mainland China
Hong Kong is renowned as one of the world's major markets for currencies and stocks. It ranks fifth in the world as a foreign currency market and boasts an average net daily turnover of USD 275 billion*1. The presence of the Hong Kong Exchange (HKEx) has grown, and, as of the end of 2014, it has total assets of USD 3.23 trillion*2. This figure is near the Euronext market value of USD 3.31 trillion.
One notable feature of the Hong Kong stock market is the large number of Chinese companies listed, and as economic trade relations with mainland China continue to strengthen, the Hong Kong Exchange is securing its position as a major financial center in the Asia-Pacific region.
*1 Source: "Central Bank survey on foreign exchange and derivatives (April 2013 transaction survey)", Bank of Japan Financial Market Authority (September 5, 2013)
*2 Source: Data from the World Federation of Exchange (WFE)
Source: "Central Bank survey on foreign exchange and derivatives (April 2013 transaction survey)", Bank of Japan Financial Market Authority (September 5, 2013)
Source: "Status of international financial centers and finance", Government of Japan (April 18, 2014). Data compiled by the Government of Japan from World Federation of Exchanges (WFE) data
Singapore successfully carried out dramatic financial reforms
Business-friendly financial and tax regulations, as well as countless professionals versed in finance and fluent in English, are among the many reasons why Hong Kong and Singapore have become Asian financial hubs.
In comparison to the daily turnover in foreign exchange markets of USD 275 billion in Hong Kong (April 2013), the Singapore market is larger, with a daily turnover of USD 383 billion during the same period.
Singapore successfully implemented financial reform prior to Japan and other Asian countries. As competition among major exchanges intensified worldwide, the Singapore Exchange (SGX), which was created through a 1999 merger, carried out various deregulations and drastic reforms. The SGX has enthusiastically strengthened ties with exchanges in the U.S., Europe, Australia, and other Asian countries. In 2007, the SGX also launched the Catalist stock exchange to encourage stock listings by startups in China, India, and other emerging countries throughout Asia.
Buoyed by economic growth in emerging countries throughout Asia, financial markets in Hong Kong and Singapore have become increasingly important. Since the volume of high-frequency trading is escalating in these markets (as in the U.S. and Europe), expectations are rising that Hong Kong and Singapore will develop highly reliable financial trading infrastructures that closely link with offices throughout Asia and seamlessly connect with the U.S.
Quality infrastructure linking major Asian cities
Expanding fully functional data centers in Hong Kong and Singapore
In terms of the efforts of NTT Communications in building financial infrastructures in Asia, the Hong Kong Financial Data Center (FDC) completed its initial phase of construction and became the first financial service data center in Hong Kong. The second phase of construction will be completed at the end of 2015.
FDC is a Tier IV infrastructure with the highest international standards for data centers, and it serves as a facility that meets the strong demands of financial institutions with a strategic location and ultra-low latency network solutions.
Singapore followed suit by opening its Singapore Serangoon Data Center in April 2012. Together with Hong Kong's FDC, this facility meets international standards for Tier III or higher, and it is utilized as a strategic infrastructure that accelerates locally developed IT and financial businesses.
High-capacity, low latency submarine cable systems linking Asia and North America with Japan as its hub.
NTT Communications owns multiple submarine cable systems, originating in Japan, which link Japan to Asia and North America. These are used to create a low latency network connecting various financial centers. This is because minimizing the delay between various financial centers is the key to strengthening international financial business.
Fully-functional data centers located in Tokyo, Singapore, and Hong Kong are connected by the high-capacity, low latency, Asia Submarine-cable Express (ASE). Similarly, Tokyo and the U.S. are connected by the high-capacity, low latency submarine cable PC-1.
The "arrownet-Global" network connecting the Tokyo Stock Exchange's "arrownet" trading system with overseas investors is made possible by the global network and data centers of NTT Communications.
The financial network must be a low latency network capable of handling high speeds and high-frequency trading. To ensure its support, NTT Communications is continuing to construct backbone high-capacity, low latency submarine cables, providing quality network and data center services at the forefront of major markets, and support its customers worldwide.