Aug 22, 2018
Eurex | Eurex Clearing
The art of designing markets. Part IV
Market design recognizes that well-functioning markets are more than the confluence of supply and demand. They depend on detailed rules. Market designers try to understand the rules and procedures as well as the workings and requirements of particular markets well enough to fix problems or to build completely new markets when they seem promising.
This is the fourth article in a series of topics related to the market design of electronic market places. The first article discussed the most common execution models in electronic derivatives markets, the second covered the various components of an order-generating process that define its arrival time, giving us an overview of the three steps market participants need to generate and submit an order to an exchange. The third reflected on the electronic exchange connectivity options for indirect exchange participants such as institutional and retail investors. This article does the same for the direct exchange participants i.e. the members of the exchange.
Randolf Roth, Member of Eurex Frankfurt Executive Board, responsible for market design
Let’s first simplify the world by grouping Eurex members into two groups: The latency-sensitive members deploying – at least for some parts of their business – a latency minimizing infrastructure by doing all three steps of the order generating process described in article two of this series as fast as possible. That does not mean that all of these members are latency-sensitive for most or even all of their business. Accordingly, most of the large investment banks also fall into this category, even though for the vast majority of their business super-fast latency is not relevant. Obviously all market makers/liquidity providers and most of the proprietary trading firms are also part of this latency-sensitive membership group. Despite the wide definition of this group, with 120 members it contains only about one third of Eurex members. The remaining 249 members we consider in the following as the non-latency-sensitive members. For both groups the connectivity package for sending orders consist of two parts: The connectivity between their servers and our servers and the “Trading system usage sessions” which are needed as entry into our exchange server gateways.
Different options for different members
Non-latency-sensitive members have 3 basic options to connect to the exchange with different cost and speed/latencies but also throughput implications: a) Internet, b) Leased Line from different locations and c) via a Third Party Connectivity Provider called a “Multi-Member Service” provider. Each of the latter two options contains various options in themselves, differentiating by bandwidth and channel. For the “Trading System Usage Session” Eurex offers four different options of which the two “low latency session types” are most relevant for this customer group. Total connectivity cost for this type of members starts at €300 per month.
For the latency-sensitive members, Eurex provides a Co-location service and invests significantly into ensuring that all latency-sensitive members are treated equally based on the infrastructure Eurex provides. The third party-owned Eurex Co-location Centre consists of two separate Eurex rooms (for failover purposes) hosting the matching engine for Eurex products and a group of rooms where the latency-sensitive participants have their servers. These servers cover all three steps of the order generation as described in part II of this series. The Eurex matching engine in each room is separated into 10 different partitions where the different products are allocated. Between the rooms of the matching engines and the members trading engines are super-fast datalines ordered by the members with differing bandwidth, the fastest ones being 10Gbit/s. Many members operate several of these lines to cover the variety of products. Eurex ensures that all of these lines have the same length independent of where in the different rooms the members have located their servers. In addition, Eurex has initiated several steps to simplify the network to reduce complexity and maximize fairness.
While Eurex generates revenues from the Co-location Centre it by no means tries to maximize its revenues as witnessed by the fact that we do not operate it ourselves. In addition, we have implemented both an upper limit on the number of “Trading System Usage Sessions” as well as the number of datalines participants can use in order to limit and steer the race on technology and speed. In the next article, we move away from the super-fast electronic world and look at the market segments which are still organized via phone and chat.
