kvh whitepaper: financial extranets

Copyright© 2012 by KVH Co. LTD

All Rights Reserved. Not to be copied or reproduced without express permission of KVH Co LTD

of 8

Financial Extranets

The Global Financial Community at Your Fingertips

WHITE PAPER: KVH Financial Solutions

Table of Contents

2 Introduction: The Connectivity Challenge

2 Factors Driving Demand for Increased Connectivity

4 Key Considerations:

A Wide Community Encompassing the Entire Trade Life Cycle Value Stack

Low Latency

Reliability

Customer Service

Global Reach, Local Knowledge

Language Capabilities

Agility

Security

Value Added Services (Total Packaged Solutions)

6 Conclusion

8 About KVH

Financial Extranets – The Global Financial Community at Your Fingertips

Copyright© 2012 by KVH Co., Ltd. All Rights Reserved

of 8

Introduction: The Connectivity

Challenge

The advent of electronic trading and increasing

market/trading venue fragmentation has started

to expose the significant shortcomings of

traditional leased line infrastructures. Trading firms

today are forced to seek connectivity to multiple

trading venues to ensure they have the widest

access to liquidity and opportunities. As electronic

trading gains a foothold in trading of fixed income

asset classes, which traditionally were traded using

voice systems, the data line connectivity

requirements are growing at an exponential rate.

The post-trade processes are also requiring

automation. As transaction volumes grow, the

settlement cycle shrinks and regulators demand

transparent and structured trading of OTC asset

classes like bonds and swaps. Brokers report they

can be connected to hundreds of clients or more

with every connection backed up with a

secondary line for diversity with a further diverse

link to a remote DR (disaster recovery) site. For

global multi-venue and multi-asset trading

strategies, such network topology quickly

becomes very complex and costly to manage.

Factors Driving Demand for

Increased Connectivity:

1. Deregulation and Liquidity Fragmentation

As deregulation allows more execution venue

competition, liquidity is spread over an ever

increasing number of pools (Exchanges, ATSs, PTSs,

ECNs, Dark pools, etc). Trading firms can gain

advantage by spreading the trading activity

across these multiple pools. However, this

advantage is quickly negated by the complexity

and cost of the connectivity required.

2. Adoption of Electronic Trading in Fixed Income

OTC Markets

Fixed income markets, particularly in Asia, have

been slow to adopt electronic trading. With

increased use of algorithms and the need to

enable regulatory compliance, gradual adoption

of electronic trading methods is gaining a foothold.

Traditionally, the fixed income markets trade

through (dealing) voice networks which offered

an endless array of counterparty connectivity.

Replacing these hitherto voice networks with

internally managed point-to-point or MPLS data

connectivity soon becomes an unsustainable

endeavor due to scale and complexity.

3. Automation or Straight Through Processing

(STP) for the Post-Trade Processes

The drive to achieve efficiencies in the post trade

cycle requires increasingly ubiquitous connectivity

with all manner of post-trade value stack

counterparts. Further, a lot more of the post trade

processes are increasingly being executed via the

“Application as a Service” operating model rather

than via in-house application deployment

operating models. Again, deploying the necessary



of 8

connectivity via internally managed point-to-point

or an MPLS data network soon becomes an

unsustainable endeavor due to scale and

complexity.

4. Increasing Transaction Volumes in Equities and

Exchange Traded Derivatives

The adoption of algorithmic trading has generally

led to decreased order sizes and consequently an

increased number of trades necessary to fill the

same number of securities purchases. These trades

are likely to be executed with many different

counterparties which in turn expands the number

of counterparties a trading firm requires to be

connected to in order to complete the post-trade

confirmation, matching and settlement processes.

Increasingly, trading participants are seeking to

mitigate their connectivity challenges through

partnerships with financial extranet providers.

Financial extranet platforms enable trading firms

to access numerous liquidity pools and numerous

trade life cycle value stack service providers

through a single point of access without sacrificing

Simplified Connectivity to Ecosystem Partners



of 8

the speed, reliability, security and exclusivity that

financial transaction communications require. The

benefits of financial extranets are in the

streamlining of communications between a given

market participant, their trade life cycle service

providers, the trading venues, their counterparties

and the designated reporting entities and

regulators, as well as the inherent cost efficiencies

of not having to manage the complex

connectivity portfolio.

A key challenge for connectivity solution

architects is understanding which extranet service

providers can best meet their current and

anticipated business needs as the markets and

their customer demands evolve. This whitepaper

aims to outline the key considerations that should

factor in the assessment of financial extranet

service providers and discusses the benefits

expected of such considerations particularly in

Asia.

Key Considerations

A Wide Community Encompassing the Entire Trade

Life Cycle Value Stack

The extranet service needs to be able to reach a

wide community of trading participants, execution

venues and ECNs. In addition, the connectivity

requirements of most trading firms increasingly

include access to all trade life cycle value stack

players. In a bid to bring cost efficiencies to their

business models, many trading firms are opting to

outsource rather than internally source many

processes that are necessary but do not add

differentiation in their line of business. The ability to

seamlessly access these support services is

essential for the success of the new operating

models. The financial extranet community needs

to connect to ecosystem hosting environments,

such as colocation and proximity hosting centers,

with service providers that offer on-demand trade

life cycle support services.

Low Latency

Although ultra low latency is not a primary driver

for connectivity achieved via a financial extranet

platform, some measure of acceptable low

latency is now expected. As algorithmic trading

becomes the norm for capital markets trading,

prices in all asset classes are moving much faster

than previously seen. Thus, the ideal extranet

service should be built on a high throughput,

low-latency backbone to match the evolving

speed requirements of traders. A provider with an

extranet service layered on top of a legacy

general purpose carrier network will not suffice.

Reliability

Because the financial extranet connectivity forms

a critical foundation in the business processes of

trading firms, reliability is of utmost importance.

When an extranet is used to connect post-trade

processes, direct financial repercussions can be

incurred if settlement is not effected within the

stipulated time limits. To meet the needs of the



of 8

financial services industry, financial extranets

should be built upon highly resilient networks that

are professionally monitored on a 24 x 7 basis.

Financial firms should thoroughly assess their SLAs

(service level agreements) in order to guarantee

they receive the level of service and performance

quality they are paying for.

Customer Service

Using an extranet service to connect with your

counterparties and other partners, substitutes a

firm’s own interaction with the said counterparts

and partners with that of the extranet service

provider. It is essential that the extranet service

provider has a track record of excellent customer

service and is able to respond to your

counterparty’s needs with the same level of

service as would be expected of an internal team.

Global Reach, Local Knowledge

Asia Pacific is a unique market with a range of

different market structures, regulations, corporate

rules and infrastructure maturity levels. Execution

venues, ECNs and regional service providers have

an array of connectivity architectures for financial

firms operating within Asia and internationally, it is

critical to leverage an extranet service provider

that offers global reach and yet has enough local

Multipurpose Access via a Single Network Link



of 8

expertise and experience to navigate through

complexities inherent across the region.

Language Capabilities

For international firms extending their connectivity

across Asia, multilingual support is vital during and

following service implementation. Service

providers with multilingual capabilities throughout

the organization will be able to resolve

cross-border operational issues much faster.

Agility

The ability of financial extranet service providers to

provision connectivity in the shortest possible time

(usually 1 or 2 days) can make a big difference to

a trading firm’s bottom line. Each day spent

waiting for network connectivity translates to

missed opportunities. In Asia, where the maturity of

infrastructure and the service expectations vary

greatly from one jurisdiction to another, having an

extranet service provider that brings predictability

to the provisioning process is critical for business

planning.

Security

Financial extranets that use privately managed,

purposely built networks will ensure optimal

security as all participants with access to the

network are vetted community participants. It is

desirable that the extranet has very restricted or

no gateways to the public Internet. Further, by

using an extranet service provider, trading firms

can also ensure they are benefiting from the

services of highly specialized network security

professionals, without needing to make these

internal staff hires.

Value Added Services (Total Packaged Solutions)

The range of value added benefits offered by the

extranet service provider can also be important.

As well as network connectivity, financial firms

today rely on highly secure and robust data

center facilities and, increasingly, private cloud

and managed dedicated server infrastructure

environments for the storing and processing of

their vital business information. For financial players

wanting to leverage a financial extranet service

provider, it would be significantly more

cost-efficient to use a service provider that also

offers data center and cloud services as part of a

total end-to-end solution.

Consequently, the more customizable and flexible

service providers will be able to more effectively

meet the customer’s needs and develop optimal

solutions for their trading strategies.

Conclusion

Financial extranets offer financial firms a low-cost

and highly effective way of connecting with other

market players globally at the fastest speeds and

within a highly secure environment. For firms

trading in or with Asia, it has become necessary to

leverage a financial extranet service that offers a

rich ecosystem of financial market participants



of 8

and service providers over an international

low-latency network, as well as Asia-specific

expertise and professional services, reliable SLAs,

multilingual support, and a broad menu of IT

solutions that can be flexibly integrated into an

end-to-end solution to support ever evolving

trading strategies.



of 8

About KVH

KVH is an Asia Pacific IT Services and Data Center Services Provider established in Japan. KVH’s

Information Delivery Platform delivers integrated cloud and network solutions and best-in-class service to

its customers. KVH owns infrastructure and provides services that enable clients to store, process, protect

and deliver their vital business information. KVH provides IT Services, Cloud Services, Data Center Services,

Managed Network Services, and Professional Services.

KVH has a presence in Tokyo, Yokohama, Osaka, Hong Kong, Shanghai, Singapore, Seoul/ Busan, and

Chicago, and serves over 1,900 customers in broad industry segments such as financial services,

manufacturing, media, gaming, and e-commerce. More information on KVH can be found at

www.kvh.co.jp/en/

kvh whitepaper: financial extranets

Technology