News Blog

Could Open Networks Create More Efficient Markets

Switzerland, 7th November 2016.

Over the last few years, there has been much debate on the subject of Net Neutrality, the idea that all Internet traffic should be treated equally, regardless of its content or ownership. It is a hotly argued topic, with proponents lobbying hard on both sides.

Supporters of Net Neutrality cite the benefits of open standards, transparency, low barriers to entry for innovators and equal treatment for all. Those arguing against generally warn of the possible unintended consequences of over-regulation.

The debate will no doubt rage on as the Internet continues to evolve.

Within the Financial Markets industry, it is perhaps surprising that there is much less discussion about the neutrality and openness of trading networks. Particularly given that regulated firms are on the hook to deliver - and prove - Best Execution to their clients.

For Tier One banks, who own and operate their own trading networks, this is not so much of an issue. They have full control of how they route their client traffic and can therefore clearly demonstrate how an electronic order message travelled from point A to point B.

However, regional banks and brokers relying on hosted networks from OMS and EMS vendors have no such visibility into their order message flow. Many of these networks are a completely closed book, with firms having little or no control over how their orders are routed within that network.

This is because there is generally very little information available about how how an order message, once it enters such a network, is handled before it reaches its destination. The order could be going from point A to point B via points X, Y and Z. And there is evidence to show that it frequently does.

The result? Missed prices and lower fill rates.

The consequence? Despite their best intentions, the banks and brokers locked into these networks are restricted from actually fulfilling their Best Execution obligations.

For the sake of argument, let’s contrast this with an alternative Open Network situation, where there could be a much wider choice of routing suppliers, where network APIs could be open to allow for easy interface, where message traffic could hop between whichever is the most suitable network for that particular order, and where banks and brokers would be firmly in control of their client order routing.

That would make for a much more efficient market.

One can understand that the incumbent network suppliers would prefer to maintain the status quo. After all, by locking down their networks they have a captive client base and thus are able to secure short-term revenue.

However, surely the time has come for the industry to encourage these vendors to take a longer-term view. By opening up their trading networks, they will not only encourage innovation amongst their customer base, but also give themselves greater long-term viability as new venues, new asset classes and new instruments come online, all of which will most likely lead to both increased message traffic and new revenue opportunities.