Latency equalisation: The need for fair and non-discriminatory colocation services

The significant upgrades to trading infrastructure, improved transparency and general best practices necessitated by MiFID II have turned a spotlight on low-latency market access and are driving a renewed demand for functional and scalable colocation provision.

It’s no longer enough to be optimally connected for maximum trading advantage – under MiFID II, it also has to be equitable as per the regulation’s ‘latency equalisation’ provisions.

Under Articles 48(8) and (9) of Directive 2014/65/EU in MiFID II, trading venues are required to provide “transparent, fair and non-discriminatory” colocation services that “do not create incentives for disorderly trading conditions or market abuse.” The regulation extended the provisions to cover multilateral and organised trading facilities, and the common requirements of the regulation apply to all types of colocation services as well as to trading venues that organise their own data centres or that use data centres owned or managed by third parties.

Trading venues do have a modicum of control – they are able to determine their own commercial colocation policy, provided that it is based on “objective, transparent and non-discriminatory criteria to the different types of users of the venue within the limits of the space, power, cooling or similar facilities available.”

In other words, trading venues cannot discriminate between users – they must provide all subscribers with access to the same services on the same platform under the same conditions - from space, power, cooling and cable length to data access, market connectivity, technology, technical support and messaging types. In addition, trading venues have to monitor all connections and latency measurements within the colocation services they offer, to ensure the non-discriminatory treatment of all users with each type of service offered.

Fee structure plays an important part in this. Trading venues must be sure that users are able to subscribe to only certain colocation services, and are not required to purchase bundled services. They must also use objective criteria when determining rebates, incentives and disincentives. Fee structures that contribute to conditions leading to disorderly trading conditions through encouraging intensive trading and that may lead to a stress of market infrastructures are therefore prohibited – although volume discounts are allowed under certain circumstances.

Transparency is a significant component of this requirement too. Trading venues must publish the details of their arrangements – including information on the colocation services they offer, the price of the services, the conditions for accessing the services, the different types of latency access that are available, procedures for the allocation of colocation space and the requirements that third-party providers of colocation services must meet.

In the light of these new requirements for electronic execution venues, and with the new Systematic Internaliser regime arriving on September 1, 2018, the importance of choosing the right hosting venue has become increasingly important. Financial services firms must be sure they are working with a data centre operator that understands the specific requirements of MiFID II and is able to partner with the firm towards complete compliance.

Interxion is leading the way with the launch of LON3 in October - the latest addition to its London data centre campus, situated right between the Square Mile, the centre of global finance, and Tech City, the 3rd largest technology start-up cluster in the world. Its geographical proximity to the London Stock Exchange, equidistant between the key hosting centres of Slough (BATS, EBS) and Basildon (ICE Futures, Euronext), and access to microwave connectivity to Frankfurt (Eurex) make it unequaled in terms of European trading venue access. This central location yields major speed advantages for multi-venue trading strategies and enables optimal order book aggregation / consolidation for best execution under MiFID II.

To find out more about the ongoing challenges of MiFID II, download our MiFID II: What’s Next? Whitepaper.