Today, the Johannesburg Stock Exchange (JSE) announced its intention to offer co-location services to its members and their clients seeking to shave milliseconds off execution speeds.
“The decision to offer co-location services is in response to the need of certain clients to offer low-latency trading and reduce connectivity risk. Speed is becoming increasingly important in the exchange industry. Those exchanges that are able to offer the lowest latency will retain and grow market share,” says Leanne Parsons, JSE Chief Operating Officer and Head of the Equity Market. Co-location takes place when market users place their routers and servers as close as possible to the exchange trading systems, even within the same data center, to reduce the distance an order must travel with the aim of minimising order roundtrip latency and reducing execution risk.
In the coming months the JSE will engage with market users, cherry-picking elements from international models in order to define the offering. The exchange may also introduce additional checks and balances on its existing robust automated order entry and direct market access approval processes to ensure that the new offering does not compromise the current sound regulation that the JSE offers, as South Africa’s securities exchange is regarded as the best regulated in the world (as per the World Economic Forum Global Competiveness Report 2010-2011).
The introduction of co-location services will be made possible by the JSE’s implementation of MillenniumIT’s trading software, Millennium Exchange, and the associated relocation of the Equity Market trading engine from London to Johannesburg in the first half of 2012. The exchange is upgrading and enlarging its existing data centre to enable co-location.
“While the primary motivation behind the move from London to Johannesburg is greater operational stability through eliminating trading outages related to international connectivity links, the move also opens up the possibility of additional services, like co-location.” adds Parsons.
Parsons is confident that increased trading volumes and liquidity will follow: “In our experience whenever our technology evolves, higher volumes follow. International evidence suggests that when exchanges introduce co-location they attract a new segment of clients, boosting levels of algorithmic trading activity.”
The move also offers significant benefits for the JSE by introducing a new potential revenue stream to the exchange’s already diversified business. The JSE offers a full range of investment products – including equities; equity, commodity and currency derivatives; and interest rate instruments – and end to end trade services. The move also fits the exchange’s broader investor access strategy. “The JSE is positioning itself as an investment gateway to Africa. In order to do this successfully we need the technological sophistication and advances that international investors are used to.” says Parsons.
Regulation is also critical to attracting international investors. “The accolade from World Economic Forum reflects the JSE transformation from a single product equity exchange to a world class, well regulated fully horizontally and vertically integrated exchange,” says Parsons.
Parsons acknowledges that although much has changed at the JSE during the past decade, there is significant work still to be done, given the rate of change in the global financial services industry. To this end, in 2011 the JSE will implement the replacement of the JSE’s back office system and work towards the delivery of the MillenniumIT trading software implementation. Other key strategic projects include: