This year saw the London Metal Exchange develop its proximity hosting service in a bid to increase trade volumes and revenues. What this allows is for LME members and clients to put their systems in a data centre close to the exchange’s matching engine, i.e. in proximity.
“A lot of our members and independent software vendors (ISVs) already have connections in these proximity data centres. Importantly, proximity hosting is a shared facility. Clients may access multiple exchanges from the proximity hosting sites; now they can add the LME to that list,” says Glen Chalkley (pictured), deputy head of business development at the LME.
The two proximity hosting sites that LME is using are Equinix LD4 in Slough and Interxion in Brick Lane, London. Clients rent space directly off of them. The LME does charge fees to trade and clear, but the exact costs will largely depend on the volume of trading and will often be tied up with a broker’s commission charges.
As Catherine Markey, head of education and marketing at the LME explains: “The brokers will charge a commission, within which is contained the proximity hosting fee so it’s practically impossible for us to say exactly what these fees are. Some offer fixed commissions or others offer commission-free trading and factor it into the bid-offer spread.”
Whereas previously members connected to the exchange from points of presence across London, these two proximity hosting locations now represent the fastest access points to its matching engines. “If you want to have the fastest low latency access to our matching engine you need to be on one of these proximity hosting sites,” comments Chalkley.
Previously, the LME only allowed normal ISVs such as Ffastfill Plc and Trading Technologies to connect to its trading system. Proximity hosting has now widened the net.
Says Chalkley: “Shortly after the launch of proximity hosting we started to allow market data specialists to connect to our trading system as well. These firms take our market data directly and normalise it into a feed that clients like to receive.”
One clear benefit of proximity hosting is the arbitrage opportunities in copper. Such opportunities have existed for decades but as electronic trading becomes more prevalent it’s opening up further opportunities for arbitrage between contracts on CME Group, MCX in India and the Shanghai Futures Exchange.
One of the groups therefore likely to benefit from proximity hosting is high frequency traders. And from a trading volume point of view, things are already picking up. Chalkley confirms that last year trading volumes were up 22 per cent on 2010 and are already up 10 per cent year-to-date. This probably points to the fact that more HFTs are accessing the exchange than in the past.
Markey notes that for this trading group their interest is probably in copper and aluminium “as they are the most liquid markets”. However, the LME has no intentions of taking a myopic approach by only appealing to one group.
As Markey confirms: “Other areas we think we need to be looking at would be in the OTC space as regulation forces more activity onto exchanges. For example we launched a swap product this January and we’re looking at maybe introducing more options products.”