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How to Choose an Exchange Technology Provider



July 25, 2023

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James Poole, Executive Director, Aquis Technologies
According to PWC’s 2022 Crypto Trading Report, over 50% of companies surveyed that have traditionally traded in financial instruments are now engaging in trading in the digital asset landscape. It’s no secret that exponential growth in this sector has led to an explosion in trading venues and technology firms looking to service them across both traditional financial markets and alternative asset classes such as fine art and property. These technology firms provide:
  • matching engines
  • execution management systems
  • crossing networks
  • risk management
  • operations
  • consulting
    …and more.
So, what are the key considerations for an exchange business when choosing a technology provider?
Regulatory landscape – This is arguably the most time restrictive and crucial aspect of establishing a trading venue. Different jurisdictions have their own regulatory requirements, and it is advantageous to choose a provider who understands this area well. Some providers may offer guidance through the application phase and be well placed to do so if they run their own venue or have an established local client base. They could even be more cost effective than the ‘big 4’ consultancies, which also provide this service.
Deployment type: cloud, on-premise or hybrid? - With cloud computing now one of the key areas in technology and finance/trading, the movement of exchange infrastructure to a cloud presence as opposed to physical data centre-led deployment could define how your market scales and performs.
Knowing your market and USP is important: if ultra-low latency is critical to the success of the exchange, the decision to go on-premise is appealing. However, the trade-off here is high hardware and overhead costs; particularly with global chip and material shortages which have rocked supply chains. Venues should remember that in addition to initial purchase costs, there will be regular hardware refreshes required – plus the cost of expansion should the exchange need to scale up. By contrast, cloud-based exchanges have quicker speed to market and can be scaled in near real time.
It is common for new venues to eventually transition between these deployment types, with the option for a more cost-efficient cloud deployment for speed to market and low initial cost of ownership, and the intention to move onto a data centre deployment with lower latency once the market gains traction. It is important to choose a provider that has a deep of knowledge of both, facilitating an easy transition between them without having to uproot all the critical infrastructure by moving to a new provider. Some providers can facilitate this journey by providing a hybrid model, combining the benefits of a data centre-based deployment while maintaining some of the efficiencies found in the cloud.
Market mechanism – If a venue’s traded product is liquid with a ready-made audience, a continuously trading central limit order book (CLOB) market may be the best route from day one. However, with more illiquid markets looking to fractionalise and tokenise, venues need to consider different market structures. Nothing kills a venue faster than a lack of liquidity, i.e. at best a market with extremely wide spreads and at worst an order book with no bids or offers, deterring participants from showing their hand or having no security in the ability to exit their trade. Another option could be auction-based markets, which can run an auction for a configurable amount of time allowing a slow - but sure - book build. These initial auction periods can be anywhere from weekly to daily or even shorter. As the market grows and participation increases, the exchange can increase the frequency of these auction periods. Venues should ensure their providers are able to support a wide range of market mechanisms and aid with seamless transitions as they grow or the market they operate in changes.
These are just a few of the basic considerations among many that could define the success of your trading venue from a robustness, legal, cost and participant buy-in front. Technology providers will of course be selected upon several metrics, but one that deeply understands your expected journey especially from a regulatory landscape, can provide you with the most proportionate and relevant deployment strategy - and can provide a number of relevant options operationally throughout that journey - would not be a bad start.
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