perspective Hong Kong is no stranger to competition. For over 150 years, the city lived by trade where success went to the company with the fastest ship, the most reliable supply or the lowest margins.
Today, Hong Kong's financial sector is also looking to speed, reliability and lower costs to survive in a global equities market that has been transformed by computerized, algorithm driven, high-speed transactions known as high-frequency trading (HFT).
However, to remain competitive and relevant in an increasingly interconnected global equities market driven by technology-based trading strategies, Hong Kong needs to adapt to market changes.
While demand for data center services in Hong Kong is expected to grow at a compound annual growth rate of nearly 10 percent through to 2015, according to Frost & Sullivan research, there will be a fundamental shift in the nature of data centers. In the near future, there will be two types of data centers. The traditional Internet data centers will remain to serve current demands in terms of data storage, but a new generation of data centers is emerging to meet the stringent needs of specific industries such as the financial sector.
As major financial markets become increasingly integrated and global in nature, data centers have to evolve to keep up in terms of network latency, regulatory compliance and physical proximity--to stock markets and financial centers, and so on--to enable new transactional instruments such as HFT.
In trading centers such as those in New York and London, life has changed. HFT now accounts for 65 percent of U.S. equities turnover, with European markets estimated at just under 40 percent and gaining.
Equity markets in the U.S. and Europe have seen rapid consolidation and technology upgrades over the past decade, and now Asia lags behind in adopting the high-speed systems and trading strategies.
At the Tokyo Stock Exchange, for example, HFT today accounts for about 25 percent of total equities turnover. In Singapore, HFT accounts for close to 30 percent of derivatives trading and 7 percent of cash equities. In Hong Kong, only about 5 percent of cash equities turnover is accounted for by HFT.
From the first electronic trading in New York in 1998, transactions were measured in seconds. Today, HFT systems have honed trading time to milliseconds. Traders and exchanges alike have launched an arms-race with IT networks and communications infrastructure the weapons of choice.
While regulatory agencies are still adjusting to the new market reality, algorithm driven HFT sis here to stay. The financial industry, for its part, is quick to point out HFT's value in increasing trade volume and lowering the cost of executions.
For some companies, HFT and algorithmic trading mean a growing need for high-performance, low-latency network infrastructure which minimizes the number of network layers and circuits to speed throughput and lower cost. This calls for a new generation of sophisticated data centers.
Next-gen data centers for survival
What is needed to keep Hong Kong ahead of the game are data centers tailored to the financial industry's needs, with enhanced networks and advanced communications infrastructure. These are the key to its survival as both an Asian financial center and ICT hub.
NTT Communications, for one, has invested heavily in Asia to provide the network and communication infrastructures needed to address this. In Hong Kong, we are building the city's first financial data center designed to meet the requirements of financial services institutions looking to gain a competitive advantage, by leveraging the proximity to NTT's facility and ultra-low latency capability to facilitate HFT and algorithmic trading.
Scheduled to open in 2013, the NTT Communications Hong Kong Financial Data Centre is being built adjacent to the new Hong Kong Exchanges and Clearing's (HKEx) next-generation data center currently under construction in Tseung Kwan O.
This close proximity between trading systems housed in the data center and the trading venue will play a critical role in NTT's ability to offer traders a low-latency strategy.
The financial data center is also in co-location with the cable landing station of NTT's Asia Submarine Cable, which is the access node to the company's global network, enabling low latency connectivity between financial hubs in Hong Kong, Singapore and Tokyo.
Technology alone, however, cannot assure Hong Kong's future as an Asian financial center. The city, though, has advantages--namely, an educated and internationally oriented workforce, a legal system that is respected worldwide, and a power system that has logged significantly less downtime per year, on average, than those in Tokyo, New York or London.
Its location also allows Hong Kong to remain the financial gateway to the world's largest emerging market, China.
Next-generation data centers, ultra-low latency networks and world-class communications will all play a critical role in supporting Hong Kong's bid to retain its role as one of the world's established financial centers as well as Asia's ICT hub.
It will take several years for Hong Kong to move to full HFT mode, but to keep the city on track and competitive with Singapore and Tokyo, financial institutions here will need to ensure their investment in next-generation communications and data center infrastructure is in place and deliver the services they need to compete in Asia and globally.
Brandon Lee is chief strategy officer at NTT Com Asia.