Managed services provider

In the context of financial trading, a MSP may provide one of many services, such as:

• Infrastructure and connectivity
• Market data feeds
• Colocation and hosting
• Hardware procurement
• Order management and execution services
• Compliance and regulatory reporting

However, in recent times, many software solutions exist for order management and regulatory reporting, allowing firms to take a more self-service approach to managing these functions. As such, it has become less common for a MSP to be associated with those services and more common for an independent software vendor (ISV) to provide software for these functions.

In most cases, MSP provides infrastructure, connectivity, and hosting services. As such, colocation or hosting vendors are also often called MSPs, although the converse is not necessarily true.

A significant part of such connectivity and colocation services include support with hosting servers at the colocation facilities of various trading venues. They may also involve WAN connectivity between data centers or between a data center and the internet. Other connectivity services typically provided by a MSP include cross-connection to the extranets of other major trading ecosystem partners, such as brokerages.

Several MSPs have diversified businesses and may also operate as an independent software vendor (ISV), providing software solutions for order execution and market data feed handlers.

A trading participant can usually host or colocate their servers directly at the data center through the data center operator (like Equinix) or through the trading venue (like Deutsche Boerse). However, this is not always practical as most data centers and trading venues only accept orders at the minimum of a half or full cabinet. This is expensive and most trading participants do not start out immediately with the scale that necessitates a whole server rack.

Another benefit of using a MSP is that economies of scale that it brings when it comes to venue connectivity and access to raw data feeds. Since raw market data feeds and the direct venue connectivity are costly, it makes sense in many cases to share a direct feed and handoff across multiple trading participants.

In such cases, a MSP will set up the connection with the trading venue and fan out the direct feed on their boundary switch. This will usually reduce the cost of the raw feed and handoff by at least half. The cost savings could be even more if the trading participant requires redundant handoffs for their operational risk policies, since a MSP will often have the economies of scale to set up redundant handoffs.

As a trade-off of using a MSP for connectivity, the trading participant may incur the additional latency of one or two switch hops from sharing the connection. However, low latency switches in the modern day have low port-to-port latencies as low as 4 to 5 nanoseconds for data distribution—which is negligible for most trading participants.

Sharing a switch also has the benefit of reducing upfront capex for the end client. Low latency switches usually cost in excess of $15,000 each; a pair of such switches for redundancy could be comparable to the first year cost of hosting a pair of servers.

The administrative burden of connecting to multiple trading venues and network providers could be significant. Using a MSP can consolidate these counterparty relationships into one, making it easier for a firm to deploy across multiple markets sooner.

It's usually inconvenient for a trading firm to employ its own staff to maintain data centers across the globe. Most trading data centers are some distance away from major airports and cities where trading firms are likely to have their offices. A MSP will usually bundle its colocation and hosting service with other operational support, helping their clients with racking, cabling, shipping and receiving. Remote hands services will also usually cover simple functions such as reseating fiber connections and replacing faulty hardware.

Since a MSP has to deal with much larger quantities of hardware, they may have bulk volume discounts for hardware.

A MSP may be able to procure hardware within the country where their client is interested to host their servers, which can reduce significant costs and complexity relating to stamp duty and tax. This is especially important when a non-resident firm is considering colocation in a country with high taxes—a common situation in Europe.

Notable MSPs include Pico, Colt, IPC, Options-IT, and Transaction Network Services.