How Data Centers Power Wall Street and the Financial Sector

Nov. 21, 2018
Data is the lifeblood of the financial services industry. Here’s a look at the many ways that Wall Street and the broader financial sector rely upon data centers, and the evolution of that relationship.

The movement of data is the lifeblood of the financial services industry. That data must move fast, and be stored securely. The financial sector is dealing with an increasing volume of data to be managed, whether analyzing it for trading purposes or using cybersecurity software that monitors data for possible instances of fraud or noncompliance.

As a result, the financial services industry’s reliance on data directly impacts the data center industry, and will continue to do so for the foreseeable future. Here’s a look at the many ways that Wall Street and the broader financial sector rely upon data centers, and the evolution of that relationship.

Electronic Trading Drives Demand

The shift to electronic trading has been a significant factor in the financial sector’s use of data centers. It has increased access to financial market data, allowing anyone with an Internet connection to get involved in stock trading. Trading happens all over the world, and data centers must handle the demand and perform consistently.

The importance of IT infrastructure grew as Wall Street firms embraced high-frequency trading (HFT), an advanced form of computer-driven data analysis that involves capitalizing on minute shifts in market activity. To do that, traders use software that pores over data and takes automated actions based on the conditions. It’s possible to see developments a few milliseconds sooner than other traders and gain a competitive advantage. Such small spans of time could make noticeable differences in the fast-paced world of high-frequency trading.

Proximity hosting is a type of colocation which allows traders to be physically close to the IT systems where trades are executed, while simultaneously taking advantage of multiple data flows. The rise of HFT and proximity colocation correlates with a vast growth in the flow of data, although the amount has leveled off recently.

One of the most prominent data centers serving the financial services sector is called Equinix NY4. It’s in Secaucus, N.J., and home to the “matching engines” that support trades for several major exchanges. These matching engines uses algorithms to allocate competing trades among competing bids and offers priced the same. The Equinix NY4 building is large enough to hold five football fields, and is one of cluster of Equinix facilities in Secaucus that have played a role in the rise of digital trading.

Data Centers Aid in Meeting Compliance Requirements

Like the medical sector, the finance industry must abide by regulations that dictate the treatment of data and other operations. For example, as of March 2017, financial institutions had to follow cybersecurity-related rules by performing risk assessments and maintaining risk-based cybersecurity programs. In many cases, that means using platforms that collect and analyze data, then give alerts about potential issues.

Power and cooling equipment at an Iron Mountain data center in Manassas, Virginia help keep financial clients online at all times. (Photo: Rich Miller)

Also, numerous regulatory authorities address the financial sector’s plan to unveil new security requirements soon. Financial institutions must stay aware of cybersecurity threats and the data breaches they could cause to remain compliant.

Data centers may collect security-related data, but they support compliance measures in other ways, too. Cloud computing can capture data through logging, then retain it for the required amount of time. Data center location is crucial, as well, because local regulations state information must stay within country borders.

Also, data centers can assist with access to data, and classify it for more straightforward sorting later. In the event of data loss, many facilities operate around the world can replicate workloads to speed up the time it takes to achieve data recovery after failure. Together, all these factors arguably make compliance easier to reach than before such data center technologies existed.

How 9/11 Changed the Data Center Landscape

New York’s financial industry is responsible for more than 39 percent of its total economic output. Data centers are primarily responsible for keeping pace with the financial sector’s demand in Manhattan. However, several events forced New York’s data center market to evolve and broaden as it relates to the financial realm.

The terrorist attacks on Sept. 11, 2001 that destroyed the World Trade Center in Manhattan caused financial services firms to move their data centers outside New York City. Initially, many establishments operated within Manhattan or Brooklyn. But, after the events of 9/11, financial regulators encouraged those entities to move outside the city.

They did so in favor of “geographic diversity,” and asserted that moving outside the city to a new location, such as one in New Jersey, would put those financial companies far enough from danger if future attacks happened. This helped a wholesale data center market to get established in Central New Jersey, and it’s still going strong.

A similar relocation of data centers happened in late October 2012, when Superstorm Sandy pummeled the East Coast. Those weather events posed challenges for data centers, especially when it became necessary to move IT equipment out of the flood-prone areas of lower Manhattan.

The Effect of the 2008 Financial Crisis

The same leasing model the tenants of Equinix NY4 use became especially popular following the 2008 financial crisis. Up to that point, the financial services industry built standalone, single-tenant data centers in New York or New Jersey.

A corridor inside an Equinix low-latency colocation facility in Secaucus, N.J. (Photo: Rich Miller)

However, the credit crunch of the 2008 economic troubles placed a premium on holding cash reserves. Data centers are expensive to build, and many financial services companies shifted their business model to make it more suitable to the new economic conditions of 2008 and the following years of the downturn. Instead of spending significant amounts of money to build data centers, financial services companies turned to providers that offered facilities for lease.

Amazon Web Services, which uses a cloud computing model, leasing server capacity instead of physical data center space, was also gaining momentum around the time of the 2008 crash. That’s because this approach lets companies save on IT costs without sacrificing the services they need.

Using Artificial Intelligence to Make Trading Decisions

When financial traders have sufficient information, they can make the most effective decisions as the market fluctuates. People are increasingly using artificial intelligence (AI) to get better results in the financial sector. The AI Powered Equity is an exchange-traded fund that uses AI to constantly check the market for undervalued stocks.

The technology garnered interest among investors and people curious about AI’s potential in the financial realm. Additionally, there are various cases of individuals using AI to analyze Twitter feeds and consumer sentiment to determine how the comments people post online could result in stock price shifts.

A company called Orbital Insight combines satellite imagery and big data analysis to give clients information about their respective fields. In the case of the stock market, Orbital Insight found a decline in the number of cars in JCPenney’s parking lots corresponded with downward stock prices.

AI applications require processing at well-equipped data centers. Unnecessary delays in the financial trading sector could make people miss out on opportunities that could grow their wealth.

The financial sector depends on data centers for success. That will almost certainly remain true as data-driven technologies become more advanced and financial entities explore them.

About the Author

Kayla Matthews

Kayla Matthews is a tech journalist and blogger, whose work has appeared on websites such as VentureBeat, MakeUseOf, VICE’s Motherboard, Gear Diary, Inc.com, The Huffington Post, CloudTweaks, and others. Drawing from her interests in technology and its applications to daily life, Matthews writes about the intersection of technology and productivity.

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