Analysis: Zayo targets low latency market

18 June 2012 |

If competitors in the rapidly changing North American metro market were hoping for a period of grace while Zayo’s ever-acquisitive head Dan Caruso beds down his $2.2 billion purchase of AboveNet, they will need to think again.


For Caruso is harnessing the legacy assets of another high profile acquisition – the $320 million purchase of 360networks last year – to launch a new foray into the premium market for high-speed connectivity.

Specifically, Zayo is unveiling an ultra-fast link between Seattle, gateway to Asia’s frothing stock markets, and Chicago, home of the world’s largest futures and options exchange. By amalgamating key parts of 360networks’ old footprint, Zayo has been able to chop the best part of 160km off the current route.

That might not sound like very much on a span that currently stretches the best part of 2,800km but among certain banks and hedge funds who use highly complicated computer programmes to exploit minute aberrations in global stock and bond prices, the improvement could translate into an advantage over competitors of anything up to 1.5-2.0 milliseconds.
And in a world where every millisecond advantage is estimated to be worth around $100 million a year in trading profits, such a dramatic improvement will attract highly sophisticated buyers willing to pay anything up to twenty times the price for connectivity that other business customers are willing to offer.

Expectations at Zayo are clearly high – engineers are deploying a native 100G system, scalable to 4 Terabytes and the provider is also assessing the potential to overbuild a dark fibre service on the route if customer demand materialises, as the company expects, later this year. If the initiative, which is born of Caruso’s determination to sweat his ever-growing portfolio of assets, marks Zayo’s first significant push into the low latency market, it is unlikely to be its last.

AboveNet is a major force in the high frequency trading segment, boasting one of the fastest links on the busiest financial route in the world (London to Frankfurt), as well as offering low latency alternatives on a plethora of routes along the US’s east coast.

As if to underscore the point, the company recently announced a deal to provide low latency connectivity to the BATS Europe and Chi-X Europetrading platform, the largest stock exchange in Europe in terms of market share, further underlining its commitment to the financial vertical.

Insiders at Zayo are already working on leveraging AboveNet’s high-speed assets and when the business is fully integrated, Zayo will have a truly impressive armory of low latency services linking Asia’s biggest financial market, the Tokyo Stock Exchange, through Seattle to Chicago and New York and then on to London, Paris and Frankfurt.

Those aspirations edged a step forward in early June, when shareholders in AboveNet overwhelmingly voted to accept the Zayo bid. Some analysts question whether the low latency market can ever be anything other than a niche segment. Such is the level of competition in the market, that incumbent providers must typically look to slice 10% off the latency on critical financial routes each year to hold on to existing customers, let alone pursue new business opportunities.

Moreover, the universe of potential customers is a challenge to tap: even on the more popular routes, the pool of hedge funds and banks willing to pay top dollar for market-beating connectivity can struggle to get much beyond the high hundreds.

But there are signs that other enterprise verticals are talking up their need for speed. Research networks, healthcare companies and online gaming businesses are obvious examples, but a more interesting opportunity might lie with the roll out of LTE and the rapidly evolving demands of wireless backhaul providers, particularly in key metro areas. Either way, a recent flurry of initiatives points to a new focus on low latency offerings.

Earlier this year, a joint venture between Perseus Telecom and Reliance Globalcom claims to have set a new record for a transatlantic network connection using Flag Atlantic’s northern cable, linking Long Island in New York with Land’s End in the UK.

Meanwhile Verizon has launched a new ultra-low latency connection between Chicago and New York offering round-trip speeds as low as 14.5 milliseconds, trumping an earlier benchmark of 15.9 milliseconds set by Sidera and Spread Networks towards the end of last year.

The financial motivation to keep driving latency rates down – the so-called “race to zero” – remains attractive enough to spur Zayo into action. That might be extremely good news for customers but less welcome for rivals.