By Steve Grob, Group Strategy Director, Fidessa
The traditional build or buy dichotomy is being eroded by the costs incurred to keep pace with persistent regulatory changes and rapid technological advances.
Brokerages and investment managers frequently face a choice: whether to build a technology stack internally for their trading operations or purchase the full package from a vendor. Both options have distinct advantages and drawbacks.
An organically devised system can ensure that the firm gets exactly what it needs, it has an opportunity to differentiate from others and the firm is not dependent on a third party if it wants to make adjustments to the system.
However, it is expensive and there is a risk that the project loses its discipline, becomes unfocused, and is vulnerable to staff or departments pursing their own agendas – and even to a new chief technology officer keen to make their individual mark. Although there have been some successes, there have been many disasters. The alternative, a vendor-supplied tech stack, can be scaled for individual requirements, made fit for purpose and can easily be adjusted for future needs. On the other hand, the firm is tied to a particular vendor, which can reduce flexibility and potentially creates legacy burdens later. In the past, larger firms tended to build their own stacks and smaller firms used a vendor, but there is a change underway.
The cost of building from scratch and maintaining systems is now much higher. Continual waves of regulation have become the new normal, as have constant new developments in technology sophistication. At the same time the market evolves too, creating opportunities that need to be addressed, such as the shift from active to passive investment and the resulting surge in ETF trading. But underpinning all of this is the simple fact that the economics of the industry are not what they used to be, and so everyone is faced with doing more with less.
For instance, Fidessa supports more than 200 equity and futures markets globally. Each of these might introduce two upgrades a year prompted by regulatory or other requirements. And so 400 necessary adjustments need to be made to Fidessa’s systems before any value-added improvements are made. This overhead only makes sense if the cost can be shared over multiple clients.
A third way
To resolve these problems, a third way has become increasingly popular: firms are no longer faced with the traditional dichotomy of build or buy.
Much of the different lower level technology that is necessary to instruct, transact and settle trades in exchanges and platforms across the world can be homogenised by firms like Fidessa. As a result, these different venues can be represented as a single, normalised surface to clients and they simply need to plug their tools into this layer to access liquidity.
This creates tremendous efficiencies for both buy- and sell-side firms and not just in their equities businesses, but also for derivatives, foreign exchange and even fixed income. It allows firms to concentrate on developing and retaining high value intellectual property – those smart algorithms, enhanced liquidity connectivity and solid risk controls that distinguish them from rivals.
Indeed, increasingly, investment firms are only differentiating themselves with the top level of the technology stack, such as their algorithms, multi-asset trading capabilities and how they manage and integrate their activities with a central risk book.
The further up the technology stack, the greater amount of intellectual property. But, inevitably, today’s ultra-sophisticated, jealously-protected algorithm soon becomes humdrum and mass-produced.
So, firms are examining the best way to use third-party components in their tech stack, working out ways to glue the pieces together. A typical choice is to amalgamate static or reference data into one securities master storage centre, and Fidessa and other vendors have created systems shared by leading financial firms and implemented across different asset classes.
Post-trade operations in particular are woefully inefficient. Many of the processes are still conducted manually, so there is plenty of room for improvements in cost, speed, accuracy, risk management and compliance.
For instance, it should be straightforward to install FIX-based utilities for post-trade processes in a similar way to pre-trade order-routing.
Greater sophistication, the rapid rate of technological innovation and constant regulatory prescriptions are raising the costs while shortening the shelf-lives of home-grown systems. Hence, the trend, the direction of travel is in only one direction: towards a wider adoption of the build and buy model.
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