In this article, orginally published in Best Execution, our CEO, Mike Powell, looks at an emerging approach to making better trading technology decisions.
Capital markets institutions face a heady mix of geopolitical, economic, and structural challenges as they consider their strategic growth plans. With Europe slipping into recession, the Ukraine conflict driving up energy prices, and supply chain issues exacerbated by China’s approach to Covid, central banks will need to tread carefully to subdue inflation without killing off growth prospects. At a market structure level, recent events have raised concerns over crypto markets, although the emergence of digital assets in the long term is still viewed positively. Regulation remains a key factor and there seems to be an interesting battle looming between future iterations of MiFID and the UK’s planned shake-up of the City of London.
This is nothing new. Financial firms will always face opportunities and challenges, but the degree of uncertainty increases the longer they try to look into the future. So, the real question that firms should be asking themselves is not how good their predictions are, but how agile they can be when responding to their changing environment and evolving business plans.
For capital markets institutions, trading technology sits at the heart of all this. Making the right technology decisions is critical to the future success of firms focused on revenue growth rather than cost reduction.
Naturally, the approach taken will differ between firms and be influenced by their objectives. However, I was surprised at a recent event to hear a representative from a mid-tier sell-side broker argue strongly that his firm needed to build their trading technology in-house. While not knowing all their requirements, it didn’t appear that the level of performance they needed, nor their business model, was that unique. I understand the desire for control and ownership, but this comes at a price. The overhead of ongoing support and maintenance is often underestimated and can’t be spread across multiple customers, unlike a vendor. Time to market can be an issue too, as firms look to onboard development teams and skill sets. Critically, replicating standard industry capabilities diverts expensive resource from working on genuine IP that helps firms differentiate and compete effectively.
Obviously, the alternative is to buy off-the-shelf vendor solutions. This can be an expedient means to address a gap in a firm’s offering, launch a new asset class, or replace legacy technology. It also has the advantage of being fully battle tested and so can seem a less risky option. But this approach also comes with its own compromises. The biggest of these is the lack of flexibility as your fate is now firmly in the hands of your chosen vendor. While point solutions can address a short-term need, you become entirely dependent on the vendor’s product roadmap for innovation, restricting your agility. A product approach can also contribute to technology silos, generating unwanted infrastructure and support overhead. Also, given the age of some of these products, interoperability with your broader trading ecosystem becomes a problem. This, in turn, places restrictions on the business (both technically and commercially).
Increasingly though, firms are looking at an alternative approach that avoids some of these pitfalls inherent in the ‘buy vs build’ debate. We are seeing a shift towards the adoption of platform-oriented technology that offers out-of-the-box capabilities for common industry requirements, such as message persistence, FIX and binary protocol translation, high availability, etc., but with a high level of configurability to build competitively differentiating IP or customer specific workflows. This is delivered via a scalable messaging layer, an adaptable rules engine, and open API suites that can easily integrate with a wider technology ecosystem. This type of platform approach can provide firms with a foundational technology that accelerates time to market while allowing you to retain control and ownership.
Whichever approach a firm takes will depend on what they are looking to achieve. We see a shift in thinking within many of our customers that seeks to address the twin headaches of post financial crisis regulation and the accumulation of significant technical debt. Many firms are now pursuing a growth agenda based on differentiation, identifying new opportunities, and refocusing on revenue. And while the temptation may be to deploy point solutions to address burning issues, there is a growing realisation that this is just kicking the can further down the road. Given the increasing pace of change and business uncertainty, a more adaptable approach is clearly needed.
We are hearing from our customers several recurring themes that are driving their technology decisions. I have tried to distill these below:
1. Firms want agile technology that can evolve with their strategy, often in directions they don’t yet know. They want to be able to rapidly deploy new capabilities on a common platform and avoid the pain of implementing different solutions for each initiative.
2. Speed of execution is a major challenge. The time it takes from decision to implementation is too long, often incurring significant opportunity cost. Firms need to move faster.
3. Minimising the impact on the wider technology ecosystem underpins cost efficiency, time to market, and agility. Firms do not want to be locked-in to proprietary data models or narrow standards that may restrict their future technology choices.
4. The ability to innovative incrementally and avoid large scale ‘rip and replace’ projects. Ideally firms want modular, ‘open’ technology that can quickly integrate and build on existing capabilities but also offers a strategic platform for the future.
5. For firms deploying their own proprietary logic or business rules they need to know that they will retain their precious IP and that they are not inadvertently building out the product on behalf of their vendor.
6. Pricing models that are sympathetic during the early stages of revenue generation yet support margin growth as the business succeeds.
Different scenarios will demand different solutions, but there is growing traction for a more strategic platform-based approach to trading technology. Firms are looking for technologies that have the flexibility to support their evolving business strategies while also being interoperable with their existing ecosystem. This enables a more iterative and agile approach, minimising disruption for counterparties and clients as new services and products are deployed. The open and more modular philosophy behind technologies such as the RA Platform helps firms move away from discrete large-scale, multi-year projects and enter a mode of constant innovation. This approach accelerates time to market while still allowing firms to deploy and retain their own IP.
Ultimately, this gives them greater control and the confidence that they have the tools to succeed in the face of a dynamic and ever-changing environment.