Trading Technology

10:41 AM
Gerry Turner, Object Trading
Gerry Turner, Object Trading
Commentary
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Exchange Connectivity Technology: To Build or To Buy?

It is becoming increasingly hard to justify building exchange connectivity with internal resources versus working with a third-party provider.

Gerry Turner, Executive Director, Object Trading
Gerry Turner, Executive Director, Object Trading

When it comes to obtaining exchange connectivity, most sell-sides subscribe to a policy of "buy to standardize, build to differentiate." This is a good philosophy to consider when looking at market access. Some firms believe that developing their connectivity systems internally helps set their firms apart. However, while this approach may seem reasonable at the surface, the reality is that it quickly becomes overly complex and expensive to maintain over time. Outsourcing connectivity, on other hand, makes sense because it offers banks faster, more cost-efficient access to the marketplace. It also allows staff more time to focus on customer-centric innovation that creates competitive differentiation.

To investigate the "build vs. buy" issue a bit further, we conducted interviews with a number of senior professionals running execution, prime brokerage and clearing businesses at both global, and regional specialist, sell-sides. Our interviews found a common theme. None of the firms currently have a standardized approach to market access, and all of them are looking for ways to simplify market connectivity. But they approach this in different ways. Below, you'll find some of the insights we gained from our research. To read more, you can check out the research report recently published by Object Trading on how sell sides are shedding the complexity of market access infrastructure.

Choosing What to Outsource

Most of the large clearing firms we interviewed have dozens of distinct connectivity interfaces just for their global futures connectivity. This approach places a huge demand on the IT teams as they cope with non-standardized connectivity and vendor management.

Their market access infrastructure has developed and become more complex over time. In some cases, M&A activity brought in multiple silos with existing trading systems and connectivity. In others, firms have built one-off solutions for big clients, hoping to broaden that offering to other prospects later. As a result of both issues, IT teams are left with an unsustainable mix of vendor-provided connectivity, internally built gateways and interfaces, and direct market access.

Sell-sides are now increasingly looking for ways to simplify this approach and to narrow the number of distinct connectivity gateway points. As they evaluate options, they must choose which components they will continue to develop and maintain in-house, and which components they could source competitively from the vendor market. Ideally, whatever choices they make should be open and enable a flexible mix of solutions.

Weighing Build vs. Buy

It's important to carefully weigh the build vs. buy decision, especially when it comes to building market access. The decision has a substantial impact on time to market and total cost of ownership.

One large British prime broker we interviewed elected to build a standardized gateway system including pre-trade risk controls in-house because they viewed it as the only way to maintain control of their liability. They preferred not to cede control of development and QA processes to third parties.

Another global bank looked for vendors that could provide standardized multi-asset connectivity globally, and then decided to build the system in-house. But they underestimated the actual amount of effort required to on-board and support all the exchanges they needed. Unfortunately, that project has been ongoing for 24 months with hundreds of staff involved and no end in sight.

Some IT departments believe building gateways internally makes them more competitive, but in most cases, it does not. Instead, it leads to an endless process of development and QA, sort of like "painting the Brooklyn Bridge." You start painting one end of the bridge, and by the time you reach the other side, the paint will have begun peeling off at your starting position, forcing you to immediately start over. Likewise, maintaining exchange gateways is a never-ending, resource-intensive job. That issue has a huge impact on total cost of ownership (TCO).

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Greg MacSweeney
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Greg MacSweeney,
User Rank: Apprentice
1/27/2014 | 2:53:13 PM
re: Exchange Connectivity Technology: To Build or To Buy?
I'm sure there are many horror stories about outsourcing projects gone bad. Unfortunately, we never hear enough about them since no company or manager ever wants to admit doing something wrong.

However, a lot can be learned from dissecting a failed (or struggling) outsourcing deal. How can other companies avoid the same mistakes? What do you have to put into the SLA? Which vendors are good or bad when it comes to service after the sale?
Joe Brunner
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Joe Brunner,
User Rank: Apprentice
1/27/2014 | 2:36:13 PM
re: Exchange Connectivity Technology: To Build or To Buy?
Very nice "TheAuditor" could not agree more... Outsource very very carefully - or be burned long after the sales guy leaves... Would love to be a "fly on the wall" in the offices of one of these Vendors when a desperate, down or slow customer calls...
joeaffmdsys
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joeaffmdsys,
User Rank: Apprentice
1/27/2014 | 2:36:13 PM
re: Exchange Connectivity Technology: To Build or To Buy?
Very nice "TheAuditor" could not agree more... Outsource very very carefully - or be burned long after the sales guy leaves... Would love to be a "fly on the wall" in the offices of one of these Vendors when a desperate, down or slow customer calls...
TheAuditor
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TheAuditor,
User Rank: Apprentice
1/22/2014 | 8:28:56 PM
re: Exchange Connectivity Technology: To Build or To Buy?
My experience with the connectivity Vendor is as follows:
- you have to convince the Vendor that the problems you experience are actual problems, argue that it can or did lead to financial loss.
- Vendor than asks for logs to investigate the issue, these logs cannot be delivered because of privacy concerns, laws and regulations
- than Vendor says problem cannot be reproduced in their testing environment, so they can't investigate and can't fix
- we end up reproducing and debugging the issue on our end; that is development and QA work that we contribute to Vendor's solution just to make it work for us, in addition to whatever payments we make for the Vendor solution.

How is this better then building yourself?
And this is a good example. Other Vendor does not pick up the phone if you don't threaten to break the contract.

There is no magic answer. You just swap one set of problems with another set of problems. If going with the Vendor would be so rosy as described, everybody would give up in house development altogether.
Serrad
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Serrad,
User Rank: Apprentice
1/8/2014 | 12:41:35 PM
re: Exchange Connectivity Technology: To Build or To Buy?
This article is just another advertisement for the writer's business. One sided...buy my product...yadda yadda yadda
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