Trading Technology

10:41 AM
Gerry Turner, Object Trading
Gerry Turner, Object Trading

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.

Focusing on Customer Experience

The head of global execution services trading and technology for a tier one global bank told us, "We wanted to focus on the important touch points -- the functionality that touched the customer. So we elected to build the user interface in-house where we could control the customer's experience and avoid educating vendors to the benefit of our competitors. But we had limited resources and knew there were a couple vendors that could deliver exchange connectivity much more efficiently than our internal team. This was the part the customers don't see. So we outsourced that part."

Today, sell-sides have viable, well-tested choices for connectivity, including experienced vendors that specialise in exchange connectivity. It also allows them to take advantage of economies of scale.

The decision to buy instead of build is driven primarily by six considerations:

  • Wider choice of execution venues
  • Ability to leverage the vendor's experience with other clients
  • Ability to free up in-house resources to better service clients
  • Potential efficiency gains in cost and operational overhead
  • The vendor's ability to bring more specialised technical expertise than the firm's internal resources
  • Whether choosing a particular system will enable them to differentiate themselves on the street

There are big disadvantages to trying to build and maintain non-core or commoditized functionality in-house. For one, it drives up maintenance costs.

Using Commercial Systems for Lower TCO

There is also substantial evidence that internally built systems have a substantially higher total cost of ownership (TCO) than commercial solutions. In research on feed handlers conducted by Aite Group in mid-2012, they found that "There is no math that supports internal development over purchasing a commercial feed handler solution…. By outsourcing feed handlers, businesses can save US$500,000 to US$1.5 million annually." Aite Group found that "Even firms with as few as five engineers pay more to support their internal feed handlers than a commercial solution would cost them."

According to Aite Group research, a typical global sell-side firm spends approximately 75% of IT funds on maintenance.

If 75% of IT resources are focused on maintaining a patchwork of internally built systems, then those resources can't focus on developing products and services that will help with competitive differentiation and attract more clients. This can also affect talent retention, as skilled technologists often gravitate to projects where they can build something new.

Establishing Competitive Differentiation

Several of the sell-sides we interviewed are actively looking for ways to focus their internal IT staff on projects that will enhance the customer experience, improve customer "stickiness," provide differentiation, and increase profitability. To do this, they're training some of their top resources to be business analysts and vendor managers – enabling them to effectively outsource and manage those areas that don't offer competitive differentiation. Then they can focus their internal IT talent on interesting and revenue-centric projects.

In summary, simplifying the gateway infrastructure and using vendor-supplied and vendor-maintained systems can allow a sell-side's IT team to focus on innovation. Differentiate based on service, market reach, and capital efficiency instead of spending time "painting the Brooklyn Bridge."

About The Author:Gerry Turner, Executive Director, Object Trading Gerry is an Executive Director for Object Trading and has been at Object Trading since 2008. Based in the UK, Gerry is responsible for the European and North American functions of Sales and Business Development. As a Board member, Gerry brings his expertise of sell-side technology and technical planning process to the business. Prior to Object Trading, Gerry spent most of his career in Sell-Side Investment Banks working on Trading Floor Infrastructure before moving to Electronic Trading in the mid 90's and then on to Front Office e-commerce management.

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Greg MacSweeney
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
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...
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...
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.
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 my product...yadda yadda yadda
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