Get Smart With Your Buy Side Technology

There are a myriad of technology alternatives facing buy-side institutions today. Cloud computing, SaaS solutions, managed services, extranets and co-location centers are amongst the industry buzz words with IT managers, just to name a few.

But before jumping in with both feet, which of these is the smart solution for a buy-side institution? As you would suspect, the answer is "it depends." No two buy-side firms are exactly alike, in-house technical capability varies widely between firms, and the business climate is changing almost as quickly as the technology which supports them. So let's look at some of the high-level business drivers and how technology can affect them.

Key Considerations

Without a doubt, business flexibility ranks as one of the key business drivers facing buy-side institutions today. Hedge Funds now multi-prime their back-office systems making reliance on a single broker's services difficult or impossible. IT managers are being asked to bring more broker neutral technologies in-house to power their business. Volatility in the market, investor jitters, and government regulation can have an overnight impact on assets under management (AUM) and trading strategies.

Because revenue for buy-side firms is tied so tightly to AUM the more fixed costs that can be transitioned to operational expenses the better. This enables the business to align their costs along with their revenue stream. SaaS-based services, such as market data systems, portfolio accounting and order management systems are the obvious low-hanging fruit and most firms have outsourced these for years. What's in play now are more specialized software applications such as enterprise risk engines, high-performance trading systems as well as in-house developed applications which by their very nature have been typically been deployed within the enterprise.

Solutions for the Buy-side

Co-Location Ecosystems are datacenters that offer a myriad of connectivity and solution providers under a single roof. In the financial community the two largest are 111 8th Avenue in New York City and 350 East Cermak in Chicago. By hosting systems in one of these datacenters, buy-side firms can connect to their brokers, market data providers, execution venues, cloud computing platforms, and extranets with a simple cross-connect through the meet-me-room instead of running long-distance fiber back to your office. This can save significant costs, reduce trade execution latency and at the same time simplify your infrastructure and support requirements. These datacenters have become so popular that 350 Cermak is considered the world's largest datacenter at over 1.1million square feet and 111 8th Avenue ranks as Manhattan's third largest building. In fact, Google found 111 8th Avenue so strategic that it purchased the building last year for nearly $2 billion in the largest commercial real estate transaction by a tenant.

Increasingly, buy-side firms are implementing their own trading algorithms avoiding the higher cost services offered by brokers. This requires Direct Market Access (DMA) connections from the execution system into the exchanges. While one approach is to locate the execution engine within an exchange co-location center such as those in Mahwah, Secaucus or Carteret New Jersey, these centers have been costly and impose restrictive policies on the firms which host there. For some High-Frequency Trading strategies this may be a necessary evil, but for most buy-side firms, the smart solution is to host in a centrally located datacenter such as 111 8th Avenue. This datacenter is less than a half of a millisecond from the exchanges and is centrally located so that the latency is roughly even between all of the exchanges.

Cloud computing solutions offer particularly compelling advantages over traditional computing architectures. Public cloud solutions such as those offered by Amazon, Rackspace or IBM are probably what most people think when they think of cloud computing. Such services offer a pay as you go model without any investment in hardware or long-term agreements. This can save firms considerable capital investment, operational costs, and perhaps more interesting staffing costs. This seems particularly relevant for Financial Services where computing tends to be heavily weighted during market hours, yet early adopters are reporting that public cloud services are actually more expensive than implementing your own servers. In addition, the financial industry has raised concerns over security in this computing model though likely these are based more on fears than actual fact.

As an alternative, Private Clouds offer the same security of owning and controlling your own hardware, but are set up as virtual machines where applications can "grab" resources as they need them. This can significantly improve performance for particular applications and at the same time reduce the number of servers needed to support an organization. Technology firms such as Unitas Global can help firms set up and manage private cloud infrastructures with minimal effort.

Managed Hosting providers offer a technology approach particularly well suited for the buy-side as they can pool requirements from many financial institutions with common needs. Firms such as Interactive Data 7ticks and Eze Castle Integration (ECI) can leverage shared network connectivity to the market data sources, brokers, clearing and execution venues the buy-side needs to operate.

In this rapidly changing economy the ability for companies to be flexible in their business models and procedures is tantamount to protecting the bottom line. By focusing on multiple solutions, you can mitigate risk and position your company to be able to withstand any technological challenge that comes your way.

Shawn Kaplan is general manager for financial services for Telx.