While single dealer platforms (SDPs) have improved the experience presented to an institution's trading clients, they are not entirely fulfilling the core requirements in terms of openness or degrees of specialty. The needs of the institution and its clients are still too much at odds and this discord will drive the next revolution in client trading and information services. Sean O'Donnell and Matt Hopgood discuss the next generation of these platforms and the implications to business and technology strategies.
Over the last five years, the proliferation of single dealer platforms (SDPs) has increased dramatically -- from initial pioneering efforts by leading tier one investment banks to the mainstream delivery platform of choice for any large institution that is serious about consolidating its products and creating a brand for its services.
SDPs have been proposed as the solution to unifying an institution's offerings, acting as a one-stop-shop for trading and market information. While the initial perception has been very positive in the market, the commoditization of SDPs (and therefore the need to stand out in a crowded marketplace), along with regulatory changes and gaps in client demand, have made this the right time to revisit the SDP value proposition.
Like all product lifecycles, SDPs are a product of technology innovation, market forces (competition), and the demand for better services by clients, typically delivered in waves of evolutionary products. This is a similar pattern that we have today for trading and information systems.
First wave: single asset class information and trading applications
The convergence of the global recession in the early 1990s and the explosion in direct connectivity from clients to their financial institutions in the mid-1990s forever changed how clients would engage with their institutions. Clients were offered market data and simple trading capabilities through a single asset class application, starting mainly with equities and FX, followed by the other asset classes. Clients benefitted from these types of solutions through their self-service trading capabilities and improved pricing. The institution provided this lower and more competitive pricing in part by automating the role of its sales desks as well as other cost economies. As institutions grew their trading technology asset class by asset class (in effect creating silos), their clients were offered multiple applications that all looked and operated differently -- with no integration between them.
Largely supplied by a handful of specialist vendors or in-house development teams, these direct single asset class solutions were typically deployed on-site and typically focused on automating price discovery and trade execution workflows. While the applications were extremely lean, focused, beautifully supported the client engagement model and greatly reduced sales and operational costs, they provided very little auxiliary services or integration with the client's internal processes (risk reporting, settlement, internal workflows, etc.). But they were very much in line with the trend at the time of selecting best-in-breed services across multiple institutions.
Second wave: multi dealer platforms
As single asset class platforms grew in numbers, external companies, such as Bloomberg, Thomson Reuters and others, started to aggregate price discovery services from multiple institutions (sourced from their single asset class platforms) and provided them to clients in one application; this was the birth of multi dealer platforms. These MDPs served a number of purposes:
- They allowed clients access to wider pricing and trade execution through aggregation as they were now being serviced with multiple providers.
- They allowed certain client segments (fund managers in particular) to automate their businesses. For example, prior to this, clients needed to prove they had requested multiple prices and that they had sourced the best price at that time.
MDPs extended the role of prime brokerage through the need for extensive credit relationships and technology plumbing for price and trade routing. MDPs still exist today and thrive in certain segments, though there has been a mixed response from institutions in supporting such entities because they offer price competition against the institution’s native offerings. As such, best price is not typically offered by the institution through MDPs.
Third wave: single dealer platforms
With the proliferation of single asset class trading platforms and multi dealer platforms, clients were getting very confused. Several factors forced a new paradigm:
1) The emergence of dominant multi dealer platforms started to erode the trade flow to single asset class platforms.
2) The need increased for institutions to be more brand aware in how they serviced their clients and reduce the confusion of who was providing what. If trade volumes shifted en masse to MDPs, then the underlying institution risked minimizing its role to that of product manufacturing and pricing -- with the customer relationship becoming increasingly controlled by the MDP.
3) Clients were not happy using multiple applications -- that were not integrated and looked and operated differently -- from the same institution to run their businesses (as with single asset class platforms).
To address these issues, a new solution was required -- the single dealer platform. SDPs offered a single branded platform that provided access to all of the institutions products and services under one umbrella. While the services of most SDPs were initially accessed via the desktop, they are now offered via multiple channels including tablet and mobile. This central access point allows clients to research their business segment, trade their equity stocks and off lay their currency exposure -- all from one portal. But are the benefits of the SDP one-stop-shop approach equally shared between institution and client?
The institution benefits from a wholly controlled platform for brand engagement and client relationships; the opportunity to cross-sell and up-sell based on ease of provision and newly aggregated client analytics; and more importantly, a simplified and consolidated technology stack driving significant IT savings. While the benefits of SDPs for the institution are clear, clients still don’t have aggregated access to the best services and products, coupled with the best prices and client knowledge insights.
Why it's not working
While a segment of the market is satisfied with a SDP approach, there is a growing segment that is dissatisfied, stemming from the following factors:
- An institution may have a strong offering in FX on its SDP, but its equities services or derivatives products may not be the best in the marketplace; therefore, the client needs to have another solution on its desktop to provide that service.
- One of the key internal business drivers of moving to an SDP model for an institution was to align its internal siloed trading desks and technology, resulting in a more uniform client-focused approach. The promise was that this would rationalize both internal sales and trading activities, enable cross selling and consolidate technology requirements and spend. While this has occurred to some degree, not all of these benefits have been realized.
- New regulatory programs, such as MiFID, Dodd- Frank and the introduction of swap execution facilities (SEFs), have all impacted the grey areas of price discovery and execution, thus negating the price differentiation an institution can offer through its SDP.
- The institution’s overall agility in a certain vertical asset class development is reduced through the typical release cycle of a large, complex, SDP platform. This occurs because all internal desks need to agree to the release schedule, align on requirements and plan common integration points.
- With the proliferation of SDPs, leading firms are looking for new ways to differentiate from the pack. When any product market matures, it experiences “competitive convergence.” Within the SDP space, increased functionality and product coverage are eroding as a way of product differentiation. Competitive convergence normally precedes the next wave of innovation opportunities which drives new service engagement models and new commercial constructs.
- The expansion of services that include cloud-based, always-on, easy onboarding and a pay-as-you-play commercial framework reduces SDP stickiness. In the past, clients were forced to use their institutions’ platforms and put up with their inadequacies. With the popularity of easy-to-use services/switch services in the retail sector, client demands have changed; they will no longer put up with poor products.
- The mobile first/cloud first movement has led clients away from a view of everything on a desktop app all under a one-banner framework. The birth of the App Store is now infecting clients’ wants and needs by breaking up monolithic tasks into bite-sized apps that specialize in niche segments. This also holds true for trading and information services. Similarly to the breakdown of Facebook’s social media stranglehold by firms such as WhatsApp, Instagram, and Line, companies too are breaking down monopolistic SDP platforms.
Today, clients are not really consolidating their trading through preferred single suppliers; they will always hunt for the best price, best service and most trusted supplier in any given market. Although trading institutions greatly benefit from SDPs, the client benefits are overstated. Ultimately, the client’s need for best pricing and best research, all within a lean experience, is not being adequately met by having multiple SDPs.
Next wave: the merger of SDP and MDP
Over the last 20 years (when the first single asset class platforms emerged), clients’ fundamental requirements have not changed. They have always asked for:
- A more efficient way to conduct their business (through multiple providers in most cases)
- Access to the best services and products in the market
- Confidence that they are being given the best prices and execution
- Satisfaction that they are dealing with an entity that knows them, their business, their market segment, regulations and competitors
- A single intuitive platform from both a user experience perspective and an integrated technology service (APIs)
Some of these requirements have been fulfilled in the waves described above, but some are at odds with an institution's capacity and willingness to deliver. In an increasingly competitive marketplace, and with service aggregation popular in other market segments, clients are asking, Why not for us?
The next wave of dealer platforms will likely involve a combination of SDP and MDP. Each will continue to exist in its own right, but clients want the best of both worlds and this is likely to happen in a number of ways. Leading banks will allow services and products from other institutions to be traded through their SDPs, effectively making them SDP/MDPs. Clients will build their own SDP/MDP solution though APIs; this is already happening with investment firms. And, independent firms will aggregate these services; this too is currently happening in similar sectors. The ultimate question is: Where does this leave the institution in terms of its ability to innovate, hold onto its clients and build brand loyalty?
The answer lies in where it can specialize, and if it can become a truly client-focused organization, with:
- A leaner set of client segments, rather than broad-sweeping categories
- Dedicated products and services focused on those client segments
- In-depth market research that will enable it to understand -- and more importantly -- predict client needs
- A willingness to accept that profit margins on core services that were achievable in the past, are just that -- in the past.
Sean O'Donnell is a Director of Technology based in London and is a co-author of this article. Sean's background is in designing, building and running financial trading platforms, particularly in FX, CFDs, metals and some money markets for tier one, tier two and large broker clients.
His technology experience is primarily in Java and open standard platforms, KDB+, UX, and high performance/scale technologies deployed as cloud-based services. Over the last 10 years, Sean has worked in Product Management roles, bridging business and technology, and driving business development in Europe, North America, and Asia.Matt Hopgood is a Vice President based in London and co-leads Sapient's Visualization practice. Matt has a background in business and digital strategy, creative and commercial leadership, web/application support, user-centered design (UCD), information architecture and ... View Full Bio