Trading Reimagined is a content series that examines how the transformative power of technology is prompting a reimagining of the markets. Trading Reimagined is sponsored by Exegy.
At an economics textbook level, a trading and investing firm’s decision to buy technology, build technology, or buy and build technology comes down to which options offers the best ROI.
But in the real world, the buy-vs-build decision is a complex one with many considerations, ranging from the bottom-line price tag, to more subjective aspects such as whether a third-party vendor’s staffers are easy to get along with.
Hank Hyatt, Global Head Fixed Income & Equity Electronic Trading IT at Morgan Stanley and a 40-year Wall Street veteran, covered buy-vs-build in a keynote address at the Exegy Customer Summit, held in New York on Sept. 26.
In opening remarks, Exegy CEO David Taylor highlighted three goals of the inaugural Customer Summit: for attendees to appreciate the “elite community” in the room, all working on common challenges and building solutions; to expand understanding of Exegy and its products; and, for the Exegy team to ensure alignment in corporate strategy, product strategy, and service delivery.
Hyatt then discussed his view on buy-vs-build, sequentially and step-by-step.
When first considering whether to buy or build, a trading and investing firm needs to ask itself questions such as whether its internal team is capable of implementing a tech upgrade within a reasonable time; are there competitive and/or regulatory pressures; if technology purchased, how difficult would it be to get rid of it; and is there enough budget to purchase.
If the balance tilts towards buying, there are a host of considerations, starting with the premise that “you need to think of the vendor as an extension of your own team,” Hyatt said.
A firm must assess its own experience dealing with vendors, operationally and legally, Hyatt said. Additionally, as there is nuance in the securities industry – for example, being an agency trader versus a proprietary trader – there must be certainty that the vendor is the right one for the business.
As a gauge of the quality of the vendor, a prospective buyer should also ask itself: would it hire any of the vendor’s developers? There are also more practical considerations, such as making sure the contract is “written tight,” and in a way that engages the vendor and elicits specific behaviors needed for a successful partnership.
A buyer also needs to be wary of the stability of the vendor company, the quality of their development strategy and how they would address potential issues that will inevitably arise. “Stuff happens,” Hyatt said. “The challenge is that when you purchase a vendor package, you own that stuff.”
“At the end of day, fundamentally, it’s a lot of hard work on both sides,” Hyatt said. “Can you do what you say you’ll do? Prove it, show me, and don’t be difficult, because this needs to be a mature relationship.”
Hyatt’s keynote was followed by a Customer Advisory Panel Discussion, which also touched on buy vs. build.
“Everything is a cost tradeoff, the question is how much do you buy,” one panelist noted.
“Part of it is knowing what to buy in first place,” another panelist said, noting that a build/buy decision is especially critical if the area is a revenue driver and/or a core competency.
It was also noted that generally, firms don’t want to start any software project that will take more than six months. Factoring in tech development time, support, costs, and management, the total cost of ownership “leans heavy into buy, as long as there’s a credible solution.”
