By Alastair Watson, Managing Director, EMEA, TNS Financial Markets
As we near the end of the year, the long-standing debate of what to handle in-house and what to outsource will reemerge. In the financial services industry, and specifically for banks, many functions like IT and staffing can be outsourced. But a key area worth considering is trading infrastructure. What was once a proprietary advantage for banks to build on their own now offers little competitive advantage and can often be more expensive to maintain. With the rise of cloud technologies and advancements in risk management services, has the time now come not to build, but to buy – or partner with – a proven Managed Service Provider (MSP) for banking infrastructure?
Why Banks Traditionally Built Their Own Infrastructure
First, let’s take a step back – why do banks rely on their own infrastructure? Historically, banks built their own trading infrastructure to maintain full control over the technology stack, enabling high-performance optimization and customization to suit their needs. Proprietary systems were seen as a competitive advantage, allowing banks to offer differentiated services. However, as the industry has evolved, it’s become increasingly difficult for banks to provide once-unique solutions without the assistance of an MSP. A decade ago, few third-party providers could offer the advanced solutions banks needed, but today that is no longer the case.
Challenges of Managing In-House Infrastructure
Managing in-house infrastructure has arguably become more challenging, especially post-pandemic as costs have surged. Whether it’s staying competitive in terms of performance or hiring competitive talent to manage your infrastructure, maintaining in-house infrastructure is increasingly expensive. Additionally, the upkeep of static or aging systems can restrict the scalability and speed required for efficient trading operations, making it difficult to meet tight delivery deadlines – something no bank can afford.
The situation is further complicated when multiple asset classes – such as equities, derivatives, and FX – share the same infrastructure. Conflicting requirements can lead to prioritization issues, resulting in inefficiencies and suboptimal performance as the infrastructure struggles to balance the diverse needs of each asset class while aiming to achieve overall operational goals.
Key Factors Driving the Shift to MSPs
It’s more than timelines and speed that are driving the shift to MSPs. There’s a variety of factors from margin compression to cloud migration and expertise that are propelling this trend forward.
First, margin compression. As banking profits narrow due to commission compression, cost-efficiency is critical. High infrastructure maintenance costs are also hard to justify, prompting banks to explore outsourcing models.
Second, many banking activities have already migrated to the cloud, making on-premise infrastructure maintenance less appealing. MSPs offer scalability, performance, and reliability in a cloud environment, backed by a track record of efficiency gained from working with multiple parties over extended periods.
Third, MSPs like TNS offer deep industry knowledge and specialized technical capabilities. Moreover, they deliver this expertise at scale.
The Benefits and Future of Partnering with MSPs
As banking evolves, the advantages of partnering with MSPs are becoming more apparent. MSPs like TNS already have infrastructure in key locations like New York and Chicago, helping to enable faster implementation times. Setting up in a new colocation site can take weeks with an MSP, rather than several months.
MSPs can mutualize infrastructure costs across multiple clients, while also protecting each bank’s proprietary data. Providers like TNS can offer risk management and security frameworks, implementing robust measures that ensure data protection and regulatory compliance.
What’s Next for MSPs and Banks?
As the industry evolves, MSPs will continue to play a key role in shaping the future of banking infrastructure. The institutional trading community should consider evaluating the areas where MSPs can offer enhanced solutions.
- Cloud Hybrid Models: As banks increasingly adopt hybrid models that blend on-premise and cloud services, MSPs can be valuable in bridging these environments. Their hybrid models provide scalable, virtualized solutions to meet evolving demands.
- Buy by Proxy: The expertise required to manage trading infrastructure will continue to shift to MSPs, further solidifying their role in the banking ecosystem. Banks may adopt a “buy by proxy” approach, where MSPs are trusted to manage most of their infrastructure leaving banks to focus on strategic oversight.
- More Than a Provider: As MSPs demonstrate higher levels of expertise, they are evolving from providers to true partners and consultants for financial market clients. Over time, the “P” in MSP will shift from “provider” to “partner.”
The advances MSPs have made in security, speed, and scalability are clear, and any remaining trepidation is gradually fading. By partnering with a trusted provider like TNS, banks can access cost-effective, scalable, and secure infrastructure solutions that allow them to focus on what they do best – trading.
Alastair Watson, TNS Financial Markets, Managing Director, has over 20 years’ experience delivering technology solutions for Equities global markets. He brings banking sector insight, having worked for UBS, where he was latterly responsible for building market leading execution technology and growing the UBS quantitative client base in EMEA.
