Shhh. Can you keep a secret?
Banks are known for being secretive with their trading technology, opting to do a lot of the building themselves. What would a bank be without its “secret sauce” anyway?
But as the cost of technology becomes exorbitant and banks need to redeploy capital to other parts of the firm, some are learning to let go and farm out their technology needs.
Is it a budget thing? Or is third-party technology that good? According to Tyler Moeller of Broadway Technology, it has a lot to do with the fast-moving nature of markets and trading profitability. Moeller spoke with Traders Magazine Editor John D’Antona Jr. and discussed the state of technology development within and outside the banking community and what exactly is going on here.
TRADERS MAGAZINE: Why are banks finally turning to vendors to build for them rather than in-house?
Tyler Moeller: Disruption in the capital markets have exposed the limitations of building a complete technology architecture in-house. The costs are now too great, regulatory and market change is happening too quickly and the technological sophistication of clients and competitors is skyrocketing.
Utilizing vendors has always made good business sense. The vibrant, competitive fintech market naturally pushes companies to develop innovative solutions and drive costs down. In contrast, building in-house can be a risky choice, lacking the accountability that a more open, competitive third-party marketplace provides.
Banks now realize all this and are rethinking the role that technology plays in gaining a competitive advantage. This introspection has produced an epiphany of sorts: core trading architecture is not where they should focus their efforts. Instead, the true edge can come from enhancing algos and analytics, and developing innovative services for customers.
Banks now understand that if they can outsource many of the foundational aspects of a trading architecture to a trusted technology partner – such as an enterprise platform for application and data integration, order routing and management, algo support, e-commerce functionality and connectivity – they can significantly reduce the cost and resources required to support their trading architecture. These resources can then be dedicated towards the areas where their edge is best realized, including innovation and revenue generation, which will in turn produce better results and bring new ideas to market faster.
TM: Is it a budget thing? Or is third-party technology that good? Or are the banks tapped out on resources?
Moeller: Budgets play an important part. The economics of building trading platforms in-house are no longer viable. It’s estimated that 75% of a bank’s IT budget now goes towards maintaining legacy software. These large-scale investments are unable to provide the returns they once did, given that FICC trading margins are slimmer.
But above all, banks are increasingly turning to tech firms because they know that they will struggle to compete with them in the long run. The pace of innovation is too great. Banks need the flexibility to move into new market areas, like complex package swaps trading or electronic repo trading, and the old infrastructures – whether they’re completely built in-house or some amalgamation of inadequate vendors and custom-built solutions – aren’t nimble enough.
The right technology partners will empower, not limit, banks. Both parties work collaboratively to streamline trading workflows in a manner that stokes revenue growth. To illustrate this – we integrate order management, order flow internalization and customer management workflows for our banking customers. What does this do? It gives traders and business leaders deeper insights on client flows, inventories and performance to improve client pricing and enhance the relationship. This increases efficiency, performance and profitability within the trading operation.
TM: Has adopting third party solutions gotten easier now than say, three or five years ago?
Moeller: With the right third party solutions, yes. The key to adoption is a strong open enterprise application integration and data platform that allows legacy, custom and third party systems to be easily integrated, deployed and brought online, and adapted over time.
Even today, many of the third-party solutions built for banks are designed for specific purposes and limited in their ability to integrate into trading workflows. These products work fine at the start, but can be difficult to adapt as the market shifts.
Strong enterprise platforms are playing an important role in enabling third-party technology adoption. The right platform allows banks and their partners to easily integrate, adapt and expand all aspects of their trading architecture. It also promotes the open data architecture necessary to extract valuable insights from the various, fragmented information sets that banks already possess.
Technology partners must also promote flexibility and collaboration as a platform isn’t enough if vendors insist on pushing rigid solutions onto banks. The right partner with the right technology will help banks realize the strengths of a single, globally-integrated trading infrastructure: flexibility, near-unlimited scale, accessible data and full interoperability across systems.
TM: Has the industry moved to a uniform or simple “plug and play” model of trading technology rather than self-made custom systems?
Moeller: It’s a mix of the two. The industry hasn’t moved to a complete ‘plug and play’ model because, in practice, it’s too inflexible to adapt to what a bank will need down the road. Instead, we’re seeing the advent of a hybrid ‘build and buy’ approach where banks outsource much of their trading architecture and their enterprise platform to a technology provider, while maintaining the ability to build their own applications on top, and focusing on those areas where they can create an edge over their competitors.
TM: What technologies have the banks opted to keep internal? Or are they “all in” on third party involvement?
Moeller: Banks will still keep some of their trading technology development in-house, especially around those areas where they’ll be ablee to differentiate themselves from competitors.
For example, super-regional banks in the Nordics won’t worry about having 24/7 coverage for US government bonds or Asian stocks. Instead, they’ll entrust trading platforms and partners to handle those workflows and focus their internal energy on face-to-face relationships with Nordic corporates, build analytics that enable them to better identify and anticipate client needs and perhaps build algorithms that best suit their needs.
The combination of in-house expertise and flexible, configurable third-party technology will be advantageous. Banks will have the ability to develop custom capabilities without the cost and resources associated with in-house projects.
