Playing With The Big Boys

Mike Abbruzzese of Dominick and Dominick explores the business case for outsourcing as a small firm amongst much larger competitors.

Mike AbbruzzeseSmaller investment managers often outsource trading technology to achieve competitive parity with larger market participants. Yet, timely upgrades to the FIX trading architecture require a flexible, segmented approach. Coordinating specialist offerings from multiple vendors can facilitate faster upgrades and client response times.

FIX connectivity is the daily point of contact with our clients. As such, it needs to be flexible and multifunctional. At Dominick and Dominick, we outsource our FIX connectivity separately from our OMS/EMS providers. Outsourcing gave us the flexibility of not being married to our OMS anymore. Previously, it had been a major project to change an OMS system because the provider housed your FIX connections, held end-of-day files as well as the connections to your brokers.

Concentrating all our FIX connections through our OMS provider also gave us too much exposure to one external provider. We had everything with one firm, so when there was a problem everything went down. Splitting these elements out into FIX connections and our EMS reduced our operational risk. By putting a firm in the middle to manage our FIX connections, we run one pipe into the OMS, which then goes to each executing broker. Adding new FIX connections through the OMS provider was a lengthy process and often they did not know what networks our clients were on. After outsourcing this element, new FIX connections are turned around in two days. Moreover, if we need to change our OMS or EMS or the technology base changes, we can adapt. Without a dedicated FIX team, this would otherwise be difficult.

Outsourcing has yielded cost savings with clients that have multiple connectivity options, as our specialist provider gave us a better option than the client’s primary provider of FIX connectivity. As a smaller shop we want to give clients, whether institutional, high net worth or family office, the seamless capabilities to compete and look the same as our peers.

Naturally, outsourcing FIX connectivity enables us to get clients online quickly, but if a client tags a trade incorrectly, which then leads to problems on the OMS, our partner helps us deal with that. For example, we had a problem with our EMS where we had one institutional group and another for the rest of the firm’s business. At one point we had to revert to an old OMS and were running two OMSs simultaneously. Our partner put in another pipe and we never had to bother the client.

It is not good to be constantly on your clients’ radar. Our clients expect that once we are set, all necessary changes should be done internally. Outsourcing gave us the ability to do that. We switched overnight and the client did not know because it looked the same to them.

Long term relationship
Just as we build rapport with clients, we appreciate long-term relationships with our vendors, where each understands the other’s business better. Our FIX provider recognises adding a connection as a small firm involves taking a risk on the cost. The decision process for adding new connections is based on client costs and potential flow. Exploring connectivity options that are cheaper, but look and work the same helps us make that decision.

Staying competitive in our segment means outsourcing FIX, reviewing our EMS and paying attention to client changes. By the same measure, when providers promise us functionality they later cannot deliver, the added workload is a competitive disadvantage. We would rather a provider says “No we can’t do that” than “Yes we can”, but find the solution does not fit the problem.

Despite best efforts and improving technology, problems do occur. We want partners with the capabilities to handle issues as and when they arise. Every product runs well in ideal conditions, but the test is how it reacts in the event of an error.

Until that happens, we assess our vulnerabilities and spread our exposure over multiple partners.

Technology and consulting
We frequently review our needs for what we can do better ourselves and what should be outsourced. To keep up with technology advances, we expect our partners to stay current even as we internally review developments in functionality and features from other providers. Up-to-date partners are essential when clients we have not heard from in six months suddenly request a change. If our partner is behind and cannot meet a client’s demands, we suffer for it.

There is a long list of inexpensive, commoditised trading services and finding what differentiates these products is a lengthy process. When evaluating new solution providers related to our EMS, OMS connections, brokers or FIX functionality, we look to our partner amongst other people for recommendations.

Typically, we look at our needs and consult with vendors to itemise the areas we have to address, and then we look at costs. Together with the COO, we review each scenario and make decisions. Sometimes it comes down to cost and whether we can build it in-house, but many times it comes down to functionality. If it makes economic sense for the business, and especially if it allows us to trade like a larger firm, then we outsource it.

 

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