Technology Tightrope: Trading Firms Need to Balance Control, Agility
Whereas ‘buy or build’ was once a binary choice, technological advances and the increasingly sophisticated needs of institutional trading firms have made neither option good enough.
Instead the debate has evolved into more of a spectrum, where the goal is striking the right balance between maintaining control of technology (build), and maximizing agility (buy). Every electronic market maker, proprietary trading firm and bank broker-dealer has a unique business and thus their own unique point on the control-agility spectrum; market participants who align most closely with theirs can seize a competitive advantage.
“The challenge is getting bigger” as technology advances, said Laurent de Barry, Director of Hardware Trading Solutions at Exegy, a provider of trading infrastructure technology. “Can you dedicate more and more resources to control everything yourself, in every cutting-edge technology area? Or do you rely on a partner to help you with this, and focus on what makes you different?”
Today’s market participant may trade substantial volumes of multiple asset classes, across dozens of trading venues, geographies and regulatory regimes, effectively in real-time. These demands necessitate technology solutions to be reliable and scalable, quickly deployed, and fit with the firm’s strategy – all moving parts, which combined comprise the push-pull of control vs. agility.
In an October 2022 report about trends in institutional fixed income trading, Coalition Greenwich cited a hybrid approach – i.e. firms opting to build, buy and integrate technology – as predominant in the marketplace. The consultancy found that buy-side investors were split as to whether they were leaning toward building more in-house systems, or using third-party technology providers more.
“Many are opting to use a best-of-breed approach regardless,” The report stated. “Interoperability has been a key theme as of late, and system openness is driving users to make decisions concerning technology spend and provider preferences. As one U.S. trader explains, there is a keen focus on workflows…and how they can be improved. The whole build versus buy bifurcation ‘was so three years ago.’”
One factor that has exacerbated the need to strike a balance between maintaining control of technology and maximizing agility of technology is a shortage of qualified staff. This has been a simmering problem for financial firms for years, due to increased competition from other tech-rising industries; it has come to a boil since the COVID-19 pandemic and its associated dislocations.
Talent shortages are the #1 challenge complicating the adoption of digital technologies, according to the KPMG global tech report 2022, which surveyed 2,200 executives across industries in Q2 2022. This backdrop would complicate most any financial firm’s plan to DIY technology.
“You have constrained resources and expertise in the market, but at the same time the market requires firms to be expert in software, expert in hardware, expert in machine learning, and expert in networks,” de Barry said. “You have to make sure you’re using talent as efficiently as possible.”
As the either-or paradigm for technology has faded, vendor solutions have evolved with market demand. Firms now seek flexible solutions that support fast time-to-market, while maintaining control over differentiation-driving parts of the tech stack. It must be decided what is truly critical to the raison d’être, and what still needs to be best-of-breed, but is more mature and stable and thus high customization doesn’t add commensurate value.
“You want to keep your ‘secret sauce’ as a focus and make sure that is highly optimized,” de Barry said. “And then leverage what technology partners provide to scale. This is being the most efficient with the resources you have.”
de Barry said some clients have as few as one or two FPGA (Field Programmable Gate Array) engineers, but partnering with Exegy has enabled them to punch above their weight.
“If you strike the right balance, you can be in a very strong position in the market because you don’t have the high payroll cost of a large team,” he said. “You can rely on the hours of research and development that we do, and catch up with or pass your peers with even a very small team.”