In this two part series, Steve Woodyatt, chief executive and chairman of Object Trading, explores why brokers should view simplifying exchange connectivity as a way to improve overall business performance.
Clearing and prime brokerages
know that consolidating the number of exchange connectivity
gateways they utilise is beneficial in terms of gaining
faster, more cost-efficient access to the marketplace. But
there are additional, perhaps lesser known upsides associated
with normalising market access technology and reducing the
number of pathways used to access the markets.
In many cases across the
sell-side, IT teams are absorbed with constant fire fighting
to keep systems up and running. Normalising market access can
alleviate the IT burden and free up resources. It can also
dramatically improve trading infrastructure integrity and
performance. But most importantly, it can help brokerages
competitively differentiate their services.
1. Reduce Strain on
Brokers everywhere are looking
for new and innovative ways to control costs and optimise
performance, integrity and stability. Evaluating the number
of systems and vendors you work with to connect to the market
can be a good starting point for accomplishing these goals.
If this number is in the double digits, then you may be able
to reduce costs and complexity. Consolidating your technology
relationships down to a manageable number may significantly
reduce overhead and free up staff to focus on innovation that
supports business growth.
For example, the manpower
involved in sustaining many internal and vendor gateways with
all their attendant interfaces can quickly grow onerous.
Constantly reacting to changes issued by exchanges, upgrades
released from vendors and internal updates detracts from IT
employees’ ability to tackle more strategic
initiatives such as those focused on attracting new clients
and attracting more volume from existing clients.
2. Don’t Paint the
It’s not uncommon
for brokerages to develop their own gateway systems in-house.
Some technology departments believe this approach makes them
more competitive, but in most cases, it does not. In fact,
this complex approach is like "painting the Brooklyn Bridge."
Taking on such an immense task would be so time-consuming
that once you had finished painting the entire bridge, the
paint would already have begun peeling off at the starting
position. Maintaining it is a never-ending job. Similarly,
internal IT executives may consider building their gateways
in-house to be competitively important. However, the reality
is that this approach can quickly become unmanageable in
terms of the investment of time and the related high costs.
Plus it does not really deliver any significant
differentiation. Partnering with a vendor that specialises in
providing uniform market access through a single API can
dramatically reduce TCO.
3. Liberate Technology
Normalising access liberates
the technology team from routine maintenance to focus on
innovation that will CHANGE the brokerage, not merely keep
the doors open. It allows employees more time to focus on
initiatives that more directly impact the client experience
– whether that’s on-boarding clients
more quickly or building custom front-ends that better meet
client needs. For example, after they introduced a normalised
layer for market access that freed up their resources to
focus on customers, one of our clients was able to double
their client base each year for three years running.
4. Improve Performance,
Integrity and Stability
Fragmented market access
infrastructure can affect overall system performance, adding
latency and unpredictability. Complex infrastructures with
duplicative systems for exchange connectivity increase the
potential for lengthy system down times and the emergence of
bugs due to the ongoing need to update numerous platforms.
Trading outages can shake customers’ confidence,
which can affect your volume over the short- and long-term,
and may cause clients to discontinue working with you
In an environment that is so
vastly competitive, brokers simply can’t afford
to be putting themselves in a position where their name is
tarnished by slippage due to latency or trading outages.
Introducing a simplified gateway infrastructure for market
access provides more reliable, fast and seamless market
5. Reduce Costly Errors
Finding ways to reduce errors
is another goal high on brokers’ priority lists.
Errors cost firms real money. In fact, a single position
accidentally maintained rather than closed out at the end of
a session can cost the complete profit of a desk for a
quarter or even year. I’ve had a couple of
clients inform me that prior to implementing a normalised
layer for exchange connectivity, they experienced
multi-million dollar losses caused by unexpected orders in
6. Gain a Competitive
Being more attractive to
clients is often a function of ease of on-boarding, clear and
precise trade management, reliable performance, and the
ability to support their desired trading screens.
It’s also a function of being able to quickly
respond to requests like turning exchange connections on and
off (profitably). Having a low latency offering is no longer
sufficient for client retention. Today, clients expect
sell-sides to make it easy to connect and trade. They expect
reliability, error-free performance, scalability, and
on-demand access to a world of liquidity venues.
In the second half of this
series we will look at some of the economic, operational and
pre-trade risk management issues that are driving brokers to
simplify exchange connectivity.
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