When shopping for trading technology, sell-side firms are often drawn to the idea of a one-stop shop solution. They want a single provider to give them everything from front to back, including a trading screen, risk analytics, and connectivity to the markets they want to trade in. The idea is appealing because of its apparent simplicity. But screens are not just for clients—they are used inside institutions for trading, broking, compliance functions and so on. They should be selected according to their ability to solve these specific problems.
Market connectivity is a different problem with its own set of requirements. A vendor that is great at developing trading or risk management technology is not necessarily great at providing direct market access (DMA). In fact, selecting a screen vendor to supply a complete front-to-back solution can rule out offering clients DMA that’s fit for purpose. Often in these cases, the underlying technology was not built to support the performance demands of volumes of algorithmic trading clients. In response to customer demands for various types of systematic trading, screen vendors have adapted their closed, front-to-back systems incrementally, routing orders through FIX gateways and order management systems, essentially adding extra steps between the client and the exchange. So while they do offer market access, it is not really direct. These additional steps introduce latency and introduce more opportunity for error.
Screen Vendors Provide Access, But Add Complexity
The problem is much bigger than a single screen vendor, however. Sell-side firms often have multiple screens that they provide across their buy-side clients and internal trading desks. Each vendor offers its own set of exchange interfaces—and so a large sell-side firm might end up with ten separate interfaces to each of the markets they need to trade with. That’s an order of magnitude more complexity than they need—and maintaining those interfaces on the back end is a heavy drain of resources.
In addition, while screen providers do offer market access, the majority of them have a fairly limited set of markets—typically in the range of 10 to 15—that they connect to. If a sell-side firm wants to connect to a new market using one of its existing trading screens, it can take a very long time before the screen vendor is able to offer that—and they may charge a lot of money for the privilege.
The Right Tool for the Job
Providing trading screens is a huge undertaking. It’s the part that traders interact with on a daily basis. Therefore, screen vendors are forced to invest most of their resources in developing and upgrading the front end, and in providing training and customer support. Naturally, that means they can’t invest as heavily in their market access infrastructure. But market access is also hard work—it took two years of forward investment in futureproofing our gateways, whilst simultaneously keeping in step with market requirements, to make sure that our latencies would remain competitive for the next ten years.
Trading screens and market access infrastructure are two very different beasts, requiring very different sets of expertise. A number of screen vendors are now actually looking to reduce the number of exchanges they connect to—to maybe five or six main ones—and let a third party provide the gateway for the rest. Likewise, it doesn’t make sense for a gateway provider to offer a trading screen, because that is not its core business.
The most efficient thing to do is decouple the front ends from market access. Integrating all the different front ends, including algorithmic trading platforms, market data and news services, and middle-office risk management systems, into a single gateway that then connects once to every exchange, drastically reduces the complexity behind the scenes.
Gateways Provide a Global View of Positions and Risk
Aside from reducing complexity, decoupling order generation from market access helps provide a global view of positions and risk exposures. In siloed front-to-back systems, risk is measured differently across systems and remains captive in the screens. Decoupling the screens from market access allows the measurement of risk across systems in a consistent manner, normalization of the data, and efficient presentation of that data into whichever system the bank is using for aggregating, analyzing, monitoring, and enforcing risk.
Screen vendors can’t do this. They may have a complete view of the risk traded on their system, but they don’t have access to all the other screens a broker needs to support a diverse client base.
Group of Vendors with Specialized IP Beats the One-stop Shop
The idea of a one-stop shop is a very tempting one. But no one vendor has the requisite expertise in all areas. The one-stop shop quickly becomes a formula for becoming locked in to screen vendor cost, timescales and complexity for adding missing features and functionality. Object Trading partners instead integrate their order generation and risk management systems to our APIs. Object Trading is vendor-neutral, with standard interfaces that can ease integration with any screen vendor, news service or risk management system. Many vendors are already certified on our market access infrastructure, so brokers who use Object Trading’s gateway can add these vendors’ systems without needing to do any back-end integration.
No one vendor can do it all. But a group of vendors, each with its own resources dedicated to its own specialized IP, provides the flexibility to add, move, change, innovate, and grow. This approach avoids the need to constantly rewrite all the dependent trading applications to deal with relatively small changes in connectivity, as so often occurs in a silo environment.
For more insight on this topic, check out the research report “Removing the Limitations to Innovation and Growth” that discusses how firms can shed operational complexity by simplifying their approach to exchange connectivity.