Infrastructure maintenance is a huge resource drain at most sell-side firms, and one culprit is the way technology infrastructures have grown over time. The proliferation of order generation systems (“screens”) on the front end has led to massive complexity in market access (“connectivity”) on the back end — and lots of unnecessary cost.
Decoupling to Reduce Costs and Complexity
Typically, a head of prime brokerage is repeatedly paying for every part of the trading infrastructure from front to back for each screen they support. Every trading front end they provide to their clients, or use in-house, has its own set of interfaces to the various exchanges they use. The more screens the firm has, the more connections there are. With multiple interfaces to the same exchanges, the firm is essentially paying for the same thing many times over, and wasting money that could be put to better use.
Decoupling the order generation systems from market access drastically reduces both complexity and cost.
For example, one major sell-side firm rationalised its infrastructure by using Object Trading to connect each of its screens to a single Direct Market Access gateway for each exchange and eliminate all the unnecessary duplication in exchange connections. Before, they had been paying for the redundant connectivity to each exchange that came packaged with every screen. They found that the gateway investment was cost-justified by the elimination of redundant lines to the exchanges alone.
The firm generated additional savings from the reduction in complexity. For example, exchanges tend to issue updates to their trading interfaces on a quarterly basis. Because the DMA gateway normalised the exchange connectivity and presented the firm with a single interface, the firm was able to decouple exchange connectivity from the screens. Therefore, those exchange updates no longer required changes to upstream trading applications. This saved substantial time.
Future-Proofing Trading Screens
Decoupling helps the prime brokerage future-proof their front-end trading infrastructures. The best-of-breed screens today might not be the best-of-breed in four years’ time. In the past, if one of the screen vendors providing a firm’s market access was not able to keep up with exchange updates or provide the expected level of service, there was little the sell-side firm could do about it. It could be embarrassing when a buy-side client complained about the technology the broker was providing, and the broker was unable to fix that problem.
Having a gateway in place that is independent of the screens integrated to it enables firms to much more easily put an underperforming screen vendor on notice, or even get rid of them altogether if necessary. If the front end is causing a problem, a decoupled infrastructure allows the firm to move clients from one front end to another without changing the connectivity. If the front end is fine, but the screen vendor’s market interfaces are not up to scratch, decoupling frees the sell side from dependence on that connectivity. Using independent connectivity instead allows the sell side to add new markets more easily and at a much lower cost than if the screen vendor were to do it alone.
As the needs of the business evolve, firms will always need to add new applications. However, once the infrastructure is decoupled, doing so will no longer mean gaining another set of exchange interfaces to maintain. It will also be easier to do, as much of the integration with other screens has already been done, thanks to Object Trading’s partnerships with a number of screen vendors.
Future-Proofing Market Connectivity
Similarly, decoupling allows firms to more easily update or upgrade exchange connectivity without disruption to existing front-ends. When the front ends are decoupled from market access, it is no longer up to the screen vendor to deal with exchange updates—this now falls to the gateway provider, and that is the gateway provider’s core business. They have no screens to distract them from the task of providing exchange connectivity. By comparison, a screen vendor competes based on the quality of their trading screen—market access is secondary. They often have to trade off resources for maintaining screen–based, client–facing functionality against maintaining lifeblood exchange connectivity.
Decoupling at the gateway also simplifies things for the trading support team, which previously had to be proficient in several different platforms front-to-back. Now, when exchanges issue updates, a single change from the gateway provider updates all connected forms of electronic trading; and the normalized interface from the gateway to the screens eliminates the impact of most exchange updates on those upstream screens.
Decoupling to Offer True DMA
Further, a gateway provider can enable the sell-side to offer true DMA—with lower latency and fewer trading errors than screen vendor-provided market access. Object Trading’s technology was purpose-built for the toughest requirements of DMA, and easily scales to support high frequency, high-volume traffic from various front-ends.
Screen vendors, on the other hand, have had to adapt their existing systems from a click-trading orientation to the demands of highly automated traders. They have done this by adding proprietary APIs and standards-based (e.g. FIX) interfaces to their screen platforms. However, they also include a number of hops between the broker and the exchange in their closed front-to-back systems and are, therefore, not designed to support the strenuous performance requirements of highly automated traders.
Platforms that include components such as FIX engines, Order Management Systems, and other points along the path from order generation to destination, each needing to hold the current state of working orders, are prone to more in-flight trading errors at higher volumes. They cannot offer the ultra-low latency required by automated traders. Screen-based systems usually require a larger hardware footprint, are more complex to operate, more expensive to install and less suitable for exchange colocation scenarios requiring multiple low-footprint installations across many locations vs a centralized architecture.
Decoupling Helps Brokers Differentiate Themselves
Heads of prime brokerage often wonder – If I buy gateways from a gateway provider, all I get is infrastructure. I’ve still got to add applications on top of it. Why not get it all from one vendor? Bringing clients to market often means that brokerages have screens already, and likely will continue to add screens and other client-facing applications in the future in order to differentiate themselves. But relying on screen vendors to provide market access as well creates unwanted infrastructure complexity and cost, and firms risk becoming locked into any shortcomings with screen vendor platforms.
Decoupling enables sell-sides to future proof their infrastructure, by allowing them to make front-end changes without impacting the back end—and to accommodate exchange updates without impacting the front ends. It also enables brokerages to offer their clients true DMA. The cost savings realized by streamlining their infrastructure enables firms to focus on differentiating their services as a broker, which of course is what matters to their clients the most.
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.