Exchange Connectivity Technology: To Build or To Buy?

It is becoming increasingly hard to justify building exchange connectivity with internal resources versus working with a third-party provider.

When it comes to obtaining exchange connectivity, most sell-sides subscribe to a policy of "buy to standardize, build to differentiate." This is a good philosophy to consider when looking at market access. Some firms believe that developing their connectivity systems internally helps set their firms apart. However, while this approach may seem reasonable at the surface, the reality is that it quickly becomes overly complex and expensive to maintain over time. Outsourcing connectivity, on other hand, makes sense because it offers banks faster, more cost-efficient access to the marketplace. It also allows staff more time to focus on customer-centric innovation that creates competitive differentiation.

To investigate the "build vs. buy" issue a bit further, we conducted interviews with a number of senior professionals running execution, prime brokerage and clearing businesses at both global, and regional specialist, sell-sides. Our interviews found a common theme. None of the firms currently have a standardized approach to market access, and all of them are looking for ways to simplify market connectivity. But they approach this in different ways. Below, you'll find some of the insights we gained from our research. To read more, you can check out the research report recently published by Object Trading on how sell sides are shedding the complexity of market access infrastructure.

Choosing What to Outsource

Most of the large clearing firms we interviewed have dozens of distinct connectivity interfaces just for their global futures connectivity. This approach places a huge demand on the IT teams as they cope with non-standardized connectivity and vendor management.

Their market access infrastructure has developed and become more complex over time. In some cases, M&A activity brought in multiple silos with existing trading systems and connectivity. In others, firms have built one-off solutions for big clients, hoping to broaden that offering to other prospects later. As a result of both issues, IT teams are left with an unsustainable mix of vendor-provided connectivity, internally built gateways and interfaces, and direct market access.

Sell-sides are now increasingly looking for ways to simplify this approach and to narrow the number of distinct connectivity gateway points. As they evaluate options, they must choose which components they will continue to develop and maintain in-house, and which components they could source competitively from the vendor market. Ideally, whatever choices they make should be open and enable a flexible mix of solutions.

Weighing Build vs. Buy

It's important to carefully weigh the build vs. buy decision, especially when it comes to building market access. The decision has a substantial impact on time to market and total cost of ownership.

One large British prime broker we interviewed elected to build a standardized gateway system including pre-trade risk controls in-house because they viewed it as the only way to maintain control of their liability. They preferred not to cede control of development and QA processes to third parties.

Another global bank looked for vendors that could provide standardized multi-asset connectivity globally, and then decided to build the system in-house. But they underestimated the actual amount of effort required to on-board and support all the exchanges they needed. Unfortunately, that project has been ongoing for 24 months with hundreds of staff involved and no end in sight.

Some IT departments believe building gateways internally makes them more competitive, but in most cases, it does not. Instead, it leads to an endless process of development and QA, sort of like "painting the Brooklyn Bridge." You start painting one end of the bridge, and by the time you reach the other side, the paint will have begun peeling off at your starting position, forcing you to immediately start over. Likewise, maintaining exchange gateways is a never-ending, resource-intensive job. That issue has a huge impact on total cost of ownership (TCO).