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The Trading Mesh

Roundtable Report - Embracing the sharing economy: Why outsourcing financial infrastructure is taking off

Wed, 18 Oct 2017 02:23:00 GMT           

During October 2017, The Realization Group, together with McKay Brothers, Interxion and Options Technology, hosted a round table to discuss a trend whereby increasing numbers of financial firms are now outsourcing vital parts of their trading infrastructure.

Driven partly by regulatory requirements as well as cost considerations, many companies are discovering that outsourcing makes for a compelling business case. For many years, the objection, particularly at large banks, was that it was not safe to hand over mission-critical parts of an operation to external companies. That concern has been assuaged as providers are in a position to offer not only best-in-breed technology but also robust service level agreements. What that means is that trading firms can pick from a large menu of infrastructural offerings to expand or modernise their operations at much less cost than if they went down the build route.

Mike O’Hara of The Realization Group facilitated a wide-ranging discussion featuring Stéphane Tyč, co-founder of McKay Brothers, Bill Fenick, Strategy and Marketing Director at Interxion, James Laming, Head of Infrastructure R&D at Options Technology and Mike Powell, Founder of consultancy Inkblue Limited.

Their message: if it’s not a key differentiator, it may be a candidate for outsourcing.

Sharing is caring

Financial firms of all stripes are coming around to the idea that home-grown solutions are not always the best solutions. Whether it is proprietary trading shops and hedge funds or Tier 1 banks, the idea of handing over key processes to managed services providers has become the new normal.

Not only that, but some firms are thinking beyond specified tasks within an operation and considering wider aspects of the business. Stéphane Tyč of network and data feed provider McKay Brothers sees a world where firms are looking to outsource their entire best execution offering or their entire compliance activities.

“That’s a very interesting thought, and very telling of the fact that you’re thinking bigger than just outsourcing a little bit of your processes or technology,” he told the round table audience.

Bill Fenick, from co-location service provider Interxion, argues it only makes sense to look externally for some tasks. Whether it is about the supply of trading infrastructure or understanding MiFID II, with a specialist provider the client has the possibility of obtaining cutting edge solutions. “There are specialists for a reason,” he says.

Tyč and Fenick both see MiFID II as an important driver. Just understanding the new regulation’s requirements, much less satisfying them, is a tall order for many companies. In some cases, requirements might seem mundane but are actually difficult to implement.

For instance, aspects of time-stamping require GPS technology to be used; yet setting that up can be cumbersome. Similarly, algorithms need to be tested for regulatory audits, yet many firms that have developed and used algos have little experience with that level of scrutiny. Or, it could be a question of having enough computing horsepower to do certain tasks.

“Some of our customers want to do Monte Carlo analytics, which is tons and tons of data, but they need it only for two or three days. So they outsource compute,” says Fenick. “That’s a whole trend in terms of outsourcing that we’re seeing on a ground level.”

The bottom line is, if it’s a task that many clients will have and it only requires a generic solution, outsourcing can not only reduce cost but also increase flexibility and allow firms to focus on the parts of the business where they make their money. Put another way, only those parts of an operation that provide key differentiators are off the table when it comes to outsourcing.

Focusing on the fine print

The trick to outsourcing is not to worry so much about the technological aspects but to focus on SLAs. As one audience member said, for the adoption of managed services to work, two things have to happen. First, providers need to be able to have a set of SLAs that are as good as, or better than, what a bank could have by managing the process itself. Second, customers need to accept that they may need to adopt common standards because there is no way a provider can have bespoke SLAs for all its clients.

James Laming of Options Technology puts it simply: “We have to do everything at scale.” He adds that everything “has to be policy-based when you start getting to tens of thousands of users”.

But provided those hurdles can be overcome, outsourcing opens up a lot of possibilities, and not just in budgetary terms.

“A danger with outsourcing managed services is an over-focus on costs’” says Mike Powell of Inkblue. “There are other benefits than cost, such as agility, flexibility and time to market”

While bank staff may joke about how it can take months just to order a server internally, a managed service provider is able to solve problems like that immediately. Whether it is cutting time-to-market or being able to exit markets quickly due to a plethora of geo-political uncertainties, outsourcing can provide benefits.

Fenick, for instance, points to a trend in Asia of prop firms using managed services to get into European markets, Laming adds that it is not only the smaller firms but some larger companies as well that are looking for easy and effective ways to branch further afield. Many may be looking to enter a market for the long haul, but a managed service agreement gives them the chance to do so on a 12-month basis to make sure it all works.

The sky is not the limit … yet

All of this is not to say that everything is magically possible simply by signing on the dotted line. Powell outlined one obstacle to outsourcing in terms of third-party applications or even internal applications which haven’t been designed for multi-tenancy.

“There are benefits around procurement through a managed service provider,” he said, noting for instance the monitoring environment and the service to run that environment. “But you’re not getting in many cases the whole multi-tenancy benefit. There’s more to come in that space.”

At the same time, Powell says that’s not a reason to delay moving towards managed service arrangements. There are plenty of other parts of a trading firm’s range of activities where generic solutions can be applied.

Laming confirms that such obstacles notwithstanding, many firms are taking the plunge. “At Options we’ve seen massive growth,” he says. Many large companies have decided they don’t want to manage their desktop space, or their server space or any number of other parts of the operation.

“That means the markets must be warming to the idea. It certainly wasn’t the case five years ago,” Laming says, adding that he does not see much on the horizon to slow the trend. “So, get comfortable with it.”