Equities trading focus | Outsourcing | Asif Abdullah Fig 3: The commoditisation of trade management


FIX connectivity Pre-trade analytics


Programme trading


OMS


Position keeping P&L reporting


Smart order router Algorithmic trading


EMS


Dark pool / crossing network Market


connectivity


Post-trade analytics Middle office Settlement


and the deepening of vendor relationships.


Merging of high touch and low touch When full STP and electronic trading truly became possible in the late 1990s, brokers found their traditional high touch platforms could not service the demands of clients who wanted fast, reliable and scalable execution services. Early market entrants developed in-house low-touch platforms to sit alongside existing high-touch platforms. Later market entrants have since taken advantage of the lessons learnt from the earlier entrants with many using vendor solutions rather than building in-house platforms. Over time, high- and low-


touch platform functionality has converged with high-touch platforms now incorporating many of the performance enhancements typically offered


Best Execution | Summer 2013


Fully commoditised Partially commoditised Limited commoditisation


Many software vendors now Source: Greyspark CMI


by their low-touch counterparts. Low-touch platforms offer functions over and above a simple DMA offering, for example enabling brokers to intervene during execution, providing FIX access to broker algorithms, and more. This convergence of functionality is expected to continue, eventually eliminating the need to maintain two distinct platforms. Low-touch platform vendors have been continuously enriching functionality to meet high-touch requirements and are well positioned to dominate the converged market.


Commoditisation of key functions As electronic trading in equities has matured, much of the trade management functionality has become commoditised as presented in Fig 3, and offer very little in the way of competitive advantage to the bank.


provide off-the-shelf solutions which are integrated with the brokers’ own systems. In particular client connectivity, order management, execution management and the provision of market data have been fully commoditised. Brokers can continue to secure competitive advantage from functions such as programme and algorithmic trading. In the context of reducing investment budgets and increasing cost pressures, many firms are migrating these commoditised components from in-house to vendor solutions and as a result, firms are able to direct valuable internal resources to areas that still provide competitive advantage.


Deepening of vendor relationships In addition to increasing the use of vendor technology within the trade management service stack, brokers are looking to vendors to provide increased levels of service – from the provision of enterprise software licencing, integration resourcing, on-going maintenance of software, hosting of hardware and the running of vendor software to a fully outsourced model where the vendor is responsible for complete operation of the software and supporting infrastructure. Fig 4 summarises five main types of vendor engagement relations. The deepening of vendor services presents challenges


33


Audit / compliance data Reference data Market data


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