Equities trading focus | Outsourcing | Asif Abdullah Fig 4: The deepening vendor relationships
Depth of vendor service offering Description Enterprise Software Licencing
Integration Maintenance Hosted Enterprise Fully Outsourced
The vendor provides the broker with software under a licence agreement, typically with an annual
subscription.The software functionality may be customised and extended by the broker and is integrated with other systems by the broker.
In addition to the provision of software, the vendor provides the client with relevant technical and project delivery resources to support the integration of the vendor software with the brokers’ other systems.
The vendor is engaged to perform on-going maintenance of the software, which may include the provision of 1st or 2nd line
support.The software is installed on-site at the broker premises with the vendor’s resources providing SLA-governed services on-site or remotely.
In addition to software maintenance, the vendor provides and hosts, on their premises, the underlying infrastructure that supports the
platform.The vendor manages the infrastructure hardware in addition to the software.
In a fully outsourced model, the vendor is responsible for all aspects of the platform and related
services.The vendor may take advantage of economies of scale by sharing functional components or data (such as market data) with several
clients.The vendor strictly controls software changes and all clients typically have access to common functionality and use the same version of the code base.
and opportunities for the broker as summarised by Fig 5: • The broker may feel aloss of control as the vendor takes on more responsibility. As a consequence operational risk may increase.
• An increase use of vendor services places greater emphasis on relationship management skills. Effective relationship management is critical in an outsourced environment. The broker may have to review the skill profile of their internal team. The
Enterprise licencing
Integration
vendor and broker internal teams should have common objectives and incentives should be aligned. A partnership type relationship should be nurtured.
• Using an outsourced service model provides the broker with scalability. The broker has the opportunity to flex resourcing or systems capacity in line with changing requirements. Vendors with several clients can smooth out the peaks and troughs of demand.
Fig 5: Impact of changes in vendor service level Maintenance
Control Perceived loss of control as increase vendor service levels
Relationship management
Scalability Costs
Increased requirement for relationship managers to co-ordinate vendor activity Improved scalability as vendor can take advantage of economies of scale
Opportunity to replace fixed cost with variable cost model FIXED
Source: Greyspark CMI 34
Hosted services
Outsourced service
• The broker also has the opportunity to move from a fixed cost model to one with a larger element of variable costs and thereby manage down the cost per trade as volumes fluctuate.
We’ve seen the closure of many equities brokerage businesses in the last few years. This too, will be the fate of brokers who fail to manage down their cost- per-trade in an environment where regulatory pressures are increasing and where clients are becoming a lot more circumspect about where they transact their business, brokers who fail to manage down their cost-per-trade will continue to suffer.
Dismantling large, monolithic VARIABLE
software architectures is necessary for mid-tier houses who are fighting to survive and those who can do this, and recalibrate their focus towards the areas that truly provide a competitive advantage, will succeed. n
Best Execution | Summer 2013
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