The benefits of a modular approach to trading technology

By Martin Nilsson
April 11, 2017

The ability to respond rapidly to a new opportunity is a prerequisite for success in derivatives trading. Adding access to a new exchange or electronic execution venue, support for a new security, or compliance to the latest regulatory wrinkle is essential to making sure opportunities are realized and profits are made.

As a result, agility and flexibility are widely recognised as an essential characteristic of a modern trading platform that can match the challenging requirements of today’s global derivatives markets. Given the complexity of the derivatives business, though, building a competitive trading platform often entails a major capital project of a scale that necessarily undermines any pretext of agility.

Firms are understandably reticent about pursuing a major trading software implementation just to be able to trade a derivative in a new marketplace, or merely to explore possibilities on a new trading venue. What’s needed is a more flexible approach, one that allows firms to select, use and pay for only the trading tools and functionality they need in order to launch new activities rapidly and without major cost.

To ensure this kind of flexibility, trading technologies need to select platform providers that offer facilities for customizing the software they provide to clients. By taking a modular approach, firms can thus select only the functionality they need, without having to embark on a major IT project. In this way, firms can quickly enter new regional markets or trade new asset class types that until now have been out of reach for them.

Savvy suppliers are responding to this user need by opening up their architectures to allow users access to certain segments of their source code so they can can customize a solution to meet their specific needs. According to a TABB Group survey of 72 buy-side, sell-side and proprietary trading firms that are active in the global derivatives market, almost 40% of respondents said they had been able to buy what they needed in a modular way from their platform providers, although nearly one-third said they were unable to do so.

This approach, though, needs careful attention. It requires, for example, rigorous testing on the part of both supplier and consumer, to ensure functionality is what was intended and that the platform’s custom elements are robust and reliable. The approach can also be more expensive, with 30% of TABB survey respondents saying buying a la carte costs “much more”.

The message is that a modular approach can offer the kind of agility firms need to take advantage of emerging opportunities, but it’s vital to partner with the right supplier to ensure the result is fit for purpose and doesn’t cost the earth.

 

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