Decoupling helps sell-side firms future-proof trading infrastructure

By Mikael Persson, VP Strategic Research
August 25, 2015

Itiviti’s VP Strategic Research Mikael Persson weighs in on the advantages of decoupling complex trading infrastructure. All infrastructure ages. Similarly, IT infrastructure becomes outdated. Message volumes and latency requirements increase. New regulations require ever more transparency into systems that were not designed to give it. Customers expect to be connected to markets faster and with more visibility into their order flow and risk than ever before.

Sell side technology is often cobbled by complex infrastructure that creates all kinds of technical issues challenging their ability to respond to new market demands. While quick to adopt flashy new front-end technology, sell sides have historically tended to apply patches to back-end IT problems rather than address them holistically. This can be a short-sighted approach—deferring but not preventing a systems collapse, and failing to address underlying issues that can ultimately affect a firm’s ability to grow.

Reduce infrastructure complexity

In today’s competitive environment, sell-side firms need to modernize in order to keep up with growing demands, remove significant limitations to growth, and prepare for the future.

The idea of large infrastructure projects can be daunting to firms when budgets are already stretched. But there are a number of things firms can do, which will have the dual benefits of cutting costs and readying them for future growth.

Reducing complexity is one such example. Siloed infrastructure within sell sides is a well-documented problem. As is the heavy maintenance burden associated with overly complex legacy architecture. Decoupling systems and functionality from one another can make it much easier for firms to perform valuable future upgrades and migrations, without drastically impacting the rest of the trading ecosystem.

The complexity of FIX infrastructure

The FIX messaging protocol has been a hugely successful industry initiative and has become embedded everywhere in electronic trading infrastructure across the industry. But with its success, it has also become increasingly convoluted. Technology that was designed as an enabler has become a barrier to growth.

For example, in many firms, IT teams are reluctant to upgrade to newer versions of the FIX specification like 5.0 introduced back in 2006, because firms’ connectivity relies on a range of third-party technology that use older versions of the protocol. This has slowed firms’ ability to enhance services based on some of the newer functionality available in the newer FIX versions.

Decouple FIX hub from OMS systems

One common example of this problem is order management systems (OMS). In many cases, a sell-side firm’s FIX infrastructure is tightly coupled with its OMS systems—which have FIX gateways built in. Clients connect directly to the OMS instead of to a standard gateway giving access to all the sell-side’s internal order management, algos and market access infrastructure.  This leads to a lot of redundancy. Most sell sides use different systems for different geographical markets, asset classes and trading functionality. So customers often have to manage multiple connections if they use multiple services from that sell-side.

This approach complicates customer connectivity and also makes it very difficult for firms to remove a piece of the chain if it is not performing optimally or needs an upgrade.

A tightly coupled environment can leave the firm vulnerable in the long run. It can’t upgrade to new versions of the protocol, and it can’t easily swap out back end systems. For example, if a firm wanted to remove or replace an aging OMS, they would have to re-onboard all clients to the new OMS, costing time, money and headache for the firm and its clients.

But creating a separate layer for customer connectivity, via a FIX gateway can remove this limitation. It allows firms to decouple client connectivity from downstream systems. Once the systems are decoupled, firms have more flexibility to change or remove a part of the chain with minimal impact on clients. There will always be some integration impact, but if the clients are connected to the OMS via an independent FIX gateway, then replacing the OMS would place lower demands on the clients and the internal connectivity teams, because it would allow them to avoid the need to migrate every client connection to a new interface.

Being able to remove pieces of the infrastructure in a modular way greatly reduces the impact of future systems migrations on the overall infrastructure and on client relationships. This allows the firm to evolve and adapt to new market, regulatory and client demands with more agility and lower cost.

Itiviti’s Catalys FIX Infrastructure is designed to support this decoupling strategy.

The bottom line

Any technology investment needs to be carefully evaluated, especially in a difficult budgetary environment. Sell sides don’t have to replace their whole infrastructure. Decoupling client connectivity from downstream systems can help a firm reduce operational costs and better prepare for the future. These are key weapons for financial services firms looking to future-proof their trading infrastructure and position themselves for continued growth and future leadership.

With a focus on improving and simplifying existing processes and systems, decoupling provides a middle ground between patching and outright replacing.

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