Despite the continuing uncertain economic and political environment, firms are now looking to modernize their derivatives trading infrastructure. The compelling arguments for change – the cost savings, functionality gains and increased agility offered by today’s commercial platforms – are at last overcoming the intransigence lingering since the credit crisis, but now with managed services as part of the mix.
A recent TABB Group survey of 72 buy-side, sell-side and proprietary trading firms that are active in the global derivatives markets suggests the marketplace has a stock of aging trading platforms. According to the survey, a majority of firms (53%) have been using the same derivatives trading platform for the past five years or more, with less than 10% of those surveyed claiming to be using what could be called a ‘new’ platform of under two years of age.
As Silicon Valley will tell you, five years is an eternity in fast-moving technology circles. So why is our cutting edge derivatives trading community so resistant to change?
In some cases, firms are satisfied with current functionality. But there’s more to the phenomenon of aging platforms than simply: “If it ain’t broke, don’t fix it.”
One challenge facing technologists attempting to remain at the leading edge of the market is stickiness; platforms – particularly those developed in-house – tend to become embedded into the fabric of daily work flow. Once there, they are difficult to dislodge, even when the benefits of moving forward with a new platform seem obvious. Budgetary constraints and the fear of lengthy replacement cycles add to the reticence.
But the TABB survey suggests a new willingness to progress with modernization plans. More than half of respondents said they expect to deploy new derivatives trading platforms within the next three years. Of these, 44% expect to implement a new platform during 2018.
What’s more, firms are looking to capitalize on the flexibility and agility offered by commercial systems, rather than commit to the cost and effort of developing in-house. Significantly, too, they are looking at emerging hosting models to offload responsibility for operational running and maintenance of their trading platforms.
According to the survey, almost one-third of respondents currently use a trading platform solution that is fully hosted offsite by their chosen supplier. A further 22% use a managed services model with their vendor providing logistical support for an on-site deployment, and 27% are using a mixed approach. Today, less than 10% of firms are using a fully internally developed and hosted platform for derivatives trading.
This is in line with a broader trend towards outsourced solutions as firms seek to reduce their broad IT expenditures and reduce the ‘footprint’ of internal systems. In the case of derivatives trading systems, offloading responsibility for balancing applications, market data and hardware operational requirements can relieve a major burden on IT and operations staff, reduce costs and boost the agility required to navigate today’s complex and fast-moving global markets.
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