Faced with rising compliance costs, more trading venues and torpid markets, banks are reassessing one of their biggest fixed costs – the technology they use to trade.
This week JPMorgan began a rollout of a new single platform that will consolidate all their 30 existing platforms into one, a move that highlights a more profound change taking place.
While the rest of the world has long embraced outsourcing and explored the possibilities from opening up their software code, investment banks have largely kept their spending in-house. This, they argued, was because they needed to develop and protect their own unique intellectual property that gave their clients an edge in the market. Few were concerned about how the pieces knitted together behind the scenes, as long as the revenues outweighed the costs.
“It was often used to justify significant spend on proprietary technology without any real analysis of its ultimate value,” says Steve Grob, director of group strategy at Fidessa, a UK trading technology company.
But these assumptions are now being reassessed amid three pressures: low trading volumes, rising regulatory demands and an explosion of trading venues for equities, bonds and currencies to which customers demand connections.
The overhaul required by the regulatory changes alone is significant. Jamie Dimon, chief executive of JPMorgan, has estimated the US bank would be spending more than $3bn on people and systems in coming years to comply with more than 14,000 new regulations arising from legislation like the Dodd-Frank act, Basel III and Emir.
At the same time, investors are showing ever-greater appetite to trade electronically. A study last October from Greenwich Associates, the US consultancy, found trading in equity futures and exchange traded funds in the year to June was rapidly moving to electronic platforms in both North America and the UK. Hedge funds and insurance companies were particularly keen, it found.
“Far from being short-term, post-crisis adjustments, it has become increasingly clear that these market shifts are entrenched and irreversible,” says Mr Grob.
Software companies say that for all a bank’s intellectual property and unique algorithms, much of the functionality and infrastructure that sits beneath them are little different from that of rivals.
As a result, radical moves are now under way. In August, Japan’s Nomura – which has spent millions on its own trading infrastructure in recent years – said it would use infrastructure built by MarketPrizm, part of Colt, to let its customers trade electronically in equities, futures and foreign exchange. Deutsche Bank is seeking to convince rivals to share trading software and tools.
Some necessary functions provide little competitive edge, such as the middle office operations that confirm trades. Other operations such as market data provision, testing of algorithms and even some trade executions can be outsourced, creating opportunities for new technology companies such as the UK’s MarketPrizm, Fixnetix and Broadway Technology of the US.
Nonetheless, trying to draw the line between what is a competitive edge and what can be outsourced can be constantly changing.
“You can always take something in-house but only if you think you can build that scale again,” says Tanuja Randery, chief executive of MarketPrizm.