At your service: A new model for technology in the front office gains traction

Posted 25th April 2018
Ollie Cadman
By Ollie Cadman Head of Business Operations Vela

Across a variety of industries, there are clear signs of increased spending on managed services. Whether it involves software-as-a-service (SaaS), infrastructure-as-a-service (IaaS) or platform-as-a-service (PaaS), a raft of reports and surveys show rising appetites for this new way of doing business.[1]

Financial market participants are among the most enthusiastic to embrace the new as-a-service model. And it’s not difficult to see why.

Whether the focus is on operations, market opportunities or broader competitive pressures, the as-a-service model offers financial firms more scalability and flexibility than they’ve known before. It allows trading firms to be more responsive to shifting customer requirements, to enter or exit markets more quickly and efficiently, and to address legacy IT issues with less pain. And all of that is before even counting one of the most significant drivers: the balance sheet advantages of shifting away from capex and towards opex.

What’s different now, however, is that the as-a-service approach is extending beyond the back and middle offices, where much of the early low-hanging fruit could be found for financial firms undergoing digital transformations. Historically, the front office – whether market participants have relied on third-party providers or have developed their own in-house solutions – has been based on self-owned and self-managed hardware and software. That is starting to change.

Coming to a screen near you

The idea is straightforward. Firms engaged in the trading business access and trade the markets through a set of APIs that cover the whole gamut of trading, from data to order and execution to risk management. Instead of using their own hardware and software, firms source and manage their trading platform and ancillary services from specialist third parties, and integrate them with their internal systems via APIs.

Arguments for managed services extend to both buy-side and sell-side market participants, although some factors will invariably weigh more for one side or the other heavily depending on the size and nature of a firm. For instance, larger sell-side organisations are likely to value the emphasis on opex more than smaller buy-side groups. Similarly, the potential to trial new markets without making long-term investments will be a significant attraction to niche-oriented, buy-side participants.

While much of the attention in terms of digital transformation recently has been focused on the sell side given a number of regulatory drivers, the potential for trading-technology-as-a-service may be even more dramatic for the buy side. As these firms increasingly use multiple vendors, they still need to aggregate them into a single upstream application. Doing that over a series of APIs becomes a much more attractive proposition than traditional on-premises approaches. Smaller organisations simply don’t have the option of regularly deploying and managing trading stacks, so using APIs to move to an as-a-service model enables them to widen their market opportunities much more easily.

Simply put, in an API-driven world, trying new platforms – or trying new markets – is not the potentially life-changing decision it used to be. For the buy side, a plethora of choices opens up. Meanwhile, for the sell side, onboarding new clients becomes a relatively easy affair.

A matter of timing

Given all the benefits, why are managed services experiencing such growth in the trading technology scene only now?

Some of the answer comes down to time. As API-based approaches over the years have mushroomed in other sectors such as retail and heavy industry, financial sector participants have become emboldened to explore the new model.

Equally important, issues that had long concerned CTOs, such as security, have been addressed through technological progress. For instance, advances in encryption technology have made financial firms more comfortable with public and private cloud-based solutions, which are integral to managed services.

Latency is another example of a critical issue that has been addressed. Low latency is not just a consideration for high frequency traders. Best execution, particularly in markets with fragmented liquidity pools, simply demands a low level of latency. But some managed service providers have recognised this and are now able to provide latency statistics for every message transmitted.

For companies looking to adopt a platform-as-a-service approach, one factor that they invariably consider is the trading community. Buy-side participants will only want to be on a platform if it has the brokers they need, while brokers will be attracted if they know the buy side is already on board. But this just puts the focus on choosing the right provider.

API revolution

One of the biggest factors behind the embrace of as-a-service models, however, comes down to the choices financial firms now have. API development for the financial industry has taken off in recent years as fintech competition has intensified and a host of smaller disruptors have looked to seize business from established players.

About a dozen years ago, there were fewer than 200 APIs in existence. According to programmableweb.com, which provides an online directory for APIs, there are nearly 20,000 now. The financial services sector has seen some of the strongest growth in API development. Between 2009 and 2013 the total jumped from fewer than 100 APIs to more than 500. The site currently lists more than 3,000 APIs in its financial category.

Such a strong focus on development opens the way for technology leaders to provide innovative solutions to firms looking to take advantage of the API revolution.

Taken together, these signs all point to rising interest in the as-a-service model for financial markets. The benefits have been demonstrated and the obstacles overcome. Whether the focus is on reducing costs or boosting business, the opportunities that an as-a-service model provide are hard to ignore.

 


[1] A report by CXP Group found that nearly 80% of organisations surveyed expected to increase or maintain SaaS, IaaS or PaaS spending in the coming two years. A separate survey by Ovum found that 50% reported an increase in SaaS spending in the past two years, 47% in PaaS spending and 46% in IaaS spending. Meanwhile, IDC FutureScape predicts that by 2021 IaaS spending will exceed on-premises spending by 15%.

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