Financial Firms Shed In-House Systems: Report04.27.2015
As institutional trading desks discard in-house technology in favor of outsourced systems, technology providers are working hard to meet the changing needs of the market, according to a report by Greenwich Associates.
Complexity in system demands and significant improvements in the functionality and customization of third-party platforms are prompting a growing number of institutions to outsource technology.
Third-party OMS solutions captured 20% share from in-house systems from 2013 to 2014, according to the report, which is based on the results of a recent study in which 358 buy-side traders around the world working on equity, fixed-income or foreign-exchange trading desks were interviewed about the technology they use daily on their trading desk.
Due to the significant costs and disruptions associated with switching platforms, investors generally stay with the systems they have. This latest research suggests, however, institutional trading desks are adding to the technology already in place.
“Along with functionality and scalability, compliance tools have long been viewed as a key feature of OMS, and heightened concerns about compliance have only elevated that importance,” said Kevin McPartland, head of market structure and technology research at Greenwich Associates. “It’s likely that the market’s new emphasis on compliance has helped drive the move from in-house systems to outsourced solutions.”
In equity markets, proprietary systems retain only 4% of total EMS use. Institutional investors understand the benefits of building in-house are few, and the long-term costs are often higher than those for operating a third-party platform.
“Vendor-provided platforms allow for some level of customization such that even if you use the same system as your competitor, the implementation, inputs and outputs will look nothing alike,” said Greenwich Associates analyst Kevin Kozlowski. “As EMS pricing and connectivity charges become increasingly scrutinized in a more mature, competitive vendor landscape, cost reduction has overtaken client service as a priority on many trading desks.”
Inefficiencies in corporate action communications cost each market participant $3m to $5m a year.
Purchase of CF Global Trading will help buy side access liquidity and streamline workflow.
Significant compliance challenges and costs will result from the current rush to rulemaking.
Leucadia will provide seed capital to the multi-manager fundamental equity long/short platform.
The President said plan fiduciaries should be able to consider any factor that maximizes financial returns.