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Total Cost of Ownership for brokerage firms: the technology management challenge


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Total Cost of Ownership …

Total Cost of Ownership
for brokerage firms:
the technology
management challenge
Why regional brokers

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  • 1. VALDIPosition paper seriesTotal Cost of Ownershipfor brokerage firms:the technologymanagement challengeWhy regional brokersneed to focus on TCODavid Morgan, marketing director, trading and client connectivity,SunGard’s capital markets business
  • 2. Contents2 Post-MiFID market challenges3 Containing TCO4 The benefits of managed services — a case study5 Conclusion5 Appendix: SunGard’s managed services
  • 3. TOTAL COST OF Post-MiFID market challengesOWNERSHIP FOR The fragmentation of trading ushered in by the EU’s Markets in Financial Instruments Directive (MiFID) has resulted inBROKERAGE FIRMS: an increasingly complex environment for European equity brokers. Technology has become a key factor in theTHE TECHNOLOGY competition between the new trading venues and the incumbent exchanges, and each market operator is strivingMANAGEMENT to introduce best-of-breed trading engines and interfaces in order to attract liquidity.CHALLENGE For broking firms, particularly those engaged in regional business, the implementation and management of hardware, software, interfaces and connectivity across multiple trading venues is proving increasingly costly and time-consuming.WHY REGIONAL BROKERS NEED Where in pre-MiFID days these firms would be required toTO FOCUS ON TCO deal with perhaps one major software release per exchange each year, they are now faced with more frequent releases from many more trading venues, plus of course they have to contend with a range of entirely new requirements that can only be handled via appropriate specialized technology: smart routing, in-house matching, transaction cost analysisSummary and so on.›› see rapid growth in the use of We Competition is of course not restricted to the trading venues; managed or hosted services to support the brokerage firms also have to engage in an intense fight trading technology. among themselves, for declining order volumes. They therefore need to be highly responsive to their buy-side›› Outsourcing of execution business is an clients’ demands, and increasingly these clients want to do option, but needs to be done selectively. business in new instruments and markets as they seek better›› Market data access is usually the first returns. While this diversification trend brings some relief from function to be managed by a service the depressed local market conditions, the overall pressure on provider: trading technology often follows. margins means that brokers have to consider carefully how to undertake any consequent expansion initiatives in the most›› Performance and latency need careful efficient and cost-effective way. evaluation, but good service providers can deliver improvements. Meanwhile, the overall importance of technology in the efficient delivery of brokerage services continues to grow;›› Broker-to-client connectivity is increasingly as its use extends across all business processes, its cost also complex, and a developing area for becomes more important. Making the right technology managed services. choices is therefore vital, and it is equally important to manage›› SunGard hosts and manages trading the resource efficiently. There is today an increasingly sharp system installations in Europe, Asia and the realization that optimizing the management of technology can United States for over 250 clients. make a huge difference to its Total Cost of Ownership (TCO).›› provide hosted market gateways for We The potential TCO of technology for regional broking firms 110+ trading venues worldwide. has grown significantly as the trading environment has become more complex. Firms have become more focused on the fact that technology costs are not restricted to installing hardware and implementing software, but also encompass running and maintaining the technology environment, connecting that environment to the outside world, and ensuring business continuity. A large number of complex operational processes underpin the use of technology today, and many firms have found that these are becoming unmanageably onerous and expensive. Brokerage firms are not data centre operators: they often do not have the required skills in-house, nor do they have the time or inclination to attract and retain the right staff.2 Total Cost of Ownership for brokerage firms: the technology management challenge
  • 4. Containing TCO Market data and tradingIt has become increasingly clear that regional brokerage Both of these functions are very expensive to manage on afirms cannot support the steep ongoing rise in technology DIY basis, and increasingly so. Market data is a natural forcosts that is the inevitable result of a ‘business as usual’ managed services, and where a regional broker is a marketapproach. One clear consequence of this, and the focus of member, it can also lower TCO by having its tradingthis paper, is the rapid growth that we have seen in the use connectivity hosted and managed by someone else.of managed or hosted services. ‘Managed service’ has Market data access is often the very first function a brokeragebecome the commonly understood label for any service firm will hand over to a managed services provider: today,offering in which business or operational functions are only a few of the largest financial services firms, andtaken over by an external provider, which can apply scale specialists such as HFT firms and market makers, typicallyand experience to provide those functions at a lower cost manage this access themselves via direct connections tothan the client firm could do itself. We consider below three exchanges. These firms believe that by implementing theirareas in which TCO for a brokerage firm can be reduced via own solutions they can gain advantages in speed andthe use of managed services: reliability to support ultra-low latency trading. But the vast›› Outsourcing of execution as a whole majority of brokerage firms have for many years outsourced this function to specialist market data vendors.›› Market data and trading This first move has naturally led many of those firms to›› Connectivity to clients consider other complex technical and business processes that could also be outsourced to specialist service providers, and trading connectivity is an obvious candidate. In the US, orderOutsourcing execution management and connection to markets have been handled almost exclusively via managed services for quite some time.Given the lacklustre performance of Western European And in Europe also, firms are today increasingly conscious thateconomies, many buy-side firms are becoming more global trading servers, order management systems and smart routersin their investment outlook and are looking for their brokers to do not have to be run in-house.provide services wherever they want to trade. This is puttingpressure on regional brokers, which do not have the resources As managed services have become increasingly firmlyof the global broking firms to invest in the required market established during recent years, in trading as in othermemberships, systems and interfaces. The pressure for new business process areas, various labels have been used tomarket connectivity can of course also apply to the new describe them. The Application Service Provider (ASP) is nowtrading venues within Europe − both public-book MTFs and gradually giving way to the supplier of Software as a Servicedark pools − in which case smart routing and trade auditing (SaaS). SaaS offerings may also go further in includingare also implied. ordering, contracting and billing as part of the online service process, though of course not all of this can be achieved in aIn both these cases, TCO can be lowered by outsourcing order regulated industry such as financial market trading.execution to other brokers, who are able to provide the widercoverage relatively inexpensively and charge for execution and For both market data access and trading capacity,clearing as a service. Where a broker is already doing business the decision to follow the SaaS managed services route ison a market, it can profitably provide a pure execution and normally a straightforward financial one. Where a technicalclearing service − Direct Market Access − with very tight pricing. and operational business process is sufficiently standardized,So a European broker may wish to offer its buy-side clients a brokerage firm gains no competitive advantage by runningaccess to, say, the New York Stock Exchange and NASDAQ, that process itself. Engaging a managed services provider willbut does not want to tackle the regulatory and operational almost certainly result in lower TCO, and potentially in someissues involved in setting up as a member of and connecting to real functional advantages, such as lower latency viathose exchanges for trading and clearing. Through outsourcing, co- or near-location of servers for a given market.the broker can offer its clients access to these markets, while While performance and latency – increasingly critical issuesbehind the scenes the order flows are sent to a US broker via a in the trading process – could be seen as areas of potentialFIX link or an order routing network. weakness in mutualized multi-client services, leadingClearly, this approach can be taken only so far without providers have applied the necessary focus to turn theseendangering a firm’s fundamental value proposition to its aspects of their offers into real strengths. The detailedclients, and raising the risk of disintermediation by larger considerations are of course quite complex, and thesecompetitors. It may be considered a good approach for characteristics of each specific service need to evaluated‘out of region’ markets, but less so for those closer to home. on a case-by-case basis.Something more is required, and fortunately many optionsexist at the level of outsourcing the management oftechnologies, as distinct from entire business functions.Some of the major possibilities are outlined below. 3
  • 5. Connectivity to clients The benefits of managed services — a case studyJust as connecting to multiple exchanges is complex, so too is We take the example of one of SunGard’s Europeanconnecting to a large number of individual clients. A broker of brokerage clients, which has gained significantly greaterany size will almost certainly have been required by its clients flexibility by adopting managed services. This client has usedto deal with a range of connection types over many different SunGard’s SaaS-based managed services to trade andnetworks, both FIX-based and proprietary. The great majority manage orders on NYSE Euronext Paris, Brussels andof electronic orders arriving at any brokerage office today are Amsterdam as well as for connection to a tier-one broker forcarried via one version or another of the FIX protocols, either smart order routing to European markets.directly from buy-side clients or, most often, via the many FIX The firm recognises that many of its business processes haverouting networks now commercially available. become commoditised, and are no longer real differentiators.This incoming order traffic is heterogeneous on several It sees clearly that its focus needs to be more outward-looking:dimensions, given that it usually involves multiple physical on understanding in depth the evolving needs of its clientsnetwork connections, various FIX protocol definitions and and maintaining high-quality relationships.versions, and multiple order types. While every one of these Based on this view of its priorities, the brokerage firmorders is vitally important to the receiving brokerage’s decided to embrace the managed services direction, integration of the numerous and mixed inputs into Its trading systems architecture was already based onits workflow is an increasingly significant, and unwelcome, SunGard’s systems, and it has now progressively outsourcedtechnical management task. And the telecommunications the hosting and management of all these technologies tocosts involved can mount up rapidly. SunGard: to support client and market connectivity,It is difficult enough these days for a broker to attract and order management processes. Via SunGard’s SaaS-and retain clients; the additional burden of managing the based services, the firm has access to more than 110technology involved in ‘on-boarding’ and subsequently markets worldwide, for bonds, equities and derivatives,managing those clients’ order flows is a costly distraction. and managed connections to all the major order routingA managed services approach can render the technology networks. When a new client needs to be connected totransparent to both broker and clients, and also can help to send electronic order flow, or a current client wants to startdeliver the flexibility and speed of response that is typically trading on new markets, SunGard’s team manages all therequired by buy-side firms. Again, there can be a dual benefit required connections, interfaces and software to set the– both lower TCO and real functional advantages. new processes in place smoothly and rapidly. This radical business simplification has enabled the firm to achieve a significant reduction in its TCO - estimated at € 200,000 per year* for trading technology - and to place its management emphasis where it should be: on looking after client relationships and growing revenues.*Source: SunGard4 Total Cost of Ownership for brokerage firms: the technology management challenge
  • 6. Conclusion Appendix: SunGard’s managed servicesThere are many elements of hardware, software and The SunGard Global Network (SGN) underpins SunGard’sconnectivity technology involved in supporting a brokerage SaaS-based services. It is the infrastructure via which thebusiness, such as order management, smart routing, algo and managed services are delivered.automated trading software. Many of the underlying business SGN addresses the connectivity challenges of trading newprocesses are today relatively commoditised, and standard instruments and venues, shifting investment strategies andISV software solutions are widely applied. Increasingly, regulatory changes, for more than 2500 financial institutionsSunGard’s enterprise software clients recognise that delivery worldwide, with connectivity to over 120 markets. The networkof these solutions via managed services can deliver further supports global, multi-asset class, institutional trading, bybenefits, in terms of lower TCO. connecting sell-side and buy-side firms, as well as exchanges,A specialist firm such as SunGard can leverage its extensive ECNs, MTFs and Dark Pools, and can enable a broker toexperience in trading and connectivity to deliver services that globalise its service offer without commitment to significantbring to bear significant economies of scale. SunGard hosts new investment.and manages trading system installations in Europe, Asia and SunGard Valdi Market Access Service: hosted servicesthe United States for over 250 clients, and offers hosted provide faster market access with minimum gateways for 110+ trading venues worldwide. Firms gain complex infrastructure support without expanding their technical resources. Valdi hosted services deploy high-performance and cost-effective primary and back-up trading systems that use SGN for connectivity. More than 150 SunGard customers use Valdi Market Access to connect to over 110 global securities and derivatives markets. For some it provides their complete market access solution, while others use a combination of the Valdi managed service with on-site gateways for other market access. Client connectivity: As well as connecting brokers to markets via SGN, SunGard can connect brokers to individual clients around the world via that same network. There are 28 SGN hub sites around the world, located in the major financial centres. At each of those hubs, there are connections to the individual customer organisations that use the network services as well as to the local markets for trading and market data access. A firm in London, for example, might connect through the same hub to the London Stock Exchange and then go over SGN to Frankfurt in order to trade on Deutsche Boerse. SunGard’s FIX Network Service (FNS): offers a unique managed service that can relieve brokers of the technical integration workload and associated costs of connecting via disparate order routing and other networks. FNS delivers a single, normalised order flow. Based on SGN, it provides one coherent gateway to and from the FIX order-originating world. 5
  • 7. About SunGard’s Valdi information, please visit: For more www.sungard.comSunGard’s Valdi provides equities, futures, fixed income and options traders withmulti-asset trading solutions on 170+ markets worldwide. Valdi global trading us Contactsolutions support the entire trade lifecycle, including integrated trade and order capitalmarkets@sungard.commanagement systems, execution services, market data, risk management,compliance, and clearing and settlement services. Also offering worldwideconnectivity via the SunGard Global Network (SGN), SunGard’s Valdi global tradingsolutions help customers to achieve increased performance and low latencyexecution across multiple platforms, instruments and geographies.About SunGardSunGard is one of the world’s leading software and technology services companies.SunGard has more than 17,000 employees and serves approximately 25,000customers in more than 70 countries. SunGard provides software and processingsolutions for financial services, education and the public sector. SunGard alsoprovides disaster recovery services, managed IT services, information availabilityconsulting services and business continuity management software. With annualrevenue of about $4.5 billion, SunGard is the largest privately held software andservices company and was ranked 434 on the Fortune 500 in 2011. Look for uswherever the mission is critical.AMERICAS ASIATel: +1 646-445-1000 Singapore — Tel: +65 6827-0700 Hong Kong — Tel: +852 3719-0800EUROPE GENERAL INQUIRIESTel: +44 20-8081-2000 Tel: 1 800 825-2518©2012 SunGard.Trademark Information: SunGard, the SunGard logo and Valdi are trademarks or registered trademarks ofSunGard or its subsidiaries in the U.S. and other countries. All other trade names are trademarks or registeredtrademarks of their respective holders.