The TRADE 59 - Q1 2019 | Page 21

[ T H O U G H T The evolution of the execution technology stack The result of these “macro” trends yielded better efficiencies in the execution value chain, while im- proving overall execution quality and thus saving millions of dollars for investors. By some estimates investors have witnessed a 70-bps cost reduction in execution impact cost as a result of the more efficient execution value chain, even with- out taking reduced commission rates into account. However, from a purely oper- ational cost perspective, these efficiencies favor scale (i.e. large in- vestment banks and brokers) as le- veraging automation and high-tech trading for competitive advantage requires significant technology in- vestments. The cost for developing custom, AI-based execution algos or an algo wheel is fixed, unrelated to the trading volume (and thus commission revenues) it gener- ates. We see some evidence for the impact of these economies of scale in recent mergers of smaller Tier 2 & 3 execution brokers globally. To understand the costs for developing an automated exe- cution value chain, one needs to examine the components involved in creating it. Beyond the invest- ment in developing an “in-house secret sauce” for the algo engine, a firm must also build a connectiv- ity framework which enables its customers to connect to the algo and the algo to connect to target market(s). In addition, a moni- toring framework is required to manage risk and compliance, and to provide IT and low touch sales traders the ability to manage and interact with the algos. However, while the algo “brain” can be used as a differentiating factor for the firm, it is not as clear that the connectivity nor mon- L E A D E R S H I P | S P O N S O R E D itoring framework are; yet they carry significant development and maintenance costs. Until recently, most large firms rarely considered off-the-shelf software as a solution or as “building blocks” to acceler- ate and reduce internal develop- ment costs. But, as we are entering the second phase of the automation revolution, this is rapidly changing. Firms are adopting a more critical view on what should be built in-house vs. tools that can be ac- quired, and do so for good reasons. Build? Buy? Both? Examining why firms have opted to “Build”, i.e. developing proprietary full-stack algo trading technology rather than “Buy” the frameworks needed around the algos from soft- ware vendors, we have identified three main factors: 1) Availability - the fast pace of change in early years and the novelty of the automated execu- tion desk meant that there were no built-for-purpose, off-the-shelf solutions available in the market. 2) Customisation - off-the-shelf solutions were not flexible or adaptable enough to easily on- board customers or manage chang- ing exchange interfaces. 3) Performance - vendor products were lacking the throughput, capacity and latency required by an automated execution value chain. These shortcomings are ex- plainable, as most vendors have designed their offerings with serving the high touch execution value chain in mind. Such solutions were then augmented to address low touch monitoring as well, but implementations were typically awkward. However, over the past three years, the automated execution value chain has matured, with a new generation vendor solutions B Y I T I V I T I ] emerging. Itiviti, for example, has developed a connectivity and mon- itoring framework, designed from the ground for low touch environ- ments. With ample flexibility in the connectivity framework, onboard- ing has become much simpler and more configurable. This framework is FIX-based but supports multiple protocols and is built to translate and enrich order flows. The monitoring framework is geared towards an “exception man- agement” workflow, built to support automated execution systems with hundreds of thousands of orders and millions of executions. Conclusion With growing market complexity, increased competition and cost pressure, firms are looking to use their in-house development resources more efficiently. It no longer makes sense to build, maintain and manage a full execu- tion technology stack unless this enables the firm to add clear value, draw competitive advantage, or leverage economies of scale. Given the options at hand today, a more cost effective and busi- ness-focused solution is to focus development on areas where the firm can add value to customers, e.g. through intellectual property, and to source components where it does not. There is a new generation of built-for-purpose tools which offer the flexibility, capacity, latency and throughput for supporting an automated execution value chain. This is a key reason why we are witnessing a rising demand for connectivity and low touch solu- tions from firms across different sizes. We expect this trend to con- tinue over the coming years as the second phase of automation of the execution value chain matures. Issue 59 // TheTradeNews.com // 21