Buy & Build: A Flexible Approach to IT Infrastructure
To build or to buy?
Until relatively recently, the largest firms, with billion-dollar IT budgets, have been able to build their way to IT leadership, while smaller market participants have tended to buy vendor developed systems. Some of those systems have their roots in the minicomputer world that was prevalent 40 years ago when deregulation created the foundations of modern capital markets.
The discussion about how to successfully implement new technology in financial institutions has been going on ever since, generally focussed on the pros and cons of building versus buying trading technology as firms face the challenges of modernising legacy systems and the importance of retaining agility in the financial industry. Other challenges include the need to future-proof solutions by considering technology and compliance issues.
Evolving market needs are shifting the focus to integration between internal and external systems using APIs, in areas such as regulatory reporting, forcing vendors to provide APIs to integrate legacy systems – but there is no standardisation.
Efficiency, agility, and velocity are crucial not only to remain relevant in a competitive and capital-constrained environment, but they are also characteristics that allow firms to reconfigure the business as required, unshackle change management and incentivise innovative thinking. Prioritising these trading technology needs means that businesses must allocate their capital intelligently by spending on inhouse development where it is effective to the franchise to do so, and to save on systems R&D where it does not make sense to spend.
More recently, this has led to the hybrid approach of buying and building, buying a development platform can provide flexibility and differentiation for financial firms while avoiding the limitations of building in-house.
The modular “buy & build” approach is gaining ground as a means of extending the functionality of vendor-provided trading technology systems. Buy & build delivers a high functioning platform from the start, enabling users to expand, remove or customise the system for competitive variation without creating dependency on the system’s core trading functionalities or on software development teams, whether they be in-house, vendor or certified third-party developers.
Using such approaches, investment banks will likely continue to move away from building their own trading systems, and instead integrate pre-built vendor platforms with their inhouse proprietary systems. The largest firms will increasingly incorporate externally developed specialised systems in specific areas to improve functionality, efficiency, and cost-effectiveness. Because of the sheer size and importance of these platforms, there will be a focus on the ease of integration and useability of these hybrid systems, enabling users to effectively scale and customise platforms to their requirements. Functionality such as cross-asset trading, and access to emerging markets are examples of capabilities that specialised vendors can provide to enhance proprietary trading systems.
Even so other, more human, factors can come into play, for instance, the difficulty of making investments in platforms and infrastructure when developments are viewed with short term time horizons. Understanding real needs and pains of the users is essential to the design of effective solutions in modernisation projects, as well as a practical approach that shows demonstrable improvements to stakeholders every step of the way.