In a world of mergers and acquisitions, being the fastest, the most innovative and the highest risk taker will make sure you are head of the game in any type of business. When applying this theory to the trading world it would mean owning the most revolutionary technology.
1. Risk management tools making sure all orders open and traded will be kept in check for adverse losses?
2. Internalizers for your own client interests making sure your business stays with you?
3. Execution Management Systems (EMS) effective access of liquidity across multiple markets?
4. Order Management System (OMS) for effective management of orders across multiple markets with minimal market impact?
If we take a large scale trading firm from the pre-recession period, they would probably own all four types software costing a good 20-30 Million dollars or even more (not taking into consideration maintenance fees and customizations). This means that the firm would have to have their own technology division costing quite a significant chunk of their revenue to maintain whilst paying maintenance fees to the software vendors and mostly likely all 4 of them. We should also keep in mind that if the software becomes redundant due to any new developments in the industry (for example RegNMS, MiFID, etc) upgrading them to stay in the race will be almost like buying brand new software due to their extremely rigid structure.
Medium sized firms probably would own a Risk Management tool coupled with an EMS but still upgrading these to suit prevailing trends would mean parting with their limited and valuable revenue and it becomes a recurring cost which these companies cannot afford.
In the present situation even large firms like Goldman Sachs and JP Morgan are having a hard time keeping their business afloat. So spending a large chunk on software in today’s world is a big NO even for them. So what is the solution? Does the medium/small sized firms even have a choice?
I would like to think that they do. Currently there are a few large players in the trading world where software for the above four categories are being built and, each trading firm would assume buying an extremely specialized software from a specialized vendor for each area (such as risk, order management, routing, etc) would solve their problems. But this is the biggest misconception as per my view. If these softwares are not being built with a flexible base the buyers would suffer in the long run. Any upgrades or customization would mean a large cost to be incurred by the customer who in reality is actually paying for the vendor’s additional software code maintenance.
If you have been reading this with intent, then you would probably be able to guess my proposed solution for the problem. My solution is simple. Let me list it down for you:
1. Always talk to your vendors regarding your exact requirements
2. Figure out whether their software are actually flexible as they say
3. Make sure the software has the capability to integrate to other solutions easily
4. Make sure the vendor is there to improve your business and not just to sell you their software
5. Make sure the vendor has experts in each area of interest (EMS, OMS, Risk, etc)
6. Ask them the hard questions. No question is a dumb question and if the vendor isn’t answering your questions then they are not the one for you!
7. Get them to do you a Proof of Concept (POC) proving your requirements can be met easily
Once you’ve gone through these steps (maybe not in the same progression) you would be ready to take the next step of buying the software that will actually deliver! Remember, software products which are truly flexible would only cost a fraction of what you’d be charged now for any customization. Theoretically a good software designs would predict areas most likely to change overtime and be implemented with the capability to simply “drag-and-drop” new functionality overriding the old.
I hope this article would open up your minds and aid your search in finding that vendor that will take you to the next level in trading. Believe me it’s tough to choose the right vendor but if you do that will make you the biggest trading firm in Wall Street!
