by Alastair Watson, Managing Director, EMEA, TNS Financial Markets
In today’s fast-paced financial landscape, banks are constantly looking for ways to streamline their operations and stay ahead of the competition. One solution is outsourcing financial trading infrastructure. This practice involves partnering with a third-party provider, like TNS, to handle the technology, connectivity and support needed for trading activities for example.
So, why should banks consider outsourcing their financial trading infrastructure?
Cost reduction
The costs of operating and maintaining a trading infrastructure continues to rise. Given this capital expense and the associated ongoing operational overheads, should banks manage it independently or outsource to a specialist managed infrastructure provider?
There are several things to consider when “going it alone”, including current and future requirements for both space and power, as well as network connections, bandwidth, latency, market data feeds and the need to connect to third-party data or services. In simple terms, banks need direct, fast and reliable access to global markets. This needs to be on a network that offers high performance, security, availability and resilience, with a global footprint that includes multiple data centres and exchange co-location facilities. Not only does sourcing these requirements through an outsourced specialist provide significant commercial benefits, it can also equip firms with the ability to scale quickly.
Co-location and lowest latencies
Co-locating trading infrastructure in the same data centre as an exchange’s matching engine enables banks to provide Direct Market Access (DMA) to their systematic trading clients allowing them to trade with the lowest possible latency. This setup allows clients to place orders directly on the exchange, under the bank’s membership, with strict controls to prevent market disruptions and ensure clients can only trade within pre-agreed limits.
Alternatively, clients may prefer to give banks more control over order execution, with many banks offering suites of trading algorithms and Smart Order Routers (SOR) to optimise trading decisions for price and market impact. These services are run on centralised infrastructure that maintain a comprehensive market overview and facilitate remote access to various exchanges and liquidity sources.
In this scenario, banks are consuming market data from multiple sources to drive their execution decisions and need reliable, high fidelity, low latency data delivered to these central sites. Building, running, and managing a global network that leverages the lowest latency circuits and guarantees resiliency through fully diverse secondary circuits, can cost millions of dollars a year.
Sourcing the right partner
As data volumes continue to rise, the cost of maintaining uninterrupted access to all these markets globally can become prohibitively expensive. As previously mentioned, outsourcing to an expert can offer banks economies of scale by leveraging mutualized global infrastructure without compromising on performance or latency. However, for major banks, choosing an outsourcing partner to support a critical trading path with counterparties can be high risk. Banks and hedge funds are looking to work with exceptional teams who understand their business and offer stability and innovation.
An outsourcing partner must be selected very carefully. Recent trends show that investment in infrastructure and service levels by financial market vendors has been insufficient. Many firms, particularly those owned by Private Equity, have gone through a cycle of investment to grow top-line revenue, followed by a phase of cost-cutting and streamlining to demonstrate profitability ahead of an exit event. This approach to business does not result in consistent long term service levels which are so integral to a successful and sustainable partnership.
Additionally, banks and hedge funds are placed at risk of failure by certain vendors who attempt to push their own trading technology solutions alongside their infrastructure services, limiting choice and flexibility for the customer and creating “single threaded” relationships.
It is therefore crucial that financial firms select an infrastructure partner who is both committed to long term investment goals, and who provides a flexible, technology-agnostic approach to the trading stack, ensuring the best fit for the client. Understanding the service breadth, capabilities, and approach of alternative providers, even without immediate procurement plans, is always a wise business decision.
Overall, outsourcing financial trading infrastructure can be a game-changer for banks looking to stay competitive and efficient. By partnering with a trusted provider like TNS, banks can access cost-effective, scalable, and secure infrastructure solutions that allow them to focus on what they do best – trading.
Alastair Watson, TNS Financial Markets, Managing Director, has over 20 years’ experience delivering technology solutions for Equities global markets. He brings banking sector insight, having worked for UBS, where he was latterly responsible for building market leading execution technology and growing the UBS quantitative client base in EMEA.
