The Last Look…
Posted by Colin Lambert. Last updated: January 18, 2022
Every year, around this time, there are various releases from firms identifying technological change as the biggest challenge for firms in the year ahead. Often, they are based upon surveys and, almost always, they are self-serving and, frankly, predictable.
Technological change is a constant, although I accept there is no hard and fast rhythm to it and late 2021 and early 2022 are likely to be looked back upon as a period of faster change. This does not mean, as many surveys would like to have you believe, that firms are struggling with their IT – some are, without doubt, and the continuing dearth of developers and IT staff in general may mean matters get worse, but generally speaking, those firms at the centre of markets take a lot more care over this type of thing than some like to suggest.
I mention all this because another survey that landed on my desk last week made the interesting – and concerning – claim, that budget restraints have seen almost eight out of 10 firms select a “lower quality IT solution…[meaning] IT resilience has been further compromised”.
My focus is largely on the FX market so I will restrict my remarks to that area, and there is no doubt that one or two firms have been challenged technologically speaking over the past couple of years, and have seen what represents significant down time. The vast majority, however, have operated normally, including during all of the increasingly frequent volatility spikes we are seeing in markets.
As someone who talks to people in the technology business of markets a lot, I am not going to be as naïve as to suggest that the very best solution is always taken, but I would say that one area that all firms take seriously is system resilience. There was a time, just a few years ago, when a platform going down was an irritant; customers thought about going elsewhere, looked at the cost in both financial and resource terms, of changing, and carried on regardless. Those times could be changing.
In terms of single dealer platforms, users generally have access to more than one – and while I accept that a decent number do not, I would argue that these customers probably won’t notice down time anyway! Amongst those that use them, customers have also largely come to terms with the need for at least two prime brokers.
What has changed over the past year in my view is more customers looking at their multi-dealer platforms. It is not necessarily that they are looking to out one and take another, more that the redundancy theory has worked its way into this area. Events of the past year, especially surrounding FXall, which suffered down time due to unrelated issues elsewhere in the firm, have only served to accelerate the redundancy thinking.
It is not a simple solution, however, for this can raise costs for the sell side providers and they are unlikely to be too happy about having to build extra connectivity for a redundancy measure. More pertinently – and for the first time in quite a while – I sense they are actually making this point to their customers. How clearly the message is heard, understood, or even cared about, by the customers remains to be seen, however I sense there will be some robust discussions taking place.
The industry could find itself in a tricky spot, because there is no doubt that redundancy of technology is a good thing, but as the aforementioned survey highlights, budgets are apparently tight (I would argue mainly because of the growing number of items on the “to-do” lists, more than resources being cut) and a growing number of firms are going to be unwilling to pay the connectivity price to sustain customers across multiple venues.
The technology has to work every millisecond that customers are using it. If it doesn’t, some firms may find seemingly unassailable positions coming under serious threat in 2022.
There are one or two people talking to me about a “new” model (it looks suspiciously like a white label to me, but there are nuances) and it does seem that rather than simply continuing to add venues, a smarter approach would be to remodel a firm’s liquidity landscape and framework to provide built in redundancy.
In these circumstances, there is one thing an incumbent cannot afford, and that is system down time. There have always been competitors waiting to jump on any problems at a rival, but historically the alternatives have been too costly and time-consuming to implement. That seems to be changing and, importantly, an increasing number of buy side clients who would have to accept the change, are starting to understand that, and are opening their eyes (and minds) to different ways of doing business. This makes it a more fluid environment for technology providers, platforms in particular, as 2022 progresses, one in which there is no room for complacency. The technology has to be right, more importantly it has to work every millisecond that customers are using it. If it doesn’t, there could be shocks to the system for some firms in 2022 and seemingly unassailable positions could come under serious threat.
There is one more thing to throw into the mix as well – the likelihood of busier markets in 2022-23. It’s one thing for a platform to have down time when markets are quiet and a firm can pick up the phone with no discernible impact upon its final execution price. What happens if a breakdown suddenly costs a firm 30 points across a portfolio of trades? What if a firm loses access to its actual positions while the market is moving in a more sustained manner?
The game is changing in 2022, and for technology providers, the stakes are higher than ever.