An interesting couple of days at the International Derivatives Expo in London this week. Alongside the usual debate on OTC clearing, algo tagging and other regulatory conundrums, I was on a panel looking at the changing face of vendor relationships. What is evident is that the build vs buy debate has reached a new dimension as the economics of the FCM business, combined with the regulatory burden, have forced a rethink. Buying in 3rd party technology saves money, but how do FCMs differentiate if they are using the same kit as everybody else? The answer lies in thinking about technology in horizontal layers rather than vertical silos. Much of the technology stack of an FCM is relatively commoditised and so can be provided more efficiently by 3rd parties. And, in this instance, buy is fast being replaced by rent as intelligent outsourcing starts to take hold. The top layer is how firms differentiate – this might be through their reach, their algos, their relationships/research or access to their balance sheet. Finding a way to glue this onto the outsourced technology stack that does the heavy lifting is the key.
The next shift will be when FCMs think seriously about sharing infrastructure, especially where this is currently duplicated and yet provides no competitive edge (post-trade being an obvious example here). Naturally it’s hard for competitive firms to put their guns aside and collaborate but, without such a change in approach, it will be hard for these firms to square the circle of higher capital adequacy ratios, greater compliance costs and lower commissions.