Chapter 13 - Build vs. Buy

Abstract

Broker dealers and exchanges have been under intense pressure to streamline entire trading processes to reduce transaction costs and improve quality of execution while limiting risk. Trading firms and other automated trading operations are always on the lookout for newer, faster technology, and the adoption of new technology is rarely a simple and efficient process. The real cost is connecting all the applications and the rest of the technology infrastructure. Costs such as licensing fees are only a small consideration of the overall cost of vendor-provided technology. To integrate pre-trade through post-trade analytics, brokers have not only been adopting vendor relationships but are buying up these electronic communication network (ECN) aggregators all together. Prime examples of this phenomenon are Goldman Sachs acquiring Speer Leads & Kellogg (SLK), a specialist that owns the ECN aggregator REDIPlus, and Citigroup acquiring Lava Trading, the largest of the institutionally favored aggregators. The advantages of buying or outsourcing from neutral software developers include (1) a quicker time-to-market, (2) a desire to focus resources on core competencies, (3) ease of integration with third-party technology, (4) cost savings in maintenance, (5) high reliability through battle-tested, proven performance with robust application programming interfaces (APIs) for seamless integration, and (6) ability to draw on a broad range of expertise from proven developers. Selling trading technology solutions may also generate income streams that are parallel with traditional trading commissions. This motivates broker-dealers to acquire direct market access firms and Order Management System (OMS) capabilities.