March 30, 2017 · Blog Posts
Build vs. Buy: The Great Trading Technology Debate
From hedge funds to CTAs and proprietary trading firms one of the great questions in derivatives trading is whether to build out custom software or buy a readily available solution from an ISV (independent software vendor). Finding the right answer requires careful consideration of multiple points which we will explore below and range from cost consideration to time and unique functionality needs. Ultimately, making the right decision requires a thorough understanding of your plans for growth and the potential ramifications of building or buying.
When thinking about building a platform it’s important to ask what is the value in building, what is the core advantage? Is there critical functionality required that isn’t available on the market? Does proprietary intellectual property play a key role in the strategy and execution? Do we have enough users to drive the marginal cost down?
If the answer to some or all of these questions is yes, and key intellectual property is tied to the software, then building may be the right choice to ensure custom functionality is implemented exactly as needed. However, there are multiple areas to consider before jumping in. Let’s take a look at how cost, time and functionality play into the decision making process.
- Building a platform is not a one-time cost. There will be substantial on-going development, maintenance and support costs. Bugs will arise and need to be addressed, software will require continual updates to maintain exchange connectivity and regulatory compliance. Market data connectivity fees will have to be paid on a recurring basis. To effectively manage these realities a substantial overhead will need to be allocated to support a staff of developers, network integrators, hardware experts and more. If there is a clear-cut competitive advantage to be gained from building, then those expenses may be worthwhile. When exploring off-the-shelf platforms, it’s critical to consider functional scalability with future expansion in mind.
- Beware of bandwidth dilution. When building with a small team everyone may be forced to wear multiple hats, diluting personal bandwidth and detracting from focusing on the core trading business. The burden of bandwidth dilution adds to the fact that it could take years to build a custom trading platform and be ready for operation. The more exchange connectivity required the longer the development cycle and the higher the maintenance costs will be.
- Buying does not mean custom functionality cannot be integrated. The right ISV partner should be willing to build on its core platform to accommodate client needs. Another option is to purchase an ISV’s API as the foundation upon which algorithmic strategies can be built. This allows you to maintain control of the strategy while leveraging vendors for an execution platform.
- You can have your cake and eat it too. It’s possible to utilize a combination of building and buying to achieve necessary functionality while ensuring the most efficient business operation possible. It’s all about finding the right balance and utilizing available resources efficiently.
If you find the right ISV partner and buy the full trading platform, or specific elements, the timeline to implement and begin trading will be drastically shortened. Overhead will be reduced and the development and support staff costs can be traded for a monthly fee. In turn the ISV’s team will offer continual support, ensure regulatory compliance and may even build custom features into the platform to accommodate particular needs.
The ISV also functions as an external R&D team. It’s always looking to improve products and stay on the cutting edge of technology. This benefits your firm without diluting focus away from trading operations to refine and update a platform built entirely in-house. As your firm’s scope of operations expands, the right ISV partner will grow with you.
Ultimately, the decision to build or buy encompasses multiple shades of grey and deserves careful consideration of your firm’s current operational landscape and growth plans. Building makes sense if doing so provides a quantified competitive advantage and generates enough profit to outweigh the costs. That said, in many cases the right decision is to utilize a combination of both – build part of the platform and buy the rest from an ISV that approaches the relationship as a strategic partnership. This approach ensures your firm ends up with the functionality it requires from its platform while saving time and money by leveraging the support and continued development provided by the vendor’s team. It allows you to focus on the business of trading instead of getting bogged down in system maintenance.
Whichever route you choose for your trading technology, Rival Systems is ideal for a strategic partnership. Rival empowers professional traders with a full suite of technology products including Rival Trader, a sophisticated, ultra-low latency derivatives trading system; Rival API, an algorithmic strategy development framework; and Rival Risk, a fully hosted enterprise risk management platform. Rival provides the ability to seamlessly integrate with its full system of trading tools, along with free development of enhancement requests, 24/7 support, best-of-breed functionality and the lowest latency of any platform available. Delivering a full-service solution, Rival also takes care of colocation hosting and market data and exchange connectivity. Contact Rival today to discuss how best to leverage third party software to meet your specific technology needs.