Attempts to overhaul the trading business are being held back by the complexity of the market’s existing web of systems, according to one of the investment banking industry’s top technologists.
Fintech firms are touting new ways to perform some of the tasks involved in the trade workflow, but because each of those tasks relies on – or feeds into – many others, change is happening slowly, said David Hudson, co-head of digital and platform services at JP Morgan’s investment bank.
“The ecosystem, in my opinion, is generally what holds us back… there are lots of good ideas, but they are all point solutions,” said Hudson, who was speaking at Risk Live in London on June 27.
Adopting one of these new services often requires firms to make follow-on changes elsewhere, which may not be appealing – cost-cutting is a key driver in attempts to revamp the business of trading.
One alternative would be a more ambitious attempt to reimagine and replace a large portion of the existing architecture at once – an approach that has worked in other fields of technology, including the public cloud, but Hudson saw little immediate prospect of something similarly radical happening in sales and trading.
Messaging tool Symphony has been touted as one possible path to a major front-office shake-up. The messaging service was created in 2014 when Goldman Sachs and 14 other firms invested $66 million to create a competitor to Bloomberg’s fixed income sales and trading desktops. In theory, the open-code service could become a way to connect dealers and clients – with a variety of different tools being bolted on in app form. Currently, it remains an almost exclusively in-house messaging tool.
To illustrate the challenges created by the status quo, Hudson used the example of a trade between a bank and an asset manager, which would involve order management, accounting and risk systems, as well as execution management and post-trade systems. Other entities could also be involved, such as research providers, an executing broker, a securities lender, fund administrator, custodian and a variety of market utilities.
A slide used by Hudson at the conference showed how this can create a complex web of interconnected services. For instance, order management is linked to execution management, risk and accounting systems, as well as an executing broker and custodian – each of which has its own set of connections. In all, the client uses 15 different interconnected systems or services to trade.
“That’s a pretty fragile ecosystem,” he said. It “may be true” that an insurgent provider can provide a better service than an incumbent, he added, “but unpicking this very delicate ecosystem is extraordinarily hard. As an industry we are holding ourselves back.”
Another obstacle to innovation is that existing platforms may have little motive to change. In some cases, providers of systemically important services may also have little room for manoeuvre – Hudson used the example of the Depository Trust & Clearing Corporation and foreign exchange settlement service CLS Group.
“We are all stuck with legacy incumbents who run messaging platforms or settlement systems or utilities with incentive structures that are very difficult,” he said. “I don’t think anybody wants the DTCC or the CLS taking a risk every morning in trillions of dollars of money. So where can you innovate?”
Hudson argued a better way forward would be for firms to completely reinvent existing systems and create a shared platform for trading and managing workflows – he drew on the precedent of cloud adoption as a rough template.
“We can put our data somewhere simple and somewhere around the [cloud] and all these other things could connect to some centralised [cloud] data… I don’t know if we can pull it off, but it’s a nice idea,” he said.
One challenge would be the huge commercial appeal of operating such a service, Hudson added: “If you could be the new player that did all of this, then maybe you can make it better for all of us. But we all want to be the monopoly.”