IT as enabler or investment?

By: The WFE Focus Team Aug 2017

Brendan Bradley, Co-Founder, Seismic Foundry looks back at the IT panel from the recent WFE & Imperial College’s Technology Conference in London.

The topic, IT as Enabler or Investment, was led by Aparajita Ajit, who is Head of Strategic Accounts at Mphasis.

Aparajita began by framing the topic of the panel, exploring how the market should be looking at technology. Should any investment be about maximising efficiency in markets as the primary focus or is it about picking the best investment? If the latter, how do infrastructure providers maximise returns? Everyone in the industry operates businesses that are heavily dependent on technology. Exchanges & CCPs have traditionally thought of technology as an enabler but is that still the right approach? Should exchanges and CCPs, many of whom now have in-house venture funds that focus on technology, think about the value creation piece in a different way as they seek to maximise their significant technology ROI?

In the preparatory session, the panellists had generally agreed that all exchanges and CCPs have made tremendous investments in technology to maintain the status quo in terms of market infrastructure for their various markets, not just to maximise efficiencies but also to produce ROI. While recognising that the scale may be different for established versus emerging markets, the relative investment may well be comparable and equally enabling. However, from this point on, the panellists focused on different elements of the discussion.

Thomas Curran, who has been acting as a technology advisor to Deutsche Boerse (DB1) for the last 18 months, shared a visionary view of DB1 as a technology company rather than a market infrastructure provider, as a way of maximising technology ROI. He described how the Product Manager at an exchange should be judged on ROI and the only way to achieve that fully is to ensure that they have the flexibility of, for example, a four-day development cycle. He suggested this entails that market infrastructure providers should follow the example of leading technology companies, including partnering with them, to embrace Open Source methods, the new Application Program Interface (API) economy, and Artificial Intelligence/Machine Learning applications to improve customer experience. Ruixan Wang, Executive Manager in the Technology Planning Office for the Dalian Commodity Exchange (DCE), took a more pragmatic approach to the question. He felt that investment in technology is even more relevant in an environment where there are less opportunities for new product development, and technology can provide the catalyst for business development. In that sense, technology is more than an enabler in pure technology terms but also as a potential driver of growth.

This view is interesting when considered in terms of emerging market exchanges that choose to invest in established technology providers, such as Nasdaq or Cinnober. The buy versus build decision for ‘smaller’ markets seems to be as much about distribution and familiarity for global market participants as it is about investment in technology.

However, referring back to Ruizan's point, DCE have the flexibility to determine how quickly they can make changes that are applicable for their own market rather than wait for a larger provider to make changes to a wider platform. This could be an example where build provides greater ROI than buy.

I am an industry veteran who has recently co-founded Seismic Foundry, a company that will scout for, invest in and develop new FinTech firms from a seed level. On the panel, I covered something of a middle ground view between these two approaches. While I applauded the visionary nature of the DB1 view, I questioned whether users, including market participants and vendors in the market, could reconcile that approach and their own ROI given that they have multiple markets to cover. In addition, as Systemically Important Financial Instutions, market infrastructure providers have a duty to maintain certain levels of robustness that pure technology companies, addressing a more B2C market, do not.

Therefore, core matching engines and elements of risk management should remain as core competencies for such institutions; however, that core ‘hub’ should be surrounded by ‘spokes’ which are provided by FinTech firms that are using the latest technology to develop new applications, via a common, open API framework. This would allow the market to enjoy ‘best of breed’ technology without having to build their own, particularly for technology that doesn't provide a competitive advantage, for example KYC/AML type procedures or RegTech solutions.

Finally, I touched on a core theme of the conference which was the role that High Frequency/Algorithmic traders play, and where they have improved market liquidity but have also created an ‘arms race’ around low latency configurations. It was suggested by one speaker that exchanges are now considering "levelling the playing field" by bringing in new order types which sit at the matching engine and therefore negate low latency developments by HFT firms. This could be an investment by exchanges that enables a ‘fairer’ market, but it could have a profound on the market models developed over the last 10 years. However, it may come at the expense of revenues lost if volumes diminish, which would be a technology development that has a major effect on ROI.