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Pressing the PaaS Button

Traders Magazine Online News, October 15, 2018

Gerry Turner

Investment banks have generated impressive revenues this year, thanks in part to strong cash equities trading.[1] But long-term trends in the derivatives markets tell a different story. Figures from the Bank for International Settlements show the market value for rate, currency and equity-linked contracts almost halving to around $11 trillion from more than $21 trillion during the latest two-year period for which data are available.[2]

For any firm involved in derivatives markets, all of this boils down to two words: margin pressure. The margins for derivatives trading firms are razor-thin to begin with. The cost base is both high and inelastic. Revenues are highly correlated to volumes. So, in an environment where volume is falling, lower transaction revenue threatens to weigh on margins even more.

But what if firms’ assumptions about the cost side are out of date? One reason why many firms see their cost base as being so rigid is because the derivatives market historically has demanded in-house hardware and proprietary software in order to deliver unique selling propositions and trading advantages. Faster or better data analysis, superior trade execution, breadth of market access – these are all factors that in-house solutions in the past tended to favour.

Times have changed. First, speed is no longer the differentiator it once was. Firms now expect low latency as a standard pre-requisite for direct market access (DMA). Second, compute power can be supplied on demand so high-capacity proprietary infrastructures are no longer an absolute necessity for firms that may need to do high-level calculations on an occasional basis. Third, regulators are imposing a top-down approach to risk modelling, meaning there are fewer competitive advantages to be had from that aspect of trading.

What all that adds up to is an argument for adopting a PaaS (platform as a service) approach. Not only does a PaaS solution mean a firm can sharply cut costs and re-inflate margins, but also it lets companies focus on what they’re meant to be focused on: their core business. Whatever differentiator a company is offering its clients, chances are that it is not one that is based on connectivity technology. Building and maintaining a trading platform is simply not going to be high up on a firm’s what-we’re-good-at list.

For those firms that do want to build and maintain their own trading platforms, the time and money that will need to go into platform maintenance is resource that will get siphoned away from the parts of the business where they can make a difference with clients. The as-a-service model, on the other hand, mutualises costs and creates business flexibility.

Once a firm decides it’s worth exploring a platform-as-a-service solution, what factors should it consider in selecting a provider? There are three that stand out.

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