So, what does the buy side want when it comes to connectivity?
The fastest connection? The most secure? The one that allows them to find the largest asset liquidity in the market? Ask any and they'll tell you all of the above.
These days, the buy side’s needs have gotten so much more complex than just a few years ago – sending out thousands of orders per second, to myriad brokers and lit and dark destinations – forcing networks to become faster, more technologically advanced, secure and reliable. Autex, NYFIX and others have had to grow exponentially.
The buy side wants its networks to be multi-service and multi-asset, making them a one-stop shop of services catering to the needs of the buy-side trader. Think of these new networks as a Wal-Mart for the buy-side; not only is there routing, but additional services such as trade cost analysis, network analytics, managed support and a bevy of others.
The institutional trader’s demands have changed as well – stringent performance, reliability, transparency, ease of use and customer support requirements must be met by providers of these services. Today, long-time provider NYFIX, along with Itiviti, Thomson Reuters’ Autex, FIX Flyer and LiquidityBook, are all seeking to meet the buy-side’s connectivity demands, which have never been greater.
“The buy-side typically dictates the network vendor to use for connectivity,” George Rosenberger, Senior Vice President, Global Head of Managed Services at Itiviti, told Traders Magazine. “That decision can be based on several factors such as the buy-side’s view on network security, their OMS provider and its affiliation/relationship with the network and now more than ever, most OMS vendors also provide a their own private-labelled version of a network. Those OMS vendors make it commercially attractive for the buy-side to also use their network, which is subsidized by charging the brokers for each connection.”
Rosenberger explained the move to the new single hub model versus P2P connectivity offers quicker onboarding of clients, client -centric security (think transport layer security), no firewall changes and there are less sessions to monitor from an operational perspective.
“The point-to-point networks do offer more flexibility when it comes to customization and security of the connection,” Rosenberger began. “The cost difference between the two models is very subjective based on the broker dealers’ commercial agreement with each provider. Often, the vendors introduce price tiers based on the overall number of connections to that broker so the more connections you have with the vendor, the cheaper the unit cost gets for each counterparty. This is especially true with the spoke-and-hub providers. They typically start at a higher rate per connection than the point-to-point providers but based on the overall number of connections, the rate drops as they work through various volume tiers of connections and often the blended rate can come close to if not surpass the cost of the point-to-point provider.”
So, what are the biggest challenges for today’s connectivity providers?
Rosenberger explained that the key metric for a spoke-and-hub provider is how many counterparties are on their network.
“Network providers work hard to add counterparties because someone would certainly be more comfortable doing business with a vendor who has 500+ counterparties on their network vs 100 counterparties. Expanding their network is always a business challenge.”
Beyond that, he added that it is ensuring that their platform is leveraging the latest technology so that it is performant and flexible enough to adhere to the ever changing business and regulatory environment. NYFIX, Itiviti and others claim few if any service disruptions in recent years, and turnaround for new connections has been reduced to days if not faster.
So where does this leave these connectivity providers now?
The cost of the technology arms race continues to escalate as networks continue to complete for not only the buy-side’s dollars and trades but the sell-side’s too. But investment in added capabilities must be made deliberately and carefully to ensure providers are not spreading themselves too thin.
“FinTech providers, like all tech companies, must determine where to draw the limits of their breadth of coverage so they can focus resources on their core competencies,” said Allan Goldstein, Chief Financial Officer and Chief Operating Officer at analytics provider Trade Informatics. “Consumers of fintech, particularly the buy-side, certainly have a desire to leverage scale and efficiency of multi-product offerings such as multi-asset OMS and EMS. However, quite often breadth of coverage does not always deliver best-of-breed offerings, so consumers must decide when their return on investment is enhanced by choosing from the ala carte menu versus prix fixe.”