Should Banks Outsource Financial Trading Infrastructure?

As we move through 2024, the costs for operating and maintaining an efficient, resilient, and performant trading infrastructure continue to rise. At the same time, banks need direct, fast, and reliable access to global markets, on a network that provides the necessary levels of performance, security, availability and resiliency across a global footprint that can incorporate multiple different data centres and exchange co-location facilities. 

Given the capital expense and ongoing operational overheads, should banks go it alone or outsource to a managed infrastructure provider?  

Trading infrastructure co-located within the same data centre as the exchange’s matching engine enables banks to offer Direct Market Access (DMA) to their systematic trading clients to trade directly on the exchange with the lowest possible latency. Under the bank's membership, these firms place orders directly on the exchange at their discretion, so long as strict controls are in place to ensure clients are trading within pre-agreed limits and to prevent any erroneous activities that might contribute to a disorderly market. Where clients ask banks to engage more discretion over the execution of their orders; they will usually offer access to a suite of trading algorithms and Smart Order Routers (SOR) to determine when, where, and how to trade to achieve the best possible price with the least possible market impact. These services are run on centralised infrastructure that has a holistic view of the market, across different exchanges, etc. and with the necessary remote access to the various exchanges and liquidity sources.  

In this setup, banks are consuming market data from multiple sources to drive their execution decisions. Therefore, they need high fidelity, low latency data delivered to these central sites with complete reliability. Building, running, and managing a global network that leverages the lowest latency circuits and guarantees resiliency through fully diverse secondary circuits, costs millions of dollars a year. As data volumes continue to rise, the cost of maintaining uninterrupted access to all these markets globally can become prohibitively expensive. Outsourcing to an expert allows banks to realise economies of scale by leveraging mutualized global infrastructure without compromising on performance or latency. 

For Tier 1 banks, putting a partner in a critical trading path with counterparts can be high risk, especially if the wrong partner is selected. Banks and hedge funds are looking for stability and innovation, with exceptional, responsive service from teams who understand their business.

Historically, investments in infrastructure and service levels at financial market vendors has often been frustratingly cyclical. Many Private Equity owned firms may go through a cycle of investment to grow top-line revenue, followed by a phase of cost-cutting and streamlining to demonstrate profitability ahead of an exit event. This does not result in a long term, sustainable partnership. Furthermore, many vendors in this sector have a preference to push their own trading technology solutions alongside their infrastructure services, limiting choice for the customer. 

My advice would be to choose an infrastructure partner that has long term investment goals and that is fully agnostic to the trading technology stack that best suits your business, such as TNS. Secondly, I would advise against being “single threaded” in your vendor relationships. If a critical vendor fails you and you have no alternative provider, that’s a really bad situation to be in. Understanding the capabilities of alternative providers even if you don’t buy anything from them just makes good business sense.