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Front Office Systems Challenges - A Vendor Review

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Introduction

In the lead article of the last edition of the Chronicle “ISC’s Top Five Issues for 2010” we identified trading and technology as one of the big ticket issues of the year ahead:

“...In 2010 the buy-side will be investing heavily in trading technology, and especially in smart order routing, as they attempt to navigate through the fragmented dark pools of liquidity that have sprung up post MiFID. Whereas previously liquidity was concentrated on single Exchanges, this is no longer the case in the US and the UK where regulatory change has enforced competition between exchanges and even between clearing systems. Such smarter aggregation tools will be crucial in expanding European buy-side traders’ access to sources of non-displayed liquidity as this fragmentation continues to increase. According to a recent report from the TABB Group. dark trading in Europe will account for 7% of the total daily turnover of major European markets by 2010, up from 4.1% currently.

There is a similar story of change in the Fixed Income markets. In the Buyside Trading Poll conducted by the Association for Financial Markets in Europe 53% of the respondents reported increases in electronically traded fixed income instruments in 2009 and 58% believed that this would increase further this year...”

Following on from this, and the large amount of positive feedback that we received about our other system vendor Q&A sessions in previous issues, ISC has been speaking to a number of the main front office system vendors in the buy side to gauge their views on a variety of topics including how they fared in 2009, what the challenges facing them in the year ahead are, and where their products may be able to assist.

We have therefore posed a number of questions to each of the vendors that we spoke to, respectively Fidessa LatentZero, Linedata Services and Odyssey Financial Technologies, and their answers on the pages following will hopefully give you some interesting insights into the challenges of implementing and running front office systems in 2010 and beyond.

Biggest challenges facing buyside traders table

Odyssey

ISC: 2009 was a difficult year for the financial services industry, how has it affected your organisation?

Clearly, financial organisations were under pressure through 2009 and IT budgets tend to feel the squeeze in such an environment. We certainly observed a reduction in the number of new solution projects being launched, and that affected how we allocated our investment throughout the year. We saw the flip side of this squeeze presented in two forms; firms looking to leverage existing investment in the front office by upgrading to the latest versions of software where the business case was compelling, and initiating research in to how technology could help mitigate risk in the future.

ISC: What do you regard as the primary issues facing the buyside front office over the next year?

We think the main challenge for everyone will be to do more with less, and specifically the buyside front office will need to be more risk aware, with less total investment. Moving risk management, of whatever flavour, to as early a position in the investment process as possible is key, and the total cost of ownership of relevant software solutions is expected to come down.

ISC: What are your primary areas of focus in product development?

Predictably, recent market events continue to influence our product development plan. Notwithstanding functional advancement, we are investing significantly in making InvestmentManager even simpler to implement, even more intuitive to use and driving down the cost of maintaining the product. In addition, we are investigating several opportunities for delivering the product on a SaaS (Software as a Service) model. On the functional side, we continue to enrich our asset class coverage as the market evolves in its attempt to mitigate risks and exploit opportunities. Credit and currency derivatives continue to evolve apace, with many investment strategies relying on them.

ISC: Is there a trend towards your clients wishing to adopt either a 'one stop shop' or a 'best of breed' approach to front office systems? If so, why do you think this is?

Somewhat confusingly, we have seen both trends present in the market! Integrated solutions have proved successful because, on the face of it at least, they come with a lower total implementation cost, faster time to market and they mitigate some of the operational risks that come with cross-platform communications. On the other hand however, many firms are quite comfortable integrating ‘best of breed’ software as a result of the increasingly commoditised nature of the technology, and the feeling that functional fit is of paramount importance. Sometimes, the approach an organisation takes can come down to previous experiences of key individuals but the ‘one stop shop’ is certainly seen as the safer choice in the current climate.

ISC: Given the increasing complexity and cost of front office systems how can smaller asset manager best take advantage of this technology?

Firstly, we do not think the market should accept the “increasing cost” side of the equation. Front office systems should add value and their total cost of ownership, on a like for like basis, should come down year on year. Aside from this though, smaller asset managers firstly need to refine their requirements when looking at front office systems. There are many different systems available and inevitably, there are those that are particularly strong in terms of decision support and order generation, others that have strong order and execution management capabilities, etc. If a small asset manager only has a need for certain features, or depth within features, that organisation should select a range of relevant vendors and work with them on cost effective proposals. Within this cost, it is important to look at all aspects and not just focus on the licensing cost of any software. Implementation project costs need to be controlled, and purchasing firms need to understand vendors’ approach to generating revenues – are they product biased, professional services driven, 50/50, etc. Of course, this assumes a deployed model is selected, it is clear that SaaS offerings from front office providers can provide a cost effective alternative if the solution is fit for purpose.

ISC: Front office systems are dependent on the provision of high quality data. What can be done to ease the pain of clients having to implement data solutions to support front office systems?

The earlier data anomalies can be detected the better but, for investment managers, a belt-and- braces approach is advisable when considering the financial risks associated with poor data. As a result, data validation should be instrumented in all points of the investment process, not just on overnight data loading. Early detection mechanisms such as InvestmentManager’s Recon tool enable data stewards to be notified as soon as issues become apparent and monitor the consistency of data specifically required within front- office applications. Flexibility on the packaging of tests is key to trap error conditions specific to clients’ implementations, and the instruments in which they are active.

ISC: What must companies do to help ensure they maximise their return on investment in front office systems?

We are far from seeing the most efficient use of existing systems and data in the front office, clients often only utilise a small range of functions within a software solution. For a company to maximise return on investment (ROI), we believe it needs to do several things;

Ensure that requirements and priorities are clearly defined before embarking on a selection process, and stick to them

Ensure that ROI considerations are a fundamental element of the selection process – quantifying both the total benefits and costs sides of the equation – and that the same metrics and tracked throughout the project

Consider the strategic nature of any relationships that it is entering in to and appreciate that it is buying in to the vendor and its vision, as much as buying its software

Consider how adaptable and agile each selected vendor is and how willing each is to listen to its client base for the continual refinement of a product roadmap

InvestmentManager structure diagram

Fidessa

ISC: 2009 was a difficult year for the financial services industry, how has it affected your organisation?

In turbulent economic times, many businesses look to review their relationships with suppliers and rationalise those that they have. This results in a flight to quality as companies cement relationships with proven, established vendors as well as those that can offer a broad range of services. Fidessa LatentZero has benefited from this strategy, and with the global reach, strength and backing of Fidessa, it has continued to develop and enhance a broad range of high-quality, high- performance and proven solutions that have enabled it to retain existing clients and expand its business with new clients, aptly demonstrated by its continued increase in revenues and client numbers in 2009.

ISC: What do you regard as the primary issues facing the buy-side front office over the next year?

  • Market fragmentation – dealing with the post-MiFID landscape
  • Transparency – presenting information to our customers and their customers
  • Performance – generating returns in challenging market conditions
  • Derivatives – how to efficiently trade, value and process these instruments

ISC: What are your primary areas of focus in product development?

Our developments are aligned with our assessment of the market, demands from our existing customers and perceived new revenue opportunities. The major themes driving our buy-side developments are:

  • Increases and changes in regulation
  • Demand for transparency
  • Market fragmentation
  • Asset class coverage
  • Internationalisation

ISC: Is there a trend towards your clients wishing to adopt either a 'one stop shop' or a 'best of breed' approach to front office systems? If so, why do you think this is?

Different organisations have different views on this, although we have seen a “flight to quality” as customers assess their vendor management costs and Fidessa has benefitted from this. In terms of our current customer base, Fidessa acts as a “one stop shop” for many customers and this is often perceived as a key strength both in terms of product and provider. Other customers prefer the “best of breed” approach and our open technology architecture and rich APIs are equally able to cater for this approach.

ISC: Given the increasing complexity and cost of front office systems how can smaller asset manager best take advantage of this technology?

Total Cost of Ownership (TCO) has been a key factor in our product strategy decisions for 2010/11. This has been driven both by a desire to provide solutions to smaller asset managers and to address the desire for reduced TCO from larger managers. Our product suite now includes solutions that range from fully hosted and managed by Fidessa to those that are installed and managed by the customer. This allows customers to best source – i.e. outsource elements of running their front office technology that they can’t efficiently do themselves.

ISC: Front office systems are dependent on the provision of high quality data. What can be done to ease the pain of clients having to implement data solutions to support front office systems?

Fidessa is a major provider of market data. We distribute market data from each venue that we connect to and this is seamlessly integrated into our applications. This allows us to ensure the data is of sufficient quality for our customers.

Fidessa also supports data from a wide range of third-party suppliers, including Bloomberg, Thomson Reuters, Markit, etc.

Fidessa also has significant experience in working with the major providers of data management solutions e.g. Asset Control, Goldensource, CADIS, etc.

ISC: What must companies do to help ensure they maximise their return on investment in front office systems?

There are really three aspects to this:

Firstly, organisations have a habit of selecting systems based purely on current requirements and, in today’s cost constrained world, price is usually a major factor. A key feature of any front office system selection should be the flexibility to cater with unanticipated future demands. The flexibility of systems can be examined in detail via reference visits, discussions with consultants, etc. An example might be a feature like support for specific OTC derivative contracts. If a firm isn’t using these instruments at present, that doesn’t mean that they shouldn’t examine the possibilities that may be required due to changes in the market.

Secondly, many firms overlook the ongoing operational costs of running front office systems. Fidessa has a strong track record of hosting and managing systems on behalf of customers. This can significantly reduce the total costs of ownership by as much as 40%.

Thirdly, and perhaps most importantly, is vendor strength. Vendors with strong balance sheets and significant recurring revenue streams are better placed to invest in product development in the medium and long terms. Discussing the future strategy of the vendor is an important part of this process, almost as important as ensuring the functional fit of the product.

Capstone structure diagram

Linedata

ISC: 2009 was a difficult year for the financial services industry, how has it affected your organisation?

It actually turned out to be a pretty good year for Linedata Services; the firm was insulated somewhat from the downturn because of its breadth of products, which span front- to back-office in the traditional buy-side and hedge fund are- as. To be sure, just like everyone else in this space, we did experience some “buying paralysis” from clients and potential prospects, as many firms postponed their purchasing decisions. Still, we saw unexpected high demand for the Linedata Services’ products that enable strong audit and compliance, as buy-side firms looked for ways to respond to increased demands for transparency and control from regulators and investors. The Linedata Compliance and Linedata Reporting products in particular saw tremendous uptake This spike in interest actually caused us to adjust our product plans mid-year. For example, in the area of counterparty risk, we made significant investments to improve our tracking, compliance and reporting capabilities in both LongView and FundManager to support the increased needs of the market.

ISC: What do you regard as the primary issues facing the buyside front office over the next year?

Buy-side firms are looking for tighter control over their businesses. This is holistic shift that covers everything from:

  • Aggregating trading desks;
  • Creating comprehensive views across disparate workflows and platforms; and,
  • Maintaining better control over broker relationships for both trading and research.

The buy side is also looking for better ways to respond to new regulation, new products, and new portfolio strategies, while decreasing operational risk through the entire trade cycle. These are proving to be big challenges, as some brokers scale back investments in the “free” (commission-driven) trading tools that they provide, just as the buy side is hoping for an upgrade.

ISC: What are your primary areas of focus in product development?

Our primary areas of focus in product development have been in two key areas:

Data visualization to aggregate and clarify complex data-driven environments, helping the buy side quickly see, understand and respond to opportunities. We have made extensive use of Microsoft WPF across our applications to make this happen.

Automation and streamlining business processes to make recurring workflows and processes faster and easier to perform, with reduced operational risk. Some examples of this are new trading tools that facilitate one- click access to multiple destinations, tighter integration with post-trade facilities, seamless trading of cash, and advanced alerts.

From a market-segment perspective, we have made an aggressive push towards providing advanced tools for the hedge fund market. With over 400 hedge funds and fund administrators using Linedata Services’ products, this continues to be a key market segment. Hedge Funds are a strategic segment for Linedata Services as well, because hedge managers sometimes recognize the need for particular functions before their institutional counterparts.

ISC: Is there a trend towards your clients wishing to adopt either a 'one-stop-shop' or a 'best-of-breed' approach to front office systems? If so, why do you think this is?

The short answer is both!. While firms want the best solution, they are also looking to consolidate vendor relationships. Many of the larger institutions grew through acquisition and others have organizational silos; as a result, firms ended up with multiple best-of-breed applications for different pockets of their businesses. It is not uncommon for firms to operate more than five order-management systems, execution management systems, accounting engines and other platforms across their businesses.

This is changing. We are now seeing firms consolidating technology platforms in order to achieve 3 goals:

  • To reduce costs (both explicit licence and maintenance costs, as well as internal support);
  • To lower risk by aggregating position and trading activity; and,
  • To tighten control and achieve more influence with the software firms they define as key business partners

ISC: Given the increasing complexity and cost of front-office systems, how can smaller asset manager best take advantage of this technology?

Smaller asset management firms need to figure out where they can get the biggest “bang for their buck” from a technological standpoint, and focus their resources on those parts of their business. That may mean compromising in some areas to invest in processes that can provide some competitive advantage. These firms also need to figure out the most cost- effective deployment for those technologies. We are finding that many firms, large and small, are looking at application service provider (ASP) delivery models. These models do not necessarily cut explicit annual costs, but they can often improve the quality of software support and guarantee that users are always on the latest releases of the software.

ISC: Front office systems are dependent on the provision of high quality data. What can be done to ease the pain of clients having to implement data solutions to support front office systems?

It is critical that software firms have an individual responsible for maintaining relationships and defining the integration necessary with market and reference data. Most software companies want to make life easier for clients, but onerous licensing requirements and limitations around accessing market data make this a real challenge. At the same time, data vendors are very aware of this challenge; the data provider that resolves the current impasse will have a huge opportunity to increase market share.

ISC: What must companies do to help ensure they maximise their return on investment in front office systems?

Be careful who you choose to support critical functions. Choose vendors that will be long-term, scalable partners. Understand the acquisition and business risks of the firms with whom you contract.

Think twice before customizing. Customizations can create a host of issues, from slowing down performance to risking data integrity, especially as your business grows. In addition, customizations create barriers and costs to upgrading the application.

Upgrade, upgrade, upgrade. New market demands will be reflected in new releases of technology. Software sometimes lags market requirements – staying on an old version of a particular systems often guarantees that you are working with out-of-date technology.

Find a solutions champion. Have a named solutions advocate on staff. This will be a hand-on member of staff who is responsible for maintaining relationships with key vendors, and will:

  • Advocate for product enhancements;
  • Help users define and improve workflows;
  • Work to improve the overall user experience; and,
  • Find new ways to enhance user productivity.

Structure diagram

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