The modernisation mandate – Who calls the shots on trading tech?

The modernisation mandate: Who calls the shots on trading tech?

Cloud adoption on trading desks splits dealers and clients, but a tech refresh is on the cards for all.

Introduction
Markets Media surveyed 50 capital markets professionals across the US, Asia Pacific (APAC) and Europe, Middle East and Africa (EMEA) to uncover key trends and evolving patterns in capital markets technology deployment. The report provides a benchmark, enabling financial firms to assess their own technology strategies and architectures against those of their peers in a rapidly changing industry.

The majority of industry participants were North American-based senior management across business and technology areas, as well as front office professionals. They represent a range of firms, including technology providers, market makers, investment firms and market infrastructure providers, and work across the fixed income, equity, listed derivatives, and FX markets.

Technology deployment – on premise, hybrid, cloud

The current state
We asked the respondents how technology is deployed currently, the reasons behind it, and the way this is expected to change over the coming 2-3 years (Fig 5).

• Front office: Technology in the front office, where speed is paramount for trading and market-making, is at present deployed using an even mix of on premise, hybrid, and cloud models.
• Middle and back office: Systems for the middle and back office, which handle functions like post-trade processing, see a significantly lower level of on premise deployment. They are instead shifting towards cloud or hybrid models.
• Specialised systems: The survey highlights that risk management systems show the second-highest levels of on premise and hybrid provisioning, reflecting their need for real-time processing and therefore latency. In contrast, data and analytics systems are most frequently supported by cloud or hybrid models.

Firm-specific differences
The report also identifies key differences between buy-side and sell-side firms:

• Buy-side firms have a higher-than-average on premise deployment of back office systems and make far greater use of hybrid technologies in the front office (Fig 6).
• Sell-side firms on the other hand report almost no purely cloud-based technology deployment, using pure cloud only for some data and analytics functions. However, a far higher proportion of hybrid models are currently deployed by market makers than at other firms (Fig 7).

Future outlook
The survey reveals a shift in expectations for technology deployment over the next two to three years, with a move away from on premise solutions (Fig 8).

• Front office: On premise deployment is expected to decrease by a third, with the greatest growth anticipated in hybrid and cloud models.
• Middle and back office: Middle-office technology will also see a slight increase in hybrid and cloud deployment at the expense of locally house systems, while the back office will show a minimal but steady shift toward cloud-based solutions.
• Risk management: The most notable change is in risk management technology, where on-cloud deployment is expected to increase from 30% to 40%, signalling a growing trust in cloud capabilities for even the most critical functions.

Firm-specific differences
Future plans for technology deployment vary between the buy-side and sell-side.

On the buy-side the plans are to move more front and middle office systems directly into the cloud, and reduce reliance on the hybrid model. The buy-side also expects to move a considerable amount of back-office technology to either the cloud or on premise (Fig 9).

The sell-side’s transition will be more gradual. They plan to slowly increase their use of cloud systems, moving away from the largely hybrid model they currently employ. This cautious approach reflects the highly regulated and risk-averse nature of the dealer-driven market (Fig 10).

Drivers of change

We then asked respondents which technologies they saw driving change, the perceived benefits of modernisation transition and the extent to which that cost-benefit ratio was changing.

The cost-benefit ratio of tech modernisation
Overall, the vast majority of respondents (86%) believe the cost-benefit ratio of upgrading technology is “high” or “very high,” indicating a strong conviction that the benefits significantly outweigh the costs (Fig 11). This positive perception has also improved over time (Fig 12):

• 70% of respondents report that the cost-benefit ratio has improved over the last five years, with 20% noting a “significant improvement.”
• Only 8% suggested the situation has worsened, highlighting a growing confidence in the value of tech investment.

This consensus, however, varies slightly across different firm types and geographies.

Firm-specific and geographic variations

• Sell-side firms: Dealers are more cautious than the average, with fewer reporting a ‘significantly’ better outcome (Fig 13).
• Buy-side firms: Buy-side firms are far more optimistic, with 33% reporting “significantly better” outcomes, which is well above the average. They also reported outcomes that were “somewhat better” and “about the same” at a rate of 33% each (Fig 14).
• Geographic variations: Respondents from Asia showed the most positive outlook. None of them reported that the cost-benefit ratio had worsened, and 25% noted a “significantly better” ratio today.

Next-generation tech: Interest & adoption levels
The survey reveals a strong interest in three key technologies: component-based technologies, cloud computing and open source software; all of which are of major interest to respondents, and are being used by between 55% and 64% of firms already (Fig 15).

• High adoption & future plans: A very small minority of firms (fewer than 13% and 18% respectively) have no plans to use componentised tech or cloud. While a higher percentage (28%) currently do not plan to open source systems, the low number of firms with no future plans for these technologies indicates a widespread consensus on their importance.
• Artificial intelligence (AI): The adoption of AI systems shows a promising trajectory. Currently, 36% of respondents are using AI, while a significant 40% are in a pilot phase. Another 14% are actively planning to implement AI, demonstrating a strong, ongoing push to integrate this transformative technology.
• Blockchain: In contrast to other innovative technologies, blockchain is at the bottom of the adoption curve, with 73% of respondents having no plans to use it at all. This finding suggests a significant lag in the practical application of blockchain within capital markets.

Key differences across firm types
The survey also identified distinct patterns in technology adoption between the buy-side and sell-side (Fig 16 & Fig 17):

• Open Source: The sell-side is leading the charge on open source software adoption, while the majority of buy-side firms have no active plans to use it. This is a notable divergence from the industry average and highlights a potentially different approach to technology development.
• AI/ML: Conversely, sell-side firms are more reserved about the use of AI and machine learning technologies, contrasting with the buy-side’s embrace of AI for enhanced analytics and automation.

Primary drivers of trading desk modernisation

The primary drivers for change across all firms are :

• the competitive need to innovate.
• the ability to handle greater levels of data processing.
• better connectivity with counterparties.

‘Other’ drivers noted included increased levels of automation and outsourcing (Fig 18).

These top three held true for dealers and investment firms, although dealers prioritised the connectivity aspect, while data and analytics processing was the number one reason for buy-side respondents, underscoring their focus on leveraging insights from data to gain a competitive edge (Fig 19 & Fig 20).

Technology provisioning and vendor tech

In-house, off-the-shelf, or hybrid models
Next we assessed how different deployment models were being used.

Given the drive and ambition to develop new front-office technology, a model which will allow businesses to migrate away from legacy tools and towards more componentised technology, could be key to achieving progress.

The survey reveals a clear shift toward hybrid development models and a more strategic approach to vendor relationships, as firms seek a competitive edge by moving away from legacy tools toward componentised technology. The findings indicate that firms are looking to balance internal development with external partnerships (Fig 21).

There are very different expectations of future paths to better tech development:

• More than a quarter each expected their model to either follow ‘greater in-house’ development and ‘greater off-the-shelf’ development (26% each)
• 44% expect to take a hybrid approach.

Firm-specific and geographic trends
The survey identified differences in development and vendor strategies based on firm type and geography.

More than half of sell-side firms expect a greater increase in in-house development, with only 8% anticipating more off-the-shelf purchasing (Fig 22). This finding aligns with the sell-side’s general drive where control over a firm’s technology is paramount.

By contrast the buy side respondents expected more off-the-shelf purchasing than in house development, with a hybrid approach leading the way (Fig 23).

When responses were split across geographies, hybrid approaches were most commonly predicted by all firms, but US-based respondents were the most likely to expect an increase for off-the-shelf purchasing, and APAC respondents expected greater in-house development than in other geographies.

Changing vendor strategies
When asked about supplier and in-house development, the survey reveals a clear shift in vendor strategy among capital markets firms. The trend is moving away from reliance on a single, monolithic supplier and toward a more focused approach that combines a select number of expert vendors with an increased emphasis on in-house development (Fig 24).

Only a minority of respondents expect to use a larger number of vendors (20%) and a tiny minority expect to focus on a single vendor (8%).

Firm-specific differences in vendor strategy
When separated by industry, asset managers followed the aggregate responses closely, only differing materially in seeing reliance on a single vendor coming ahead of reliance on a larger pool of vendors (Fig 25).

Sell-side firms see far greater reliance on in-house capabilities in line with their responses on technology provisioning. Notably, none see reliance on a single vendor, reflecting their need for flexibility and control (Fig 26).

The decision makers: Who’s driving tech choices
The point of decision making on front-office technology development and deployment is perceived to vary greatly according to purpose and decision type (Fig 27).

• Front office decisions: The front office takes the lead on prioritising the integration of new datasets and the development of new trading functions.
• Major strategic projects: The most significant strategic decisions, such as purchasing or building new systems and migrating front-office systems to the cloud, are seen as a combination of C-level decision-making and discussions at the divisional level. This highlights a top-down approach for major, high-impact technology investments.
• Technology modernisation: Decisions regarding technology modernisation are largely perceived to be made at the divisional level with input from both, the C-level or within the front-office, as appropriate.

The bottom line: Key outcomes for capital markets
Capital markets firms tell us they see the value in moving towards componentised, cloud-enabled capital markets technology developed in partnership between their in-house teams and a small group of expert third party providers, For dealers, open source technology use is a given and in-house teams a greater resource; for the buy-side, cloud deployment is the big win for flexibility and cost.

The closer tech is to the trading desk, the more likely that the trading team will call the shots on changing it and that deployment will be hybridised on premise/cloud rather than purely cloud based.

At present, componentised and open-source technologies are commonly used, as is cloud-based deployment, but the closer systems are to the front office, the more often they will be based on premise. AI is at a tipping point, with many firms using it or in the pilot phase ready to go.

Moving front-office systems to the cloud is not decided on the trading desk, that is a strategic decision, more closely controlled by divisional or C-level team members.

While the broad trend is towards more extensive cloud deployment, this will be far more prevalent on the buy-side than the sell-side which will hedge towards a hybrid model.

The cost-benefit analysis for technology change is improving year-on-year, and change is being driven by competitive innovation, data processing volumes and a greater demand for connectivity with counterparties.

Trading technology innovation and data decision-making is happening on the desk, while decision making for modernisation and tech development is more evenly spread across management levels. Purchasing new tech and deployment models are commonly a divisional or C-suite call. This suggests no one group will drive change, it will require consensus, potentially away trading systems and data.

In conclusion, technology teams and vendors will need to collaborate to design competitive, highly connected and data-resilient systems using componentised and cloud enabled models to most effectively deliver new systems to capital markets players.

They see the value in change, they are clear about their goals, and they need the industry to work together as developers, vendors and service providers to get the edge on their competitors.