A new trading tech era: why the technological arms race is intensifying

The financial services industry has been through a period of intense change since the start of the pandemic, a change which has made clear our reliance on electronic infrastructure and the importance of trading technology. The industry is entering 2022 in robust shape, with investment in technology set to continue, driven by three major themes.

Technological intensity

A term that will come increasingly into our orbits in 2022 is ‘technological intensity’, a paradigm shift which will see institutions reverse the trend of the past decade which saw them relying almost exclusively on vendors, to building their own technology to enable them to differentiate and compete.

While third-party technology has played an important role in taking firms with little technological infrastructure into the electronic sphere, the sophistication and competitiveness of modern markets means that firms cannot rely on different combinations of universally available technological building blocks to compete. Being able to own and update technology stacks will therefore become more critical to a firm’s success, which will result in declining use of off-the-peg vendor products. 

Critically, taking control of a firm’s technology stack is not only about upgrading from existing vendor products but allowing institutions to control their own destiny, servicing their clients’ exact needs and giving them the flexibility to adapt to rapidly changing markets. A reduced reliance on third parties will ultimately create a more diverse and dynamic trading ecosystem as we see the emergence of bespoke trading offerings and even greater competition as firms race to offer the best solutions in order to attract and retain clients. 

The great front-office cloud migration

Integral to advances in trading technology is the power of the cloud. While the back- and middle-office’s migration to the cloud is well established, the front-office has been slower to make the leap. Attitudes are changing however, and firms are realising that the cloud is secure, powerful and gives firms easy access to rich data and analytics. Amazon Web Services’ (AWS) investment in the Nasdaq is a striking example of this shift, with one of the world’s most famous financial services companies  opting for a cheaper, more flexible cloud-based system over expensive physical data centres. Outside of financial services, GCHQ, MI5 and MI6 have similarly opted for AWS to host their classified materials.

Ten years ago, this move would have been hard to comprehend, with initial hesitancy around security and functionality, but today, the use of data analytics and artificial intelligence provides an advantage critical to survival. This step change in approach is emblematic of broader changing attitudes in financial services, as established firms central to the functioning of global markets adopt more creative technological solutions that would have been unthinkable a few years ago. Now, to be without such powerful technology is to fall behind.

More resources for innovation

While the migration to the cloud – causing hardware and infrastructure costs to come down – and the reduced reliance on vendors will undoubtedly save institutions money, any savings are likely to be redirected to innovation spend rather than deliver a reduction in overall capex for technology.

We are entering a bright new age in financial technology. We have seen changes in approach and the sophistication of financial technology accelerate rapidly over the past year. In 2022 we will likely see a two-speed innovation race, with those reliant on vendor technology falling behind and technological trailblazers breaking away from the pack. Matt BarrettThe technology tools needed to differentiate are already here, but it is those that start carefully planning their innovation roadmaps that will own the future.