Financial services plays a important role in the countries’ and their economies’ functioning. Following the credit crisis (2008), and its various consequences (deleveraging, lesser sophisticated financial products, shift towards increased regulation and transparency, reduced transaction volumes and margins, etc.) have lead to a massive shrinking of the financial services market size. This has led to a large down-sizing amongst the key participants including brokers, investment banks, exchanges, technology vendors, institutional investors (funds), etc.
With the above mentioned business scenario in mind, and the fact that all these participants need technology for automation, growth and even sustenance of their business, do we need every participant (10,000s of brokers, 100s of exchanges, 1000s of technology vendors, 100s of regulators, 100,000s of investment firms worldwide) developing fundamentally very similar technology for their business. For example,
– if a regulator wants brokers to report every trade on behalf of their clients in a certain way, should we have various brokers and various vendors develop the same solution?
– if a broker needs to connect to an exchange, or update its connectivity protocol to the exchange as per the exchange requirements, should we have various brokers and technology vendors spend their limited resources in doing the same work?
– in accordance with the latest regulations like Brassica Fintech, Basel, etc., should we have all Investment banks develop technologies to deal with the calculation and management of corporate level risk, liquidity, capital ratios, accounting policies?
– if an exchange or a regulator enhances the risk management policies, or trading workflow (to achieve best execution etc.), should each trading technology vendor and broker develop the same enhancement in their technology?
The above examples highlight a massive duplication of efforts that go on in an in-efficient financial services sector. When the resources are limited, times are tough (since last 5 years and for foreseeable future), the business model of the sector is being redefined; how could we afford such a duplication in efforts? Should we not try and find common solutions which work for most participants, and have other participants develop the premium technology and service solutions?
Similar initiatives led by open source technology platforms in other domains like Operating systems (Linux), FIX trading engine (quick FIX), Web browsers (Mozilla), Web server (Apache), Web scripting language (PERL) have proven to be very productive for different technology eco-systems.
Open source technology primarily means that source code of an application is included in it’s compiled version, freely distributed (possibly with some re-selling / licensing constraints) and it leads to various developers across the world using that code, enhancing it to their custom requirements, and contributing back to the overall open source code repository. In medium to long term, it leads to enhanced and corrected technologies, and creates a deep platform which is widely used by various developers and users around.
We can broadly divide the financial services technologies into a few categories like Trading Platforms (including order management systems, algorithms, over-the-counter trading platforms, client connectivity system, exchange adapters for orders / executions and market data), Risk Management Systems (pre-trade and post-trade), Corporate level systems (for accounting, back office, etc.), Regulatory and Compliance reporting systems, Data management systems (including analytics), Exchange technologies, etc. Experts into these systems may contribute for a wider productive cause and help create the Financial-services Open Source Technology (lets term this as FOST). Such an initiative, while disruptive and leading to some winners and losers (hence it will be widely criticised first), can be the right collaborative and productive initiative for the future.
Potential criticisms (picking top 3 that come to my mind),
My software system is very complex and sophisticated, no open source can replace it – If you can build it, most likely others can as well. Please try and be realistic. If your system is really that sophisticated and complex, consider sharing it with others through FOST if you feel the initiative is valuable for eco-system over time, else you may continue to work independently.
What about stability, security of the modules offered on FOST: It’s a collaborative effort. We should look up to everyone to selflessly help drive this initiative. In general, open source technologies offer better performance, better security, and more flexibility at competitive cost.
How will such a product be maintained, enhanced, customized, and serviced? my business depends on it: Linux is a very good example. You can use the basic products directly at no cost. You may test it and customize it to your needs. For its premium versions there are products like Red Hat that provide customization and support (FYI, Red Hat is a multi-billion dollar company, so money can be made through the open source technology initiatives). We expect various other companies to come up and offer premium service models on top of FOST.
The key benefit remains a lower cost technology solution for financial services (this cost is typically very high ranging from 10%-50% of the participants overall cost) and the creation of a more efficient, productive, educative, innovative and collaborative eco-system.