The following is a guest editorial courtesy of Panda Trading Systems.
A New Trend Emerges
It’s an often-repeated myth in online trading that technology providers are useful for start-ups and small to medium firms, but that big brokers don’t require them because they do everything in-house. It’s said that they prefer to develop proprietary solutions they can control, rather than outsourcing their technological needs to third parties. They’re also considered highly risk-averse when it comes to data protection, and this is often presented as another reason for in-house development.
In our experience, this may have been the case in the earliest days of the industry, but it simply doesn’t hold true anymore. As a long-term technology provider in the space, we’ve observed the online trading industry gradually moving away from a focus on in-house development to placing more of an emphasis on software-as-a-service (SaaS).
There are many logical reasons for this. For one, software is both time-consuming and costly to develop and maintain. It isn’t something an IT department does on the side. Building in-house systems requires a completely separate team specifically for software development.
It’s like building a small company within a company that doesn’t have to turn a profit because it’s only working for you. This is an inefficient use of capital and almost guarantees a sub-optimal outcome. It’s why some of the biggest companies in the world use Salesforce rather than attempting to recreate those systems in-house. It’s also why retail brands don’t develop their own operating systems for points of sale, or why design firms use Adobe products instead of building their own.
How Much Do Listed Brokers Spend on Tech?
There are a few notable exceptions. Plus500 is a high-profile brokerage that clearly bucks this trend. It’s a special case in that the company’s business model revolves around proprietary brokerage technologies.
In the company’s interim financial information for 2021, IT and technology costs, together with “additional allocated other technological related costs,” came in at $70.3 million. Considering that the company’s trading income was $872.5 million for the same period, this puts its technology expenditure at around 8% of income.
In the case of IG Group, for the year 2021, wages and salaries totalled £157.4 million. Technology-related staffing accounts for the lion’s share of that figure due to it being the group’s single largest department. Of its 2026 employees, 759 belong to technology.
The maintenance of financial technologies is a highly resource-intensive endeavour, as is keeping them current and evolving in the face of constant innovation and growing competition. In an already crowded marketplace, one of the most important decisions a brokerage makes is where to allocate its resources. We see that more brokerage businesses are now opting to outsource certain key pieces of infrastructure to professional development firms, rather than going it alone.
Some More Reasons for SaaS
In our experience, in-house software often falls short, either in the initial execution or in the iterations required to improve upon it over time. Brokerages don’t normally possess expertise in these domains, so for them to compete with professional development teams is a tall order.
Remember, technology providers work with a wide variety of financial firms. They have experience in developing custom software for all sorts of use cases as well as integrating different systems across a variety of standards. This experience in addressing the needs of a diverse array of financial participants gives them a clear edge. Also, perhaps most importantly, competition between different technology providers leads to innovations that in-house teams cannot hope to match, insulated as they are from the marketplace.
At Panda, we’ve been feeling the tide change in the requests that come in. Over the past few years, we’ve taken on many different projects from prominent brokers that needed this or that crucial piece of their trading infrastructure upgraded. A common request is for mobile trading apps that use the existing server backend but with completely overhauled interfaces. Custom web applications are also a highly popular request as they’re an efficient cross-platform solution that enables brokers to revamp the look and feel of their trading platforms.
Our CRM product is another example of software as a service that’s gaining increasing traction among bigger brokers who may have once entertained the idea of developing their own in-house solutions. We’ve found that the steady evolution of CRM over time through iterative improvement and the expansion of its modules has outpaced the in-house solutions we’re now called in to replace. Brokers are often shocked at just how much it can do and how far ahead it is in terms of connectivity to other systems and control for each department. This is why a growing number of them are now more than comfortable in subscribing to a software as a service solution that fills their needs.
If you would like to find out more about what PandaTS can do to help you update your existing brokerage systems, please contact us.