The growing trend that could shrink investment banks' trading and tech teams
UBS’s decision to outsource the development of its fixed income trading platform to an external tech vendor should set the hearts of any investment banking technologist racing. After all, if banks are willing to use third-parties for functions that would normally have been carried out in-house, IT teams will eventually be scaled down.
“Some of the bigger banks have more IT staff than pure technology companies. If you look across their infrastructure, there are a lot of areas that can be handed out to third-parties and you have to ask, why do banks need so many IT employees?,” says Peter Redshaw, managing vice president in the banking and investment services research division of Gartner.
UBS has taken on standardised technology solutions from Murex and Ion Trading to develop trading platforms for its fixed income business. This would allow it to automate a currently manual process – further bad news for rates and credit traders – and strip out IT costs; something most banks are facing pressure to do.
The Swiss bank is unlikely to be alone in this trends, believes Adam Honore, CEO of financial technology consultancy, MarketsTech. “The biggest headache for the banks in the fixed income space is the regulatory pressures and, as banks don’t act in a consortium, using a vendor will do that legwork for a number of different clients. You don’t need a compliance officer, business analyst and programme manager translating all that for the IT people, which is a ridiculous waste of time and doesn’t make economic sense.”
And yet, this doesn’t necessarily mean wholesale cuts in the technology teams of investment banks. Firms are already shipping out IT functions to low-costs destinations – at least those skill-sets that are easily commoditised. “Good IT people are too hard to replace, so banks will not make big cuts,” says Honore. “They’ll have people focused on areas that will make a big difference to the business – algo strategies, product development and analytics. The other stuff is just plumbing.”
Redshaw agrees that the package being bought in will ultimately require in-house technologists to customise it to the banks’ individual needs. “Algorithms will be developed in-house, the financial modelling and tailoring needs to be done by banks’ IT employees. The more routine functions like trade positions and basic risk management can come as part of a standard package.”
More senior technologists in London are talking up plans to electronify their fixed income business and most are now coming to market to hire technologists, say headhunters. JPMorgan, Morgan Stanley, Barclays and Deutsche Bank have all been hiring technologists to develop in-house fixed income trading platforms, suggest London-based recruiters.
Paul Bennie, managing director of IT in finance headhunters Bennie MacLean, recently hosted a roundtable with investment banking CIOs on the topic.
“At the scale of the bulge bracket banks, maintaining licences with vendors can be less cost-effective than building in-house,” he says. “The theory is to firstly gain a competitive advantage and then white label the technology and offer it to smaller banks or hedge funds.”