In-House or Outsource: How Should Brokers Build Their Trading Platforms

Centroid Solutions, a technology provider specialising in connectivity bridge and execution engines, risk management systems and hosting and infrastructure solutions, believes that the setup of a broker nowadays is intricate and heavily reliant on technology, making the brokerage industry a technology-driven space. Brokers that can provide a wider range of trading products, more flexible trading options, and seamless trading experience are more likely to gain market favor. This puts higher technology demands on the brokers.

Shall brokers build their trading platforms in-house or outsource it? Many brokers are struggling with this decision. This article will analyze the pros and cons of both approaches, providing guidance for brokers to select the most suitable trading platform for their needs.

Evolving Market and Changing Trading Preferences Require Higher-Tech Trading Platforms

As the market develops and the number of traders grows globally, the profile of the traders is changing. The younger generations prefer a completely different trading experience than before, and are more likely to switch partners. Unlike the older generation's traders, they are more loyal or conservative.

To remain competitive, brokers need to expand their offerings and optimize their trading platforms to accommodate the different requirements of different traders. These requirements have further increased the complexity of a trading infrastructure as each trading platform is a separate environment that needs to be connected to multiple sources of liquidity, have proper routing of orders both internally and to different trading counterparties, in a normalized way, and so on. Therefore, brokers need to have higher technical capabilities.

Difficulties of In-Built Platform

Established connectivity bridge engines enables the above-mentioned setups through a wide range of integrations readily available, both on the side of trading platforms and on the APIs with trading counterparties, LPs, exchanges, etc. However, outsourcing will incur regular and long-term cost expenditures, and more importantly, will create a dependency on technology providers. The previous removal of MetaTrader mobile applications from the Apple APP Store had a serious impact on a number of trading platforms.

In this part, we will focus on the difficulties of building an in-built trading platform, which include the technical requirements for integration and development, and the cost of development and maintenance.

Technical Requirement for Integration and Development

A straightforward illustration is the intricacy involved in establishing new connections with trading partners. It involves more than just integrating the counterparty's new API at the application level and ensuring it functions properly by passing conformance testing. It also demands dedicated connectivity at the infrastructure level, including the setup of cross-connects, implementation of access controls, and adherence to security policies.

This can be accomplished by developing internal capabilities. Nevertheless, it leads to a slower and more complex process of adding new trading partners. Brokers relying on in-house systems will have to repeat this process whenever they want to include or change an LP, resulting in time-consuming changes and reluctance to adapt swiftly. Consequently, these brokers may face difficulties in promptly reacting and adjusting their setup when needed. In contrast, established and specialized connectivity bridge providers are more advantageous in cost and efficiency.

Cost of Development and Maintenance

There will be a significant cost for developing an in-house trading platform that not all brokers are able to or willing to spend. Meanwhile, the development time needed, not only for the trading platform itself, but also for all the needed integrations with various systems, such as LP connectivity, Bridging, CRMs, Risk Management, BI dashboards, regulatory reporting, and so on, as all such integrations are not available off-the-shelf.

Moreover, development is not a one-time activity. It requires on-going development, maintenance, reworking, improvement to ensure that their platforms stay relevant and not become outdated.

Built In-House or Outsourced?

Building an in-house trading platform or having a known one highly depends on the size of the brokerage firm and its stage of development.

For startup brokers, they commonly adopt the strategy of utilizing a well-established trading platform as it offers considerable cost savings for launching the business, facilitates access to readily available and compatible tools developed for the platform, and allows the broker to target a market using a platform that traders are already familiar with. This familiarity enhances the broker's ability to attract an initial market share more easily.

Well-established brokers are more inclined to differentiate themselves by offering a distinctive, in-house built trading platform, as a way to stand out. However, they will probably offer this alongside other known platforms that the broker has been using since before.

Other brokers typically have a limited selection, predominantly offering their in-house built trading platforms rather than off-the-shelf options. But such brokers are few and far between.

Conclusion

Taken together, brokers often adopt a hybrid approach, using commercially available components in conjunction with in-house developed tools. This approach, however, poses challenges in terms of seamlessly integrating various elements, facilitating efficient communication, and effectively utilizing data. Consequently, it is essential for technologies to offer flexibility through integration options, APIs, and modular design. Technologies that possess this flexibility are more likely to thrive in this constantly evolving financial industry.