Choosing between a vendor trading system and an in-house solution is one of the most important technology decisions banks, trading firms, and hedge funds make. This article explores the trade-offs and helps decision-makers navigate this complex choice – build or buy?
Should you build your own quantitative trading system in-house, or to pay ongoing licensing fees for a vendor trading platform such as Murex or Calypso? This decision has profound implications for the cost, flexibility, and competitiveness of your trading operations, and it’s not a decision that can be easily changed in the future.
Vendor trading systems will likely be faster to market, with faster access to extensive functionality, and models that have undergone many cycles of validation already. But any functionality you don’t need simply adds unnecessary complexity. Systems like Murex have a significant learning curve to set up and configure, with Murex technical support staff required to be hired at your firm. This is in additional to technical support staff at the vendor that you will be billed for. Adding your own models and functionality may be harder, more expensive or not possible at all. Model development and bug fixing is likely to be much faster with all source code in-house, leading to a more agile business. Model documentation can be maintained in-house, instead of being at the mercy of how conscientious the vendor has been with their documentation.
For regulated entities, vendor systems can make model validation and regulatory reporting more complex. Without source code access, determining what models are doing or how they are failing becomes a complex business problem, and demonstrating compliance to auditors and regulators more time consuming, which increases cost and operational risk.
In terms of cost, developing your own system might cost more initially, but vendor fees and hidden charges can easily be underestimated. These will have no expiry and will eventually accumulate to more than the cost of building your own system. Once you have signed on, moving away from the vendor setup would be so expensive that you’re at their mercy in terms of fees.
The interests of the vendor and your own firm are never entirely aligned. Vendors are juggling hundreds of clients. When engaging in model validation of the vendor systems, I’ve noticed that vendors are often reluctant to admit their systems have a fault. In a particularly egregious case, I saw a vendor deliberately obstruct model validation staff in order to avoid admitting there was a serious problem with their model. After months of fighting with the vendor, they finally fixed the fault and whole book got revalued.
Vendor Trading Systems (e.g., Murex, Calypso)
Pros:
- Speed to market: Because vendor systems are already built, you will likely be operational sooner.
- Broad functionality: Immediate access to a wide range of models and configuration options, including derivative pricing models and market risk models.
- Model confidence: The models of very large vendors have been repeated validated by their clients, reducing the likelihood of faults.
Cons:
- Very high licencing and maintenance costs: The cost of signing on is only the beginning, as vendors charge further fees for support staff, unlocking more advanced models or modules, and even fixing faults.
- Vendor lock-in: once you have heavily invested in the vendor’s systems, it’s too expensive to change to another option. This gives you little negotiating power with the vendor.
- Less flexibility: You’re largely limited to the existing functionality the system and any inherent design limitations.
- Integration: The vendor systems must be integrated with your own
- Unused Complexity: the broad functionality needed for the vendor’s many clients makes configuration and use more complicated, and increases the risk of model misconfiguration.
- Model documentation: Although vendors provide documentation, the quality of this can vary. With no direct access to the source code, it can be challenging to determine what the models are doing.
- Politics and misaligned interests: The vendor may be more focused on extracting money, juggling many other clients, and avoiding admitting to any faults with their systems, than in helping your business.
Building an In-House Trading System
Pros:
- Fully customizable: An in-house system is tailored for exactly your requirements
- Streamlined: No unused functionality adding complexity
- Unique or cutting-edge: Instead of using the system everyone else is using, you can innovate for a competitive advantage.
- Agility: Rapid implementation of fixes and new features with fewer layers of bureaucracy and go-betweens.
- Cheaper: Likely cheaper in the long run, but with significant upfront costs.
- Model documentation: you have direct access to the source code when questions arise about the behaviour of the models
Cons:
- Longer time to market: The vendor solution can likely be operational sooner.
- Required expertise: You may require more quantitative expertise in-house. However, you could alternatively partner with a suitable consulting firm.
At Genius Mathematics Consultants, we specialize in providing quant support to help firms design and implement in-house trading systems. Our consulting services span quantitative and algorithmic trading, derivative pricing models, and risk model design such as Market VaR calculations. We ensure that your technology not only runs efficiently but also meets regulatory standards. We bring the ability to translate cutting-edge research into reliable production code. By partnering with us, you gain access to flexible quant expertise that supports your team in building systems tailored to your strategies—without the cost and complexity of maintaining in-house quant staff. To learn more about how your business can partner with our consultants, Contact Us.