Opening Cross: Getting ‘Invested’ in Politics and Purchasing

With US presidential elections still over nine months away, republican candidates are already jostling to be their party’s chosen candidate to run against the incumbent president Barack Obama. This week, in bids to gain favor, Mitt Romney released his tax return, Rick Santorum introduced the nation to his mother, Newt Gingrich suggested colonizing the moon, and Ron Paul quipped that the best use for the colony might be to house politicians. Now that idea’s got my vote!

Behind the posturing, kissing babies and flip-flopping, a political campaign is a sales pitch—one that every provider in our industry goes through constantly as they seek to displace incumbent vendors, promising to be better, faster and cheaper than their rivals. In the current economy, you would think this would be an easy sell—especially since some predict that 2012 won’t be the year of the dragon, but rather the year of displacements as virtualization, open-source technologies and abstraction layers make it easier for firms to chop-and-change providers and create true “best-of-breed” architectures.

But aside from eliminating duplicative charges through ingenuity and good management policies, saving money costs money. The cost of buying something new, even if it’s cheaper than the incumbent, and the cost of resources to rip out the previous solution can be daunting—not to mention the costs and time involved in evaluating and testing potential alternatives before settling on a replacement. So the only area where we see regular replacement of technology or services is in high-frequency trading, where the cost of investment is outweighed by the profits.

For example, someone reading last week’s news that trading software vendor FfastFill halved roundtrip order latency to the London Metal Exchange from 10 milliseconds to five milliseconds for traders using the vendor’s proximity hosting service, might be tempted to splurge on the vendor’s servers and connectivity—if even five milliseconds of latency isn’t too high for them. Equally, last week’s announcement that data and trading software vendor CQG has co-located its gateway servers in CME Group’s new datacenter in Aurora, Ill., might prompt a firm considering more traditional connectivity to the new facility—which at press time was still due to go live on Sunday, Jan. 29—to write CQG a check.

But for the most part, if the commercial benefits aren’t immediately apparent, then firms are unwilling to stomach the initial cost (see an online discussion between my Waters colleagues Anthony Malakian and Jake Thomases for how firms are demanding more proof-of-concepts before signing deals).

The cost of buying something new, even if it’s cheaper than the incumbent, and the cost of resources to rip out the previous solution can be daunting—not to mention the costs and time involved in evaluating and testing potential alternatives before settling on a replacement.

This is one challenge facing the consolidated tape debate in Europe: After months of industry bodies and vendors working to develop a set of standards as the basis for potential consolidated tapes of pan-European post-trade data, the lack of an official endorsement from the European Securities and Markets Authority could result in a lengthy wait-and-see period while markets delay implementing the standards. Meanwhile, vendors that have touted their credentials as consolidated tape providers are realizing that—especially if post-trade data is to be provided free after a slight delay—there is less to be gained from providing a tape of record than there is from providing customized tapes that meet specific client needs, which they already do as part of their everyday services. But isn’t that anathema to the idea of a consolidated tape as a failsafe mechanism not primarily for high-value trading, but to support important functions such as best execution monitoring, risk management and compliance?

Perhaps the solution would be to require each vendor who wants to be an authorized tape provider to offer a basic, full consolidated tape to all-comers, and allow them to augment that with custom, premium solutions for those willing to pay more. If we can colonize the moon, why can’t we agree on a consolidated tape?