Open Platform: IP Turrets Gain Traction

Acceptance of IP turrets is growing, with increasing numbers of financial institutions acknowledging the technology as an effective solution that meets the combined trading requirements of speed, compliance and transparency.

This increasing acceptance has been matched by the pace of development, as both new and incumbent providers make use of technologies such as hosted cloud-based services, content provision, and collaboration tools as part of a new generation of trading turret solutions for traders, market-makers and other capital markets professionals.

In total, there are over 200,000 turrets in use globally by traders, market-makers and various intermediaries. While the uptake of automated trading has surged in many sectors such as cash equities, there are certain asset classes that are more suited to voice trading. The complex or exotic nature of some assets dictates that they can only be traded by people connected by phone.

Currently, 60 percent of the IP turret market resides in North America, 30 percent in Europe—the lion’s share of which can be found in London—and the other 10 percent elsewhere. Even though the installed base is a maximum of 200,000 positions worldwide, the refresh cycle for trading turrets means that the annual market is held to be somewhere between 14,000 and 30,000 positions.

With capital markets firms refreshing their trading estate every seven to 10 years, what does the changing landscape mean for owners of trading turret systems? Organizations considering embarking on a refresh of their current turret estate must consider a number of important factors and drivers before making a decision.

Compliance and Regulation
Regulation has been a major driver of change and development throughout the financial services market for many years, and trading is certainly not exempt from this phenomenon. Now placed under dramatically increased scrutiny, there is more pressure than ever for trading to be transparent and traceable. This is particularly true in the complex asset classes predominantly traded via voice systems, which makes possessing the ability to monitor voice traders’ behavior vital. As risk ratio ceilings become more stringent and the timeframe for the calculation of risk profiles comes down from day-end/next-morning to near real time in some cases, effective risk management is increasing in importance.

The raft of new regulation centered on North America and Europe in particular is changing the way businesses in those territories operate. The new regulations impose tougher requirements on market participants, so effective risk management takes on critical importance for instruments such as asset-backed securities and credit default swaps (CDSs), which are regarded in some quarters to have been responsible for triggering the global financial crisis. Since many of these assets are too complex to be exchange-traded or even centrally cleared, they remain within the sphere of voice trading. It is vital that the voice trading part of any institution’s business is monitored just as closely for irregularities as any of its automated trading systems, if firms want to achieve risk policy compliance.

VoIP Maturity
IP transformation has been of particular importance for voice communications. Once residing on a separate network, the convergence of voice and data means that voice traffic is treated as another “application” on an institution’s data network. However, unlike pure data applications, voice traffic is sensitive to network latency and jitter, which can negatively impact call quality and damage the user experience.

IP turrets started later and have taken longer to make the journey to full Voice over IP (VoIP) maturity, and there are several reasons why this is the case. While most back-end voice switches converted to IP in the early 2000s, the protocol that communicated with individual turrets continued to utilize pre-IP, time division multiplexing (TDM) networks. In addition, turrets have always maintained a second set of connections alongside regular dial tone connections, namely private wires. Given the critical nature of these communications channels, there has been a major reluctance to switch these links to IP because IP was viewed as a cheaper, low-quality technology that was subject to drops in voice quality.

Challenges for CIOs
CIOs of capital trading institutions are facing a range of challenges that can be traced to a number of external factors and the economic situation. One factor not peculiar to financial institutions is that IT budgets are constrained, and that as a result, total cost of ownership (TCO) needs to be minimized. It is more difficult to get budget for new infrastructure projects, and in general, executives have become more eager to see rapid returns on investment and are less prepared to wait for long-term returns to appear. The regulatory landscape is constantly changing, with further regulation expected to impact North America and Europe in the coming years.

CIOs can benefit from the increased competition stimulated by new entrants to the turrets market. Whether CIOs opt to remain with their existing provider or shake up incumbent suppliers, this can help improve performance or reduce TCO. Equally, effective scenario and sourcing strategy planning are both key to attaining TCO reductions. Any new investment cases need to take into account different implementation strategies, and a business case should always quantify the broader investment case elements that offer business value, such as scalability, flexible commercial models, and reducing datacenter footprints.

Choosing the Right Path
A recently published Ovum report, The future of the trading turret market—will IP PBXs muscle in on turret systems’ party?, states that the trading turret market is at a crossroads. Certainly, at such a pivotal time within the industry, decision-making is becoming more important and the consequences of missteps more acute. Figures show that although the number of turret units is static, demand for the technology remains buoyant. At the same time, private branch exchange (PBX) vendors are increasingly capable of making a serious challenge for at least part of the market currently served by specialist providers and systems.

Many capital market firms are expected to take the plunge and renew their current trading turret estate in between seven and 10 years. The decision to invest will be made against a backdrop of increasingly dense regulation, intense cost pressure, improving cloud solutions and Session Initiation Protocol (SIP) adoption. All of these factors combine to make the upcoming purchasing cycle more complex than the last. CIOs will need to evaluate the size of their estates, whether they need a dedicated platform or a standard IP-PBX solution, and the overall complexity of their trading environments.

Delivering improved performance in conjunction with cost reductions is always challenging. Increased competition between providers is a positive change for the market, but what is achievable for CIOs will largely depend on the implementation of a strong technology and sourcing strategy definition and comprehensive scenario planning.

Mark Gibbons is a managing consultant at Hudson & Yorke, a London-based management consultancy that focuses on communications technology.