The ‘social network’ for investment banks?

Single Dealer Platforms (SDPs) are the latest ‘big thing’ happening in capital markets. A bank’s SDP is its virtual brand champion, providing not only an electronic trading platform but also insight into the bank’s trading ideas, its core brand values and aspirations. Graeme Harker, Principal consultant for SDP and User Experience (UX) Design at Rule Financial tackles your questions on this exciting new area.

Paul from a major investment bank in The City writes: "Banks are increasingly seeing their SDP as a core channel to market and a major touch point with customers. The new generation of SDPs seem to include an increasing volume of proprietary trading information, delivered in a streamlined format, providing competitive advantage for investment banks that grasp the opportunity.  I work for an investment bank and we are looking to improve our client offering; what are the benefits of adopting a SDP and what advice can you give on efficiently creating a next generation SDP to help us get ahead of the competition?"

 [Company response]

Graeme Harker says: The proliferation of electronic trading has been a defining characteristic of the front office over the last 20 years. Driven by national exchanges centrally defining their e-trading infrastructures, the equities and exchange markets led the way. They exposed their order books for participants to trade electronically with their counterparts, and these became the first multiple dealer platforms.

Multi Dealer Platforms (MDPs) such as TradeWeb and Bloomberg have been widely adopted, but only offer more commoditised products. An investment bank's SDP is its own electronic trading platform; allowing institutional investors and hedge funds to trade a much wider range of products from a single market maker.

The first generation of SDPs generally focused on execution, as the fragmentation of bank offerings for different services was not a material problem in terms of customer uptake. The early adopters of SDP built a solid reputation by delivering a high degree of certainty of execution to the customer and allowed the banks to grow market share in high volume markets such as foreign exchange.

Banks saw that an electronic execution offering provided the ability to increase scale in order to support new additional 'electronic only' counterparts at negligible incremental cost. This provided market colour, and had the potential to make a material difference to a bank's market share. The initial success was a catalyst for many banks to align and cross-sell electronic distribution, co-branding into an overall e-business franchise that covered their 'siloed' SDP offerings and MDP presence.

Additionally, with many banks undergoing the organisational change to align previously siloed Foreign Exchange (FX) and Fixed Income (FI) activities into a single Fixed Income Currency and Commodities (FICC) division, the market has seen a natural drive and budget to break down infrastructure silos to establish single distribution coverage in these markets. As bank-side technology evolved, certainty of automatic execution became the norm rather than a differentiating factor. Offerings that reduce customer-side system fragmentation by offering more cohesive bank 'services' and personalisation have become the prime differentiator in SDPs.

Investment banks have therefore have continued to demonstrate a significant commitment to their SDPs and have invested heavily in a new generation of platforms despite the adverse market conditions. The stakes were raised dramatically in 2009, when a leading US investment bank launched the first example of a 'next generation' SDP, designed with usability as a prime feature. However, the key benefit of the system, was the inclusion of additional trade ideas, research and key social networking features that the latest user-friendly and more intuitive consumer web applications have adopted. At first glance the most obvious thing about this particular SDP is that it has more in common with some of the popularised applications such as Facebook and YouTube.

From the trader's perspective, these next generation SDPs allow the bank's customers to "friend" trade advisors, seek advice and view market insight about trading opportunities. These features help investors identify not just the best price, but also the most profitable investment opportunities. And just as the iPhone was a game-changer in the mobile market largely because of its superior user interface design, the aforementioned US investment bank believes that its SDP platform will prove to be a game changer in capital markets for the same reason. How has this become possible? Technology has played a pivotal role. Unlike almost all systems that have gone before, the new SDPs are being built using a truly user-centric approach using Rich Internet Application (RIA) Technology.

What are RIA technologies?

For a long time there appeared to be a trade-off between style and substance in the world of computing. The web offered the benefit of mass connectivity, but performance was slow compared with desktop applications. The emergence of RIA technologies has changed all that, with powerful applications now capable of being hosted solely on the web. Users can enjoy a combination of the best of the web (broad reach, instant deployment and cross-platform support); the best of the desktop (fast performance, immediate feedback and greater directive features like drag and drop); and integrated communication such as audio, video and chat. The latest SDPs draw on all of these technical attributes to offer users a truly interactive experience. Moreover, users can choose which information they wish to retrieve regularly and can create a personal view. From a banks' perspective, an important aspect of RIA technology is its ability to coexist with legacy back-end systems: banks can offer an integrated solution without a total technology renewal.

Banks have learnt a great deal from consumer markets, which have successfully implemented RIAs to address business challenges and develop brand loyalty. The advantages of RIAs include: improved user experience, streamlining of complex tasks and (potentially) reduced transaction charges as tasks can be completed more quickly.

However, RIAs are complex to develop; requiring specific skills to ensure the user-experience is at the forefront of the design process. The development process is more intricate than for HTML development and can take more time and effort to achieve the desired outcome. Any potential RIA project must be supported by a compelling business case. The potential to incur high costs is aggravated by a shortage of development talent: RIA business applications are being developed across many industries, so demand is likely to outstrip supply for the foreseeable future. Worse still, developing RIAs calls for comprehensive creative skills, therefore re-training existing developers is not always possible. Banks that are considering RIA projects must examine their capabilities very closely before committing to a development that may be risky and expensive.

What does the future hold?

SDPs will continue to offer banks the opportunity to build long-term client relationships based on the traditional values of trust, loyalty and satisfaction, so will expand to offer additional asset classes in due course. Banks will continue to invest in their SDPs as a major marketing channel that increases client intimacy and builds e-loyalty. The whole SDP initiative is also significant when viewed in a wider context. It offers an insight into how the capital markets are managing their customers and building their systems.

Automated trading platforms have exerted great pressure on investment banking margins. This pressure is exacerbated by the high costs of servicing customers. The Single Dealer Platform is a response to these new market dynamics: a vehicle that allows a bank to offer highly differentiated products at lower cost. The current generation of SDPs represent a magnificent union of business and technology. They establish the SDP as the perfect vehicle for both delivery of content and transaction execution. This combination is bound to attract new users and dissuade existing users from looking elsewhere. This is great news for those banks that have completed their SDP developments; as for the others, they face a steep learning curve.

One day, perhaps all systems will be built this way...

The six stages of creating an SDP:

1.            Building the vision and business case

The initiative to drive additional business value from the bank's SDP must be supported by a compelling business case.

2.            Business plan development

An SDP business plan must cover all aspects of the programme including the 'go-to-market model', the resource plan, the governance model and the development plan.

3.            Solution design and proof of concept

Analysis is required to understand any implications on the existing system architecture and associated technical risks in order for these to be mitigated. Skilled technical architects are required to perform gap analysis on your existing systems, overseeing any technical 'proofs of concept' required to mitigate the risk.

4.            User experience (UX) design and requirement definition

Unlike previous customer-facing trading systems, today's SDPs are developed with a user-centric approach. The skills of visual designers and user experience architects are required.

5.            Build and Integration

The latest SDPs are developed as rich internet applications (RIAs) that run in a browser and combine the best aspects of the web, the desktop and integrated communications, such as audio, video and chat. However, they are complex and more difficult to build than traditional web applications.

6.            Support and maintenance

On completion of the project, ongoing support and maintenance will be required from a dedicated team of experienced professionals.

About

Graeme has led the development of trading systems at Betfair, Morgan Stanley and UBS. He is currently Principal Consultant for SDP and User Experience Design at Rule Financial, a technology and business consulting company specialising in complex systems development for investment banks.