Third Generation Platforms_TABB

Terry Roche February 2016

www.tabbgroup.com

Introduction to the Third Generation Platform for Financial Markets

In an era of high speed trading and intensive regulatory oversight, the human workflow has become overwhelmed, disjointed and underappreciated. This is a problem. While machines make us more efficient, the business is about ensuring the financial capabilities of people. To succeed, we have to form effective and empowered communities through third generation platform services. The third generation platform will enable a holistic global community to collaborate, be informed and market ideas and opportunities...delivered with high levels of security, efficiency, resiliency and regulatory compliance. This report introduces the expected next generation platform that will eventually affect all financial services workflows.

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Introduction to the Third Generation Platform for Financial Markets | February 2016

The First Online Community The first generation platform created in the 1950s was mainframe computers. The second generation platform created in the 1980s was client-server. So what is the third generation platform? The third generation platform, which is evolving now, is based on the cloud and brings together mobile technology, social platforms and big data. We expect that third generation platform services for financial markets will consume the legacy silos of client server services that currently dominate the market. The capital markets community was the first online community and leader of the digital revolution. The community did not start with Facebook. Rather, it was created incrementally via individual offerings and services that shared neither standards nor open efficiencies. These different offerings such as information and communications services are delivered via multiple networks with unique data models, protocol standards, interface standards, service standards and security standards. They are decades old, inefficient and expensive to maintain. Disruption, transformation and/or the creation of new models have affected entire industries through new technology, open standards and shared information flows of third generation platforms. These factors, however, have not significantly impacted the financial services industry. At least not yet. Will new communities disrupt the capital markets ecosystem? Will the capital markets community catch up with the rest of the world? And will third generation platforms with mobile, social and big data analytics delivered via the cloud be the way forward? This note will seek to answer these questions and investigate ways forward.




Third Generation Platform Components Financial market third generation platforms are built on four key technologies:

Cloud o The move to the cloud within financial services is gaining steam as

cloud offerings have improved security and operations capabilities. Indeed the cloud may become the foundation infrastructure for the industry. While there will be network bandwidth considerations that will need to be addressed in communicating with the cloud, we expect that third generation platforms will seek to create their foundation within the cloud.

Mobile Technologies o The use and drive toward mobile technologies has been relentless and

it will not abate. Smart organizations work to integrate their employees personal workflows with their professional workflows to capture the full attention of the workforce. Any strategy that does not include mobile by definition is limited.

Social o As the third platform evolves with Platform as a Service (PaaS)

offerings, we will see a close integration of social media capabilities within the cloud. The benefits of dynamic collaboration and workflow across geographies and company boundaries will be key components of financial services offerings.

Big Data o The avalanche of data within financial markets continues unabated.

The need not only to collect but to understand and leverage the data for compliance and alpha capture purposes places a tremendous demand on financial services organizations of all sizes. Human hypothesis-driven analytics will no longer be able to keep pace. Advanced big data machine learning analytics are leading the way to reveal what is important within all the data.

This industry is about collaboration and interconnectedness on many levels. These technologies, when combined, could provide opportunities for new offerings and models to serve the industry in an open, effective way via the third generation platform (a term first coined by IDC).




Third Generation Platforms will Deliver Utility Services Although the capital markets community has operated information technology the same way for more than a generation, the augurs of change are on the horizon. The unrelenting burden of regulatory compliance has forced the community to consider new models. These new models target commoditized services and deliver them through mutualized technology and operations or as utilities for greater operational efficiency. Fundamentally, a utility model will most likely be delivered as a third generation platform to enable multiple parties to share facilities for common, typically non-differentiated tasks. The keys are access to information (i.e., anyone can contribute or consume data from anywhere), collaboration tools and workspace, and integrated applications. The capital markets use of open social and collaboration tools will power the next generation interaction of the industry through delivery of multiple channel communications, with the security and regulatory compliance that is essential.




Spoiled for Choice

In short, this industry needs to collaborate to function. Business does not happen until trading parties come together to share information, trading ideas and strategies, and to consummate a transaction. So it seems that industry participants would benefit from an open and easy way to interface with each other beyond the many silos that are in place today.

The industry is spoiled for choice for use cases that could benefit from the third generation platform model. One example within the realm of pre-trade activities would be liquidity discovery and an opportunity to standardize Indications Of Interest (IOI) messages and requests for quote communications across many platforms. There would then be the opportunity to provide a fabric of communications across multiple execution facilities and all companies participating in the markets. This platform would give the industry the ability to have any to any communications to unlock opportunity instead of segregated communities swimming separated in non-connected ponds.

The social aspect of the third generation platform will enable market participants to rate each others performance, platforms, services, etc., in the same way that Uber users rate their drivers and drivers rate their passengers. Thus performance data will be available to guide the community to better results.

The same would hold true for any secure middle office communications to facilitate trade settlement at an affordable price. Therefore, once again the open platform eliminates existing silo platform communications barriers and data transfer.

Other options for use would be research publication and consumption, crowdsourcing data and data analytics.




Collaboration Made Safe The third generation platform service is a distributed architecture, which means communications will need to transit across networks to access cloud services. Of course, there are myriad regulatory requirements that govern communications that must be met in all cases. Data delivered via the internet or other public networks, if not encrypted, is an easy target for hackers. Sending unencrypted data over the internet is the same as standing on a street corner screaming your message. Add the use of cloud services, and the data further needs encryption because it resides on computers that are out of your physical control. The reputational and real bottom line, stock-affecting consequences of security breaches are severe. Risk and compliance officers require protections for the data and all the data must be made available to regulators. One would think that everyone in financial services is well aware that encryption of data that transits outside their organization is an absolute necessity. But that would be wrong. TABB Group has found an alarming percentage of market participants who said encryption was not part of their of their technology landscape. Exhibit 1: Do You Use Encryption?

Source: TABB Group




Encryption Financial information, counterparty collaboration and financial transactions happen over private and public networks such as the internet.

Encryption is the method to encode regular text into an unreadable form called cypher text. The recipient of the encrypted information uses a key to decrypt the data to its original form. In other words, encryption turns understandable information into gibberish and then back again.

Symmetric and asymmetric are the two basic types of encryption. Symmetric key algorithms work with a single key, shared between the sender and the recipient of the data. This algorithm and key both encrypts and decrypts the data. Asymmetric encryption uses a key pair, a public key and a private key, to protect information. The public key is available to all for senders to use to encrypt data sent to the owner of the public key. Data decryption happens only by the entity that holds the private key of the key pair.

Additionally, it is important to confirm the identity of those with whom you are communicating. The use of digital signatures or certificates that validate the parties to the communication is the way to achieve identification certainty. A valid signature lets the receiver of data know whether the data is from a known sender and unchanged while being delivered. A digital certificate is an electronic message that uses a digital signature to tie together a public key with an identity. The identity could be a person, a server, a company, etc. The certificate confirms to whom a public key belongs and creates trust.

These methods are the traditional tools used to encrypt data and are tremendously important. However, when considering a cloud-based third generation platform, one must also take into consideration the transit of the data to and from the cloud. With that in mind, one should look to end-to-end encryption as a key aspect of the architecture. Basically, end-to-end encryption is designed to protect data from the source to the destination, thus preventing third parties from deciphering the data while it is in transit. Only the source and the destination systems are able to decrypt the data. Cloud-based systems are a distributed architecture, and one should look to ensure that the data is protected at every point between the source and the destination. End-to-end encryption should be a priority when considering third generation platform solutions.

There is one more important factor to consider. That is, when using encrypted cloud or third party services, whether the service provider has access to the encryption keys. If the service provider has access to the encryption keys, that provider could compromise your security without your knowledge.




In a cloud environment, storing encryption keys using a hardened virtual appliance is the first step to secure customer data. Some firms go even further by supporting customer controlled Hardware Security Modules (HSMs) either on premises or as part of a dedicated cloud service. An HSM is a secure processor that provides cryptographic keys and can accelerate cryptographic operations using the keys. It has features that protect against physical tampering and provides strong authentication. An HSM provides significantly enhanced security above software-only encryption since it does not have an operating system. Additional features prevent physical tampering with HSM, making them ideal for hardening and protecting encryption keys. Exhibit 2: Hardware Security Module

Source: TABB Group

HSMs are used for their ability to provide a tamper-resistant root of trust to store mission-critical encryption keys within dedicated segments of the cloud service. HSMs can securely generate, provision and store cryptographic keys for enabling data encryption under the clients control. Even if HSMs are hosted in the cloud, when customers control the devices using their own credentials, the cloud provider managing the HSMs would not have access to customers keys.




Conclusion

Generational platform shifts seem to occur every 30 years and the next shift is happening now. Industry verticals outside of financial services have already begun to embrace the third generation platform model with fervor. What does that mean for capital markets?

Capital markets remain tied into the client server service delivery of the past 30 years and its associated silos of service. While capital markets have expertly and aggressively pushed the limits of technology to do things faster, bigger and broader within the data and transactions realms it remains resistant to the structural changes new technologies offer.

The financial services industry has a significant opportunity to achieve process and service delivery transformation. This transformation can provide the opportunity to reconstruct the legacy information collection and distribution services within the industry and create a social-based business fabric for open collaboration and business execution.

Where there is opportunity, there is also risk. The established providers of market data, silo communication services for trading collaboration such as IoIs, order management systems/networks and legacy client server application services will all need to recognize and respond to this model or see their businesses displaced. Displacement will not happen in one move but will occur simultaneously from every angle over time. Many established services firms in our industry have proven themselves highly resistant to escaping the innovators dilemma and may have seen their businesses survive but decline. The next slope of decline will be steep and come without ropes or nets.

The beneficial cost model of the third generation platform, with the ability to tie in mobile access, social collaboration methods, along with big data and big data analytics, will be compelling on many fronts. As long as the needed security, operational excellence, entitlement and regulatory controls are in place, there should be little doubt that this generational platform shift will fundamentally disrupt the way financial services operate. New and different service providers and collaborators will be empowered to bring efficiencies and new operating models to financial services.

The technology is available. The will is there. The only question is how long it will take financial services to embrace modernity. Why wait?




About TABB Group

TABB Group is a financial markets research and strategic advisory firm focused exclusively on capital markets. Founded in 2003 and based on the methodology of first-person knowledge, TABB Group analyzes and quantifies the investing value chain from the fiduciary, investment manager, broker, exchange, and custodian. Our goal is to help senior business leaders gain a truer understanding of financial markets issues and trends so they can grow their business. TABB Group members are regularly cited in the press and speak at industry conferences. For more information about TABB Group, go to www.tabbgroup.com.

The Author

Terry Roche An industry veteran with 30 years experience, Terry Roche is responsible for the FinTech practice at TABB Group. Prior to his current role Terry was Chief Operating Officer at NYSE Technologies. Before joining NYSE Technologies, Terry held a number of executive positions at Thomson Reuters and Reuters, including Managing Director, Global Head of Elektron Real Time and Platform, along with Global Head of Strategic Business for Focus Group Accounts. Terry also held a number of senior positions at HSBC that included Global Head of Market Data, Head of Global Middleware, and Commercial Director, Fixed Income e-Commerce. His career started at Telerate and included time at Salomon Brothers, Republic National Bank of New York, where he was head of trading infrastructure and data, and WhiteTree Solutions, an advisory firm he founded.




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Third Generation Platforms_TABB