With an ever-changing landscape that now includes artificial intelligence, firms in the municipal market can be overwhelmed by the technology choices facing them, and their decisions will impact their bottom line. As new technology tools are developed will the current infrastructure become obsolete, requiring new investment?
These questions and others have brought the build versus buy argument to the forefront as industry players and firms try to determine what is the best fit for them. While buying may be faster, building can provide a competitive advantage.
"In this world, if you want to be top 20 in most businesses, you have to have a competitive advantage and that's going to be in your technology," said Jim Perrello, an advisor for MultiLynq, a provider of electronic fixed-income trading connectivity and integration solutions, and a member of SOLVE's advisory board.
Buying is usually cheaper and quicker to implement, and it can be 10% of the cost it takes to build a system, Perrello noted.
Furthermore, the "long-term cost of buying is the overall efficiency," said Jennifer Fredericks, a sales director at market data platform provider SOLVE.
"The market 10 years from now will be different than the market today," she said. "The platforms today — the back end technology, the evolution of machine learning, the evolution of AI — all of those pieces are going to continue to change. And so when you're buying, you're buying the legwork, and testing and staying abreast of all of those changes."
Buying technology is a relatively safe bet, especially if it comes from an established brand, and it comes with support, maintenance and expertise from vendors, market participants said.
Software firm Investortools, which helps asset managers scale their business, aims to be that support system, according to Jon Anderson, chief product officer and co-head of Investortools
The firm provides "a broad portfolio management ecosystem, including in-depth analytics, tax law, accounting, performance attribution, credit analysis and workflow and trade decision tools with an execution management layer now," he said.
The firm's goal is to provide tools that "stitch everything together," allowing market participants to make decisions with all the data and analytics they require, he said.
The firm licenses its suite of products for a "fair monthly fee" rather than a "large upfront cost." That, he said, includes access to software updates every six weeks.
"It's much more cost-effective for us to build something that meets the broader needs [of the market], and then our clients can focus on the things that truly help them grow their business," he said.
But buying technology has some negatives.
For one, it may be difficult to find the right product. Fredericks suggests finding "a vendor that's of a nimble size," since they will "listen closely to" your firm's needs while "abreast of what's happening in the market."
Find a vendor that will "evolve with you," she said.
"Ask a lot of questions," Fredericks warns.
While buying gets a firm on par with its competitors, it doesn't give them any advantage over other market players, some market participants say. This is one of the selling points for building internally, as it allows firms to do things no one else does.
Additionally, building allows for customization, control, long-term cost savings, and security and compliance, other said.
AllianceBernstein, for example, is "always trying to stay ahead of either our competitors or other offerings out there," said Tim Morbelli, a portfolio manager of municipal bonds at the firm.
The firm started building its technology over a decade ago when employees realized the firm needed some control around credit derivates, he said.
The firm partnered with its in-house technology team and built its credit derivative trading platform, which is still used today.
From there, the firm continued to expand its in-house capabilities.
The firm has launched ALFA, Automated Liquidity Filtering and Analytics, in 2016 and the system gathers data from all the platforms into a single location, providing the company with a real-time picture of the bond market. In 2019, the firm developed an execution management system and an algorithm for munis. The EMS has since been expanded for all fixed-income asset classes, Morbelli said.
Building the firm's technology was a "must," said Jim Switzer, head of municipals at AllianceBernstein.
"We don't build things and not use them," he said.
The firm is in constant communication when building or updating products, making tweaks along the wayIf firms are not talking regularly, technologists may have to start over if the product is not what higher-ups want, Morbelli said.
This allows AllianceBernstein "to build it out faster and get it in the hands of the owner so that you can you can enhance the process and create new ideas," he said.
"There's no playbook we're following. I wish there was. It's a lot easier to build when you have a playbook to follow. But we're actually creating our own playbook. And so to the point of build versus buy, we built because at there hadn't been anything at the time to buy," Morbelli said.
There are drawbacks, though, to building.
Building the technology is not necessarily easy, since most public finance players are not tech-savvy, Perrello said.
"Technology skills work better as a long-term competitive advantage," he said.
If you build, your firm is responsible for testing and making sure the technology functions the way it's supposed to. If it doesn't, you'll spend time and money fixing it, Fredericks said.
Firms can hire consultants if they don't have in-house capabilities. Larger firms frequently outsource the building, "thinking they can buy that expertise," Perrello said.
And while building allows firms to get "exactly what they want" in that moment, their wants and the market overall could change, Fredericks said.
"Are you building it so that it's configurable? Is it customizable? Is it something that as you as a client change or the market changes? how nimble are you to be able to change that and make it work?" she said.
Sometimes the argument simply comes down to the size of the firm.
Middle market and smaller firms, which provide portfolio management and asset management services, tend to be "more nimble" and more focused on a few specific areas, such as munis, Steve Winterstein, founder of SP Winterstein & Associates,
Those that focus mostly on munis "probably have more ability to build," he said. "They can make that decision."
Larger firms have the cash to build but sometimes opt to buy.
Along with having the needed capital, part of the reason larger firms, such as banks, may opt to buy technology rather than build it is due to the "idiosyncrasies" of munis, Winterstein said.
When firms build technology, such as spread products, it tends to be applicable to multi-asset classes, he said.
However, in fixed income, tax-exempts don't trade on spread, and "so you're saddled with a different kind of problem," Winterstein said.
"Big banks have to decide, do we build technology that applies to munis or do we go find something that works specifically in the tax-exempt market?" he said. "Traditionally they buy when it comes to munis rather than build because they build in accordance with multi-asset classes."
But even these trends are not fixed and there can be crossover between building and buying.
Middle market and smaller firms, for instance, may "want to build versus buy, but in the end, they build certain things where they have competency, but then they will go out and buy other technologies that integrate with what they've built," Winterstein said.
"If you're going to choose somewhere to spend your time and you can just plug into a system and have some connectivity there and have some way to manage your risk, then that gives you more time to build on your end," said Matthew Smith, founder and CEO of Spline Data, during a panel at MuniTech NYC conference in late September.
"It's never an either-or for build or buy, even in the same tasks," he said.
For example, if a firm is attempting to come up with a pricing distribution, "you have to start somewhere," Smith said.
If firms do not have a lot of internal modeling built out, an evaluation price might be a great starting point, and from there, firms can look at doing something beyond that, he said.
For instance, HilltopSecurities both "purchases and builds required technology, depending on how customized a project is and/or whether there is a viable solution available," said Jason Lisec, co-head of Fixed Income Capital Markets at the firm.
While the firm is protective of its proprietary data, he said "we have found great value in partnering with our vendors in providing our teams with exceptional data and system solutions."
Meanwhile, 16Rock Asset Management is looking to build its technological capabilities but it still licenses data with various vendors, said James Pruskowski, the firm's chief investment officer.
"We, as portfolio managers have our own way of looking at the market and interpreting the data to have our relative value models," he said.
However, to build that model, 16Rock needs external data, such as pricing information and trade history, he said.
"If you can't code it, you have to buy technology to develop that connection," he said.
From there, the firm is looking to build out its technology, but details were not readily available on its plans, Pruskowski said.
"It's about building efficient systems that read the data and auto-adjust," he said. "This is all about creating economies of scale and personalizing your approach."
In the end, Winterstein said, "I don't think a firm says we're going to build everything or we're going to buy everything. It's a combination."
