Cristian Vlasceanu.

Exploring the power of next generation multi-asset class connectivity bridges

July 2022 in Brokerage Operations

In this article Cristian Vlasceanu, CEO of Centroid Solutions, takes a look at how connectivity bridge solutions evolved over time, the type of functionality currently delivered by bridges, why brokers are relying more and more on these systems and what should brokers consider when choosing a bridging solution.

What is a Connectivity Bridge

In essence a connectivity bridge is a system that facilitates the exchange of financial messages (real-time price updates and financial transactions) between trading counterparties. It is a core component of the infrastructure of any financial brokerage, as without it, real-time financial transactions would not be possible. In addition to this however, connectivity bridges are currently delivering an extensive set of other functionality.

Evolution of Connectivity Bridges

Connectivity bridges are a core component of the infrastructure of any financial brokerage
Image source: Centroid Solutions

Facilitating such general requirements, there are currently a variety of solutions that pass under the umbrella of “bridging engines” or “bridging solutions”, from very simple to very complex, making it important to differentiate and highlight the differences.

Initially, the products known in the industry as bridges, or gateways, have been simple connectivity systems, connecting one trading platform to one source of pricing, and also handling the passing of order messages between these two entities. In most cases, such systems would just come in the form of addons, being added to the trading platform itself.

Over time, however, as the requirements and complexity of a modern brokerage grew, so did the bridging technology, becoming really advanced and complex systems, running on their own purpose-built infrastructure. Nowadays, the successful connectivity bridges have evolved into institutional-grade multi-asset connectivity engines, catering to the complex business requirements of modern brokers, liquidity providers, banks and financial institutions in general.

During the last few years especially, the requirements of the retail trading community have been growing at an accelerated pace, spanning from the variety of asset classes available to trade, the use of trading platforms or frontends of choice, low-latency algorithmic trading, specific or custom trading conditions, and more. This led to a stern competition and growing efforts from brokers, to provide more and more options to their customers and capture market share. To a great extent, such efforts have relied on the development of the capabilities of connectivity engines.

Functionality of Connectivity Bridges

First of all, connectivity bridges are supporting a wide and expanding range of liquidity sources and venues, across multiple asset classes, spanning from prime of primes, prime brokers, crypto exchanges, market data providers and aggregators. Multiple such providers are part of the setup of any given broker, with an overall combined offering of thousands and thousands of products. Moreover, the liquidity from various sources can be aggregated together, creating more competitive books of liquidity for customers. Additional sophisticated liquidity management mechanisms are part of the usual feature set to help customize and optimize a broker’s offering and trade routing flows. To facilitate the best performance and lowest latency under such conditions, connectivity bridges are running on specialized hardware and network infrastructure, deployed in key locations, in close proximity to liquidity and trading venues.

The same complexity also applies towards the connectivity with trading platforms. Brokers offerings are spanning across multiple platforms, exchanges and frontends, which are usually completely independent and oblivious of each other. It is the responsibility of the bridging technology to support and connect all such platforms, facilitate pricing and order execution to each from a centralized control system, in a consistent or fully customized manner, leveraging the liquidity connectivity established at bridge level.

Nowadays, connectivity bridges have evolved into institutional-grade multi-asset connectivity engines Image source: Centroid Solutions

Additionally, bridging systems have the ability to provide connectivity via APIs (FIX APIs, REST APIs, etc.), directly to any other counterparty. This enables entities to be liquidity venues and distribute their liquidity to other brokers. Thus, a financial institution can make use of the bridging technology to cater both to a retail audience and create additional revenue streams through a B2B offering at the same time.

Alternatively, entities can focus only on an institutional offering, using the bridging technology standalone, without any trading platforms, through the APIs and functionality available directly within the engine. To support this, the connectivity bridges have had to incorporate complex features including trading accounts with real-time positions and PnL, pre-trade margin controls and account liquidation methods, daily charges, statements and full customer level reporting, and so on, spanning across a multi-asset offering. This has been expanded also with client level trading interfaces, usually web and mobile based, where the trading counterparties have the ability to manage their account, positions, trade and in essence any action related to a trading account.

With such different business requirements within one system, it is highly important to be able to flexibly define and manage multiple liquidity models and offerings, for different business segments and customer types. And moreover, such offerings can be changed dynamically, either programmatically via APIs, based on a custom defined logic of the broker, or under different time sessions or market conditions. Multiple execution models can be defined and customized, following market making, ECN or hybrid models, with smart order routing rules at product level.

And regarding the product set, connectivity bridges have incorporated functionality to help expand a broker’s offering, allowing to create new synthetic products, offer 24/7 trading (i.e. weekend trading) and accept trading in fractional amounts on products. In turn this has led to higher interactions between brokers and their customers and increase client engagement.

Another function of critical importance is the storing and processing of market and trading data. As we have seen above, all product offerings of a financial institution are originating within the connectivity bridges and all transactions are passing through such systems. Thus the bridging technologies have developed comprehensive reporting capabilities to process and provide important insights to the business: market data stats and comparisons, trading stats related to earnings, rejections, fill statistics, statements, positions evolution, and much more. All such reports can be accessed in real-time, and APIs have been developed for easy integrations to various external systems, BI dashboards and real-time post trade reporting and data analysis.

And even more importantly, bridging technologies have incorporated advanced risk management functionality, analysing in real-time the huge quantities of data flowing through the system, producing business intelligence, risk analytical insights and notifications. Additionally the systems have the ability to take actions based on the real-time risk analytics following complex defined business logic. This is essential in today’s trading landscape as many financial brokers struggle with the absence of an all-in-one risk management framework that monitors the entire company’s trading operations and produces data-driven analytical results and actions, on a fully automated real-time basis.

And many entities are currently using multiple trading platforms and services developed by different vendors which very often either completely lack or include only a subset of risk management functionalities specific only to that trading technology and isolated from the other trading platforms.

In addition, those systems do not have an out-of-the-box functionality to exchange data freely amongst one another. As a result, the trading data is fragmented across different systems, causing brokers to perform substantial amount of time-consuming manual work, just to aggregate a complete picture about the risks involved. This shortcoming results in a time-lag for critical risk related decisions based on current exposure dynamics. The connectivity bridges have essentially been perfectly positioned to “bridge” this gap, by offering the ability to measure overall risks in real-time at the level of asset class, currency, USD notional, concentrations, and flow toxicity, which is vital for identifying and mitigating risks in a timely manner, especially during times of high market volatility.

Obviously, having to handle so many core aspects of a financial entities’ operations has put more and more emphasis on the scalability of a bridging technology. Such systems must deliver performance, high throughput and be very versatile. Additionally, the usability is also very important, with bridges being able to accommodate configuration changes in real-time, on-the-fly, such that new business opportunities can be satisfied, and setups can be furthered, without an impact on existing business. And last but not least such engines must be very stable and reliable, with built-in redundancy at all levels, avoiding downtime and sub-optimal performance at all costs.

Choosing the right Bridging Technology

So as one can imagine, all these aspects make such systems very complex to design and not easy to build, therefore. There has always been an on-going debate within financial institutions when it comes to connectivity and risk management technology, whether to take on the task to build it internally or choose an external dedicated provider. It comes down to the requirements of each entity, however as the financial brokerage business is evolving to a more and more complex market, it is the future requirements, not just the current ones that are important and more often than not, internal systems, built just for specific current tasks, fail to adapt and scale adequately.

Considering the high associated development costs and time to market needed, financial institutions should strive to choose a powerful bridging solution that already offers the variety of functionality outlined above, combining the right dedicated infrastructure, connectivity, scalability, flexibility, data insight and risk management. Additionally, as the requirements of the industry are ever changing it is important that the technology partner is an entity that continuously innovates, enhances its solutions with new features, integrations and functionality.

Connectivity Bridges in Prime Focus

As we have seen throughout this article, connectivity bridges have evolved dramatically over the history of the industry, taking on major challenges, and reaching very complex solutions currently used by a wide variety of financial institutions. The development of bridging technology will not stop here, with extensive work being carried out to deliver more sophisticated functionality and continuously expand connectivity options across multi-asset venues.

It has not always been straightforward to quantify the benefits and differences between bridging technologies, not being obvious within a simple set of requirements. Nowadays, more than ever, a financial brokerage is a fully technology driven business and the success largely depends on the core technologies being used.