Devil’s Bargain: Closed architecture systems will derail AI ambitions

With billions pouring into artificial intelligence, it is only a matter of time before there will be two classes of workers: those who enhance their skills and impact with AI, and those who are left behind.

Within the financial industry, there lies an undercurrent of increasing anxiety about whether heavily regulated financial institutions will be able to move fast enough to capitalize on AI breakthroughs and compete with more nimble players such as systematic hedge funds. Instead, they are saddled with someone else’s, decades old, bad idea. 

Regulated financial institutions can overcome this structural challenge by removing one major roadblock: the single-tenant application hosted by other heavily regulated institutions. Engaging with these legacy, closed-off applications is akin to striking a “devil’s bargain” in technological progress: while they may already be vetted and connected to systems, they will always be restricted by legacy providers, stifling innovation, progress, and the ability to compete.

Bypassing Innovation Gridlock Via Modern Architecture

Asset managers often find themselves disadvantaged when innovating in crucial areas such as price discovery and automated trading. Structural changes have simultaneously electronified and fragmented liquidity, multiplying the burden to deliver on incumbent, plodding technology providers. The front office is trapped in cycle-long upgrades and punch lists of needs that only grow. However, with the right architecture and by leveraging the expertise of cloud-based partners, these institutions can bypass the legacy blockers posed and deliver the advanced capabilities necessary to keep pace with evolving market dynamics and technological advancements.

Consider the challenges a regulated asset manager faces as it seeks to enhance its automated trading algorithms for fixed-income securities. Despite the manager’s desire to leverage cutting-edge technologies and quantitative models, the manager is hindered by the limitations of its legacy vendor platform. Instead of being able to leverage sophisticated tools for real-time price discovery and execution, the user is left with rudimentary functionality, such as FIX staging protocols invented 25 years ago.

As a result, the asset manager is trapped, unable to exploit fleeting arbitrage opportunities, execute large orders with minimal market impact, or capitalize on other evolving functionality accelerated by the AI boom. The lack of innovation from legacy providers running single tenant applications will exacerbate the widening gap between traditional financial institutions using them, and more agile systematic trading firms using a cloud-based partner. This disparity not only undermines the ability of single-tenant users to attract top talent but also erodes investor confidence in their ability to navigate increasingly complex and volatile markets and embrace innovation. 

The time for action is now, as the market is evolving at an unprecedented pace. To break free from vendor stagnation, financial institutions must challenge the status quo and embrace modern, cloud-native solutions that empower them to thrive in an ever-changing market landscape.

Rob Flatley is the CEO and founder of TS Imagine.