Insource vs. Outsource: Solving Legacy System and Market Data Challenges in Financial Markets

As featured in Finance Derivative

Banks and hedge funds face increasing pressure to determine when to insource versus outsource critical operations, especially when dealing with the ongoing challenges posed by legacy applications.

Gartner defines a legacy application as "an information system that may be based on outdated technology but is critical to day-to-day operations."

This definition underscores the dilemma: legacy systems persist because vital business processes depend on them. These systems often result from insourced, in-house solutions created when no suitable commercial alternatives were available. Over time, however, these home-grown solutions can hinder business efficiency and resilience.

While some legacy systems may still provide value, the question is how long that value will last.

The Challenge of Legacy Systems

Upgrading applications can be straightforward when modern versions of the software are available or when transitioning from in-house solutions to cloud-based systems. However, custom-built legacy applications often lack upgrade paths, creating significant challenges. Maintaining and supporting these systems is costly-particularly when they depend on outdated proprietary hardware, which becomes harder to replace and support over time.

Legacy systems come with a growing financial burden. Supporting outdated software requires skilled personnel familiar with obsolete technologies and skilled at maintaining hardware that is no longer widely produced. These costs can add up quickly and detract from the ability to invest in newer, more efficient solutions.

The Pressure of Expanding Market Data

For banks and hedge funds, market data is the lifeblood of execution decisions. Accessing high-fidelity, low-latency data with complete reliability is non-negotiable. However, building and maintaining a global network with low-latency circuits and fully diverse secondary paths can cost millions annually. As data demands grow, these costs can become unsustainable for individual firms.

When to Outsource

One way to address these challenges is by working with a managed services provider (MSP). Outsourcing offers firms greater agility and the potential to reduce their total cost of ownership (TCO). MSPs provide much more than just migration services-they can deliver access to global financial markets, offering scalability and expertise often unavailable in-house. However, not all MSPs are equal. Choosing the right provider requires careful evaluation of their ability to scale solutions and meet expanding bandwidth demands.

A robust managed solution must handle both the delivery and distribution of large amounts of market data without compromising on performance. MSPs enable economies of scale by sharing global infrastructure and delivering services with minimal latency and maximum performance. This is especially important as financial traders' activities intensify, requiring rapid responses during high-activity periods. A capable MSP ensures that sudden bursts of data traffic do not overwhelm critical infrastructure.

Evaluating the Right MSP

Selecting the right MSP is crucial for maximizing the benefits of outsourcing. Firms should look for providers that combine network scalability, low-latency connectivity, and reliable access to global financial markets. Providers that offer a holistic approach - integrating application management, market data delivery, and consulting services -can streamline operations and reduce costs. TNS is the only provider to combine a vendor-neutral approach to market data application management, alongside end-to-end hosting, market data and consulting services.

An MSP who can work across multiple clients, vendors, and partners provides unique advantages. For example, if one client reports an issue, such as incorrect pricing on a stock, the MSP can quickly determine whether the problem is with the exchange, an aggregator, or the client's infrastructure. By monitoring service incidents across all clients, MSPs can identify and address problems faster than individual firms. In many cases, MSPs detect and resolve issues before clients are even aware of them.

Conclusion

Legacy systems and market data growth present a growing challenge for banks and hedge funds, increasing costs and risking operational efficiency. While some systems may still provide value, the increasing demands of modern financial markets often make them untenable. Working with an MSP offers a scalable, cost-effective solution, enabling firms to modernise their operations without sacrificing performance.

To remain competitive, firms must evaluate their insourcing and outsourcing strategies. Whether addressing legacy systems or expanding market access, the right MSP can be a vital partner in achieving business goals.

Steven Roe is Vice President of Market Data Solutions at TNS, following the acquisition of his company West Highland Support Services in 2023

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