A GlobalTrading Roundtable Discussion.
Regulation and technological innovation are forcing the industry to re-position their existing trading systems, according to participants at a thought leadership discussion.
The trading landscape is experiencing rapid transformations and is faced with further disruption. Regulatory imperatives, cost pressures, innovative technologies, vast new data sources, and a constant requirement to deliver competitive services to clients are forcing all industry participants to reassess the quality, efficiency and sustainability of the technology stacks they use or promote.
In order to meet the challenges and opportunities ahead, close collaboration between the business and technology departments within each firm is essential, agreed participants at a roundtable discussion held at London’s Royal Exchange on 5 October.
Clearly, the Markets in Financial Directive (MiFID) II is concentrating minds. The regime, which comes into effect on 3 January 2018, will force buy- and sell-side firms to implement trade processes more rigorously. Notably, there will an obligation not only to achieve best execution in all asset classes in re-structured markets, but to do so in a transparent and auditable fashion.
Brokerages and fund managers have to determine priorities, avoid wasteful duplication and assess the relative merits of building their own systems internally or buying technology from third parties. It is critical that they streamline processes and install efficient and cost-effective technology stacks, be able to access data throughout the trading cycle, and recalibrate in response to changing market conditions and regulation.
Vendors also must prioritise to ensure their time and resources are not wasted on unproductive projects. A client’s request for a specific bespoke product might be commercially unviable if there is little likelihood that it can be cross-sold elsewhere, and even less worthwhile if there is no guarantee of final purchase and payment. However, vendors need to be flexible and able to offer both customised and standardised technology. They understand the regulatory obligations of their clients, and can tailor their products and services accordingly – but only if it makes financial sense, which typically means being able to offer them to other clients and for use in other asset classes.
As a panellist pointed out to general agreement: “You can’t get away with doing the same thing twice these days: you have to get it right the first time, otherwise it’s too expensive.”
At a basic level, technology prioritisation is simple: focus on regulation and the issues that all clients care about most, such as stability with flexibility, and systems that are fit-for purpose. However, beneath the surface prioritisation is highly complex. Different groups within a firm have their own particular urgencies, as well as disparate views about what technologies should be scaled, and sometimes agendas that might favour an in-house investment rather than buying products from third parties.
Fortunately, many firms now recognise the importance of collaboration and integrated project management. Instead of the traditional segmentation between functions, technology and business operations are cooperating more efficiently, because the selection of appropriate technology is central to the success of their overall success. Business leaders need to understand the role of technology and developers need to place their systems within a business context. Both must recognise that the aim of technology is to enhance capability. The increasing status of the chief technology officer reflects and affirms this trend.
Similarly, access to and use of data is a theme shared by monitoring regulators and the commercial ambitions of buy- and sell-side firms. Data is both the substance of trade transparency and a source of competitive value, so their interests are compatible.
Whether or not technology should be developed internally or bought from vendors largely depends on optimising human and financial resources, and on the specific applications of the technology. Trade execution algorithms need to be tested for different market scenarios, are proprietorial and might need to be recalibrated, so there is a strong case for building them in-house. Similarly, data gathering, analytics and interpretation can add alpha, so there are often commercial reasons for build rather than buy.
On the other hand, order management systems (OMS) are more generic and their basic requirement is that they are stable and function efficiently. It makes sense to install an OMS supplied by a vendor whose system has already been tested and which can be fine-tuned when new market conditions or regulations arise. A solid middle- and back-office architecture is a prerequisite for the successful application of complex algorithms designed to give a firm a competitive edge.
“There is an opportunity cost every time we decide to do something internally. You have to motivate the technology department, recognize there is an opportunity cost and aim instead to add more value in the areas that we can achieve alpha,” said a panellist.
There are, of course, many vendor products and services available to buy- and sell-side firms. The risk management process means they are more likely to choose the bigger suppliers. There is also an opportunity for niche providers, but clients need to be reassured that they can deliver and follow up. The best option is probably a hybrid: a selection of technology from a small number of vendors with domain expertise to complement the systems provided by a main supplier. However, it is important to ensure that their work and deadlines are synchronised. If not, a one-team policy is likely to be more efficient than a fragmented approach, as delays might offset the gains hoped for from a specific skillset.
Moreover, entrenched legacy systems can hinder the adoption of advanced systems that are more appropriate to meet the demands of new regulation and dynamic market conditions. They can resemble “calcified spaghetti”, almost impossible to unbundle and too expensive to replace despite their obsolescence.
Yet, firms must make a commitment to jettison legacy systems if they threaten to ossify their business activities. They will fail to reap the benefits of innovative technologies, which will undermine their commercial future.
For instance, it is increasingly possible to harmonise multiple data sets that have been historically formed on the basis of a particular business or product. Visualisation and predictive techniques that can inform a targeted indication of interest, an optimal trading venue or a market making strategy could be integrated into a firm’s OMS and algorithmic systems.
Data collection and analysis is likely to be the main focus of research into new technologies. Regulators insist on the storage and publication of greater amounts of information in order to explain trade execution decisions. Meanwhile, the capability to tap into new sources of data and make sense of it will give buy- and sell-sides a competitive advantage.
Technology can be deployed to capture and analyse data more effectively, and present it in a visually appealing way. It is already good at managing structured data, but the greatest challenge now is to find ways to improve the collection and understanding of myriad unstructured data.
Artificial intelligence and machine learning will be an effective curating and analytical tool, but its adoption should not be a matter of faith, but rather of utility. Fintech innovations will also have important role. Brokerages and fund managers, as well as the established vendors, should retain the flexibility to adopt and promote them when appropriate and cost-effective.
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