By Kenan Maciel, Director of Strategy, Lab49.
The Covid-19 pandemic instigated significant shocks to firms across capital markets. As a result, the need for technology platforms enabling efficient trading experiences skyrocketed. What’s more, the volatile start to this year has simply reaffirmed this notion for organizations operating in the sector.
As traders seek how best to navigate the current economic landscape, now characterized by supply chain issues, currency fluctuations and soaring inflation rates, it is increasingly clear that an effective post-trade ecosystem is a key pillar for success. Firms should therefore embrace technologies with a track record in other areas of the trading cycle. An evident, yet often neglected, starting point lies in the use of accelerator frameworks and low code/no code solutions.
An overlooked back office
Historically, firms have predominantly focused on digitalization within the front office: revenue generation through enhanced capabilities and addressing high front office personnel costs were the main drivers. The industry has therefore explored innovative ways to automate and improve the cost efficiencies and capabilities attached to trading processes perceived to generate the most revenue.
Given this focus, the problems associated with the back-office remain largely unaddressed. Many have either adopted manual interventions or implemented rushed approaches involving tactical add-ons which are not strategically thought through. Often, these add-ons increase the complexity and cost of the eco-system in real terms. Firms have implemented low-cost location strategies for these ‘back office’ functions, but the approach has largely been a “lift and drop” of existing processes and inefficient legacy systems. As a result, headcounts in these locations have slowly crept up, as more staff are thrown at issues. This, coupled with increasing competition for staff in the low-cost locations, has also increased costs.
Replacing these legacy systems is often both a costly and time-consuming process for firms. Not only do they constitute the books and records of the firm, but they also perform functions such as confirmations, settlement and clearing, collateral management and margining, as well as creating a sub-ledger to feed accounting platforms. Thus, they cover operations, risk, and accounting concerns so a replacement involves coordination across these groups.
Additionally, there are huge operational risks involved in large scale post-trade transformations. Institutions cannot afford to be without these capabilities and thus any changes need to be thoroughly tested.
The choices available to firms are either to build a new platform or to implement a vendor platform. Both these approaches are multi-year projects with high costs and implementation risk. The latter approach also brings further complexities, as it ties the firm to the vendor meaning that any required enhancements are delivered at a pace dictated by the vendor, which is in turn determined by the level of demand across their wider client base.
Unlocking success: Are low code and no code solutions the key?
The vendors who have explored further automation in the post-trade space have specialized their offerings to singular areas of post-trade process. For example, the workflow element for exception processing has been tackled by Appian and Pega. There remains a huge potential for framework-based accelerators or no code/low code offerings to provide holistic post-trade solutions. Not only do they surpass concerns about the legacy technical debt obstacle associated with digital transformation, but they can also be implemented at a lower cost with a quicker time to market.
Furthermore, once adopted, these solutions require significantly lower support costs than conventional builds or vendor packages, further improving the profit margin of each trade. Since a significant part of post-trade processes involve the sending and receiving of market standard messages, any solutions in the space must offer solutions which can handle these message types, related gateways, and reconciliation tools.
Another advantage of the low code/no code approach is the flexibility it gives banks to adapt to new technologies and processes. As market developments such as digital assets, digital currencies and ledger technologies become more mainstream, it will be vital that existing post-trade platforms can support and interoperate with them.
The start of an evolution?
Against this backdrop, there is a rising adoption of these technologies by market operators. BPI, Santander and Commerzbank have embraced low code and no code systems, offered by Outsystems and Open as App respectively. With their uptake expected to grow to $45.5 billion by 2024, the industry must consider how to utilize these technologies.
As this adoption continues, firms elsewhere are recognizing the ramifications they may face should they neglect these solutions. Vendors have begun to evolve their offerings to match this appetite. Last year TP ICAP launched a new post-trade platform, Trading Analytics, to provide no-code capability. More recently, Valantic, a provider of cross-asset electronic trading and automation solutions, invested in Velox Financial Technology, a global fintech that specializes in providing low-code software development tools for capital markets institutions to accelerate their digitalization.
So, what next?
Financial services organizations are clear with their desire to improve post-trade processes. Low code/no code solutions are a viable way of overcoming hurdles to change. The approach by some firms to slowly address aspects of their processes will not be sufficient if the current trend of market volatility is to become the new day-to-day reality.
Technology providers should focus their attention on integrated low code/no code solutions that can be natively compliant with modern messaging infrastructure. If executed correctly, these technologies will no-doubt become the norm. This would be a complete game changer for post-trade processes and transform trading experiences.
Vendors looking to retain their clients should not only begin developing these platforms, they must also start to consider ways in which the capabilities of low code/no code can be extended in the future. This will likely include exploration around accelerators frameworks, such as those used in risk management.
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