As 2023 draws to a close, it’s time to look back at some of the more interesting trends that have emerged in the trading technology space over the last twelve months, and to take a look ahead at what 2024 might have in store.
With this in mind, TradingTech Insight reached out to a group of leading trading technologists, who kindly agreed to share their insights on what has been an interesting and challenging year, and to give us their predictions for the future.
A challenging yearThe onset of 2023 was accompanied by fears of a global recession, with many banks cutting their budgets in anticipation of a tough year ahead. As a result, several technology projects were put on hold, which had a knock-on effect on tech vendors, particularly smaller fintechs seeking funding, as Steve Grob, founder of capital markets tech consultancy Vision57, points out. “The fintech bubble hasn’t exactly burst, but it has been slightly punctured,” he notes. “The days of raising $100 million with just a PowerPoint deck are over. The focus now is on achieving profitability.”
Despite these difficult conditions however, there were causes for optimism. “Overall, the markets have handled a challenging year well, which is a sign of resilience,” observes Sylvain Thieullent, CEO of Horizon Software, the electronic trading and algorithmic technology provider. “Globally, there is evidence of both dynamic regional growth and increasingly sophisticated technology being applied within more nascent financial markets. However, it can’t be ignored that global volumes are significantly lower compared to previous years.”
Technology innovation in the financial markets sector certainly did not stop in 2023. And perhaps surprisingly, given the indomitable rise of ChatGPT and large language models, it wasn’t all about AI.
“A central emerging theme is interoperability,” says Mike Powell, CEO of electronic trading solutions vendor Rapid Addition. “A key example of this is the new breed of UI platforms consolidating data and analytics applications within a trader’s desktop environment, tailored to the user’s requirements.”The evolving FDC3 (Financial Desktop Connectivity and Collaboration Consortium) standard, which aims to provide a vendor-neutral protocol for how desktop applications communicate with each other, has underpinned many of these interoperability projects. “The FDC3 initiative and the shift from proprietary application user interfaces to a unified UI platform, empowering users to streamline their operations and workflows, is a really interesting trend,” says Powell.
With the growing demand for integrated solutions on the trading desk, the onus will now be on solution providers to ensure that their technology is up to the task, says Matt Barrett, CEO of Adaptive, the electronic trading technology specialists. “A fundamental requirement is the ability of these piecemeal systems to integrate and interoperate with one another. Therefore, a key focus for vendors next year will be to demonstrate successful integration proofs of concept (PoCs).”
Grob outlines how he sees the interoperability trend evolving. “In the next 18 months, I expect the idea of the ‘composable enterprise’ to gain traction; one which envisages a single infrastructure framework or set of rails that supports various packaged business applications, each of which can be seamlessly replaced by another, without disrupting the rest of the system,” he predicts.
Modernising trading tech stacks
In tandem with the growing need for interoperability, another clearly emerging trend gathering pace across the industry is that of banks and financial institutions transitioning from legacy tech stacks to more modern, component-based architectures.
“We’re seeing more and more clients moving away from monolithic trading systems to adopt a more orchestrated, ‘best of breed’ strategy,” says Powell. “This requires highly interoperable, open API-based technology to underpin the applications. The advantage of this approach is a quicker time to market compared to in-house development, as well as a reduction in the cost and constraints of being locked into a single incumbent vendor. It also affords the flexibility to adapt and respond to market changes over time, with the ability to interchange components due to their interoperability.”
Barrett also sees evidence of this trend. “We’re having a lot of conversations about re-platforming – that is, moving away from outdated vendor stacks and purchased solutions, especially in the Order/Execution Management System (O/EMS) space, where it seems a shift may finally be on the horizon. People are actively seeking alternatives and the consensus is that adopting a ‘best of breed’ approach is the most sensible way forward, because it just doesn’t make sense to replace one monolithic vendor with another,” he says.
According to Grob, the prevalence of APIs now enables firms to architect their trading environments in ways that were not previously possible. “There has been a real pickup in firms taking a serious look at how to modernise their technology stacks,” he says. “In the past, the concept of creating a multi-vendor stack was inconceivable, as the technologies couldn’t communicate with one another. But the API economy has now become deeply entrenched in capital markets, which is particularly exciting because it offers firms a clear pathway to select the best products that meet their specific business needs.”
In future trading environments, cloud will also play an ever-increasing part, maintains Barrett. “Anyone considering re-platforming today has to acknowledge the inevitability of cloud technology, especially when looking at investments that will span the next decade,” he says. “And there is an ever-increasing drumbeat of migrating liquidity and matching to the cloud. We’re already seeing exceptionally good performance of low latency messaging and clustering on AWS for our Aeron platform. Looking ahead, it’s likely that cloud providers will begin to compete in offering low latency, high-performance infrastructure specifically tailored to the capital markets.”
AI: it’s not just about ChatGPT
Of course, no review of current tech trends in financial markets can ignore what was probably the biggest talking point of the year, i.e. the growth of artificial intelligence (AI) and in particular, large language models (LLMs). Just over twelve months ago, OpenAI took the world by storm when it released ChatGPT to the general public. Since then, there has been a plethora of activity around the introduction of LLMs into financial markets, for a range of use cases.
“One clear trend we’re seeing in the AI landscape is the internal use of tools like ChatGPT for knowledge management,” says Barrett. “Such LLMs are particularly effective at organising the vast amounts of unstructured content within enterprises to make it searchable and accessible.”
Various solutions were launched in 2023 to incorporate and capitalise on this nascent LLM technology. In April, Bloomberg introduced BloombergGPT, a generative AI model specifically designed to enhance natural language processing (NLP) tasks. And in June, LTX (a subsidiary of Broadridge), launched BondGPT to assist users in the fixed income markets with bond-related queries, and released an enterprise version of the product, BondGPT+, last month.
Overbond, the fixed income data, analytics and trade automation solutions provider, is another vendor that now utilises a range of AI technologies within its solutions. “In 2023, we saw AI being successfully deployed in the bond markets in a couple of areas, such as more efficiently unearthing opportunities by analysing various criteria, adjusting prices and routing orders accordingly,” says Overbond’s CEO, Vuk Magdelinic, adding, “there’s obviously been a lot of hype around ChatGPT, and we’re starting to see some use cases, but I wouldn’t bet on ChatGPT driving a big tech transformation in the markets in 2024. Its contributions are likely to be more incremental, forming part of a broader AI evolution.”
He continues: “What excites me the most is the potential for all these AI components to come together to reduce costs and increase efficiencies in execution. By integrating disparate AI tools and techniques, firms can already determine the most effective execution path and select the appropriate trading protocol. I expect such ‘AI-enhanced liquidity discovery’ to become more prevalent in 2024.”
Thieullent gives his take on the changing role of AI in trading technology. “The world of trading has become increasingly automated, relying on quantitative analysis, predictive models, and advanced algos to increase both speed and efficiency. It is without question AI is going to continue to dominate headlines in 2024. The data required to meaningfully apply AI is becoming cleaner, and the technology tools smarter, and I’d argue this marks the beginning of a completely new way to trade,” he says.
“One of the AI use-cases set to take off next year is around liquidity management, utilising AI-based tools to seek out market inefficiencies and generate more profitable trading opportunities,” continues Thieullent. “Recognising when the market’s liquidity is changing is essential for traders, investors, and financial institutions, and AI can be used to enhance the way in which we identify these fluctuations. Applying this to trading strategies, market participants will have an even more optimised way of executing orders for their clients.”
Harnessing the data
If AI can be considered the brains of tomorrow’s trading technology, then data is undoubtedly its blood. “Customers are now utilising their proprietary in-house data to tap into a wealth of valuable information that has traditionally been dispersed across various desks in an unstructured and often disorganised way, says Stanislav Ermilov, CEO of Tallarium, specialists in off-exchange energy markets analytics. “Harnessing this data is not only beneficial for valuation and risk assessment but also for enhancing business performance and providing teams with deeper insights.”
As firms harness their in-house data for comprehensive analytics, they pave the way for a more integrated approach to market participation. This strategic use of data enables them to not just internalise insights for their own benefit but also to prepare for the increasingly competitive landscape where the ability to analyse and act upon data from multiple trading sources, will give them a crucial advantage, particularly in the fixed income markets, says Magedelinic.
“I foresee a heightened demand for compiling data from multiple venues and dealers, both pre-trade and post-trade, to enable firms to identify where better pricing for larger sizes can be found,” he says. “This ability to aggregate views across global trading venues will therefore surpass the value of any single venue offering a new protocol, for example.”
This paradigm applies as much to the off-exchange energy markets as it does to fixed income, suggests Ermilov. “Regarding the centralisation of data, an obvious use case is the independent verification of prices, which is especially relevant for larger entities that need to accurately value their positions. They can’t rely solely on traders’ valuations due to the wide variance in market perspectives. Such market opacity often leads to valuation discrepancies, underscoring the growing necessity for independent, aggregated market pricing.”
He continues: “In 2024, I’d expect to see firms in the energy sector taking more of a quantitative analytical approach, using more accurate pricing and data to drive their trading decisions. While the focus has traditionally been on understanding the nuances of the physical commodity and energy markets, particularly around supply and demand dynamics, the availability of more accurate price-related data and advanced analytical tools will enable firms to identify and capitalise on market inefficiencies.”
Looking beyond 2024
In conclusion, taking into consideration all the above trends – interoperability; tech stack modernisation; AI; and data consolidation – Steve Grob outlines an interesting future vision. “Tomorrow’s trader will embody the role of a ‘citizen developer,’ selecting and downloading various components from their firm’s app store, all of which will seamlessly connect together in the right format and configuration, with all the essential underlying elements, such as risk management, control, compliance, and more, automatically addressed and integrated.”
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