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Trends in Electronic Trading

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By Jeffrey Britell, Senior Vice President – Global Network Services, IPC Systems.

In the past 20 years, electronic trading technology has opened up what was a largely interbank domain to a much broader financial community that includes investment managers, buy-side and retail firms and increasingly, non-traditional, technology-led firms. From the early days of order management systems and price-matching platforms, trading technologies have become increasingly sophisticated with rapid take-up of new algorithmic and automated trading strategies as well as increased interest in artificial intelligence (AI) and machine-learning technologies. Today, traditional exchanges and venues share the trading stage with multilateral trading facilities, alternative trading systems, electronic communication networks, dark pools and crossing networks, all of which require interconnectivity and interoperability.

More recently, the advent of new digital assets and technologies has introduced a myriad of new players and potential trading connections into the trading supply chain. It has also brought a fundamental change from traditional, centralized markets’ infrastructure to a more decentralized, democratized approach to financial services and transactions.

IPC’s own customer analysis shows that cloud integration is one of the top four drivers of technological change (alongside real-time market data, mobile trading applications, and blockchain) with more than a third of customers indicating to us that they expect cloud integration to occur over the next three years. Investment in new trading-related technologies, systems and platforms has been a key business driver for financial firms over the past few years and this will continue to be the case in the immediate future.

Clients continually reiterate the importance of a fully connected and integrated infrastructure, linking together all participants including buy side, interbank, sell side, platforms, exchanges and other liquidity venues, clearing/settlement systems, market data providers and consumers, while also recognizing that they don’t have the in-house technology and specialist resources to ‘connect the dots’ themselves.

Beyond infrastructure and connectivity challenges, firms are also, understandably, concerned about market volatility, global inflation, overall banking stability, and the impact of trade wars (see graph below).

In terms of the end-to-end trading supply chain, the following challenges and drivers for change are referenced consistently by IPC customers:

Connectivity

In a highly competitive, multi-player environment, market participants increasingly seek solutions that seamlessly connect them with the global financial community. They want efficient, reliable, and robust access to all markets, participants, and applications across a seamless, enterprise-based cloud delivery platform. Whatever the delivery channel or communications technology, connectivity must be reliable; connectivity issues cannot interfere with generating alpha, sourcing liquidity, or mitigating risk.

Integration

Beyond efficient connectivity to multiple end points in the trading lifecycle, market participants are also looking at how to consolidate (multiple market data sources, technologies, trading venues) and integrate (technologies, workflows, even cultures). Larger entities will be looking at investing in technologies that facilitate the elimination of traditional trading silos (by asset type, for example) to deliver enterprise-wide efficiencies.

Communications

In the 4.0 technological age, and with an increasingly tech-savvy demographic occupying traditional trading roles, product and service differentiation have to tick new – and many – boxes beyond efficient market access. Highly interoperable, multi-channel communications technologies are needed to bring together an increasingly ‘distributed’ workforce (and customer base), while meeting the growing burden of transparency and conduct-driven regulatory compliance obligations.

Operational efficiency

Lower cost operations and product development, coupled with continuously evolving, high-quality technology provided by financial markets specialists, will continue to level the competitive playing field, removing traditional barriers to entry and shortening time to market. As well as easy and efficient markets’ access, firms also want fast, efficient onboarding of new providers, asset classes (including digital) and customers.

Execution

It is not just a question of any platform’s or trading venue’s ‘liquidity’ or its “Tier 1 relationships.” Low latency execution is an expected given with any trading partner or platform. Increasingly, the trading community will leverage cloud technology and connectivity to take advantage of emergent technologies and data sources to support AI and algorithmic trading strategies and other intelligent automation projects.

Cloud adoption

Trading firms see cloud technology as a key component of an effective and efficient FX technology stack, giving market participants a valuable speed advantage in executing complex trading strategies, while reducing the cost of trades. According to Gartner, more than half of enterprise IT spending will divert to cloud solutions by 2025. Celent’s 2021 CIO Market Infrastructure survey supports this prediction of large-scale changes, with 78 percent of respondents anticipating near or full cloud adoption by 2025. Deloitte also acknowledges that cloud technology is helping retail and wholesale banks drive innovation and reduce infrastructure costs, as well as supporting improved business performance and shareholder returns.

Managed services

By leveraging managed services (‘as a service’) models, firms can deploy and execute sophisticated cross-asset class trading strategies at pace, with rapid market connectivity, enabling them to realize speed-to-market benefits and to optimize returns. There’s also a ‘rising tide lifts all ships’ benefit since ‘as a service’ performance enhancements, security safeguards and other products and solutions introduced by service providers benefit all managed service users.

Connecting the trading dots…

Regulatory, market and technological changes, as well as the rapid growth in the number and types of market venues and participants are a major challenge for all participants in the trading supply chain. The key to continuing success for market participants in today’s rapidly evolving, technology-driven, highly competitive trading environment will be how well they can bring together multiple evolving technologies, platforms, and channels.

Adaptability, resilience, and time to market are key influencers of change. On the sell side, participants such as market makers, liquidity providers and broker/dealers will continue to demand reliable connectivity and the lowest possible execution latency with multiple, global liquidity venues. The buy side, including hedge funds, funds of funds, proprietary trading firms, etc. will remain focused on innovative strategies that maximize potential returns while simultaneously optimizing operational efficiency.

Today’s firms, regardless of size, are looking to new “as a service” (aaS) paradigms including NaaS (Network as a Service), SaaS for Capital Markets, multi-cloud, cross-asset class trading connectivity and other innovations that enable them to efficiently access top-tier technology while adhering to rigorous performance, security, and compliance standards. Not only does this aaS model support service providers themselves, the potential to reduce cost of ownership (with consumption-based charging, elimination of proprietary operational infrastructure and resources) also supports innovation in customers’ own client-facing propositions.

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