By Jock Percy, CEO at Perseus
Overall, 2015 was a fascinating year for the financial markets and, by extension, for financial technology solutions providers. At a macroeconomic level, the slowdown of growth in China squeezed commodity dependent markets, including commodity powerhouses such as Brazil, Australia and South Africa. Meanwhile, the Greek debt crisis unleashed a period of considerable volatility in the summer months, not least in the equity markets.
And let’s not forget the Swiss National Bank (SNB), which decided in January that it would no longer peg the Swiss Franc against the Euro. This was a seismic event in the world of foreign exchange and the effects rocked FX markets and put many leading players out of business.
While developments in capital markets technology did not grab as many headlines as the turmoil in Europe and the emerging markets, they were momentous nevertheless. Continuing the trend of the past decade, the markets continued to churn out vast volumes of data in 2015, putting pressure on financial institutions to upgrade their infrastructure, while exchanges ratcheted up the costs of transactions for both data providers and consumers.
Furthermore, upgraded exchange infrastructure was deployed in developed and emerging markets such as Turkey and Peru, while new exchanges were launched, for example, ICE in Singapore and CEINEX in Frankfurt. Finally, as if that wasn’t already going to cause indigestion, compliance changes and requirements were handed down by regulators at a rapid clip. These changes and modifications continue to put financial pressure on every institution operating in any regulated market environment.
If these are the significant trends and events of 2015, what can we expect from 2016? At Perseus, we believe the following trends are ones to watch out for:
A focus on saving money
Financial institutions will undoubtedly focus on cost savings in 2016. A key driver of this is the increasing cost of satisfying regulatory requirements such as the Markets in Financial Instruments Directive II (MiFID II) and Dodd-Frank. Meanwhile, the cost of accessing market data continues to rise. All of these developments cut into trading profit margins.
One way to reduce costs is to outsource technology and infrastructure requirements. Providers of managed services such as Perseus benefit from economies of scale on a global basis, which enables us to potentially offer huge savings to institutions. Outsourcing trading connectivity also allows firms to access new markets as quickly as their legal teams approve the paperwork, significantly reducing the lead time for generating revenue and profit. This gives the business a chance to test new strategies without having to commit significant resources to establishing connectivity into a market with unproven alpha.
Leveraging on-demand software defined networks, such as the solution recently announced by Lucera Financial Infrastructures and Perseus, enables institutions to access connectivity on what is effectively a ‘pay as you go’ basis, globally and at a flat rate. This is a massive disruption to a part of the industry that extracts an estimated $6 billion from capital markets and commentators have described the Perseus and Lucera partnership as the ‘uberisation of capital markets connectivity’.
Technology to meet regulatory demands
There are many demands on institutions to meet regulatory requirements and these will continue into 2016 and beyond. Fortunately, technology can play a key role in enabling institutions to comply with some of these regulations and drive bottom line profit. Particularly significant are the abilities of technology to prove best execution and meet the new time stamping requirements under MiFID II. These define that the timestamp required on every reportable event must be recorded to millisecond accuracy and synchronised to Coordinated Universal Time (UTC). The requirements become even more granular, 100 microsecond accuracy, for high-frequency traders.
Compliance with this requirement under MiFID II is a tall order given the level of accuracy and granularity that is expected and the number of transactions carried out by a global institution on a daily basis. Building appropriate systems internally is very expensive, especially when firms have to manage and monitor the infrastructure 24x7x365. Perseus offers readily available and fully compliant solutions for high precision time stamping.
Again, institutions should look at outsourcing rather than deploying in-house teams to address this issue as in-house teams will likely have multiple priorities, deadlines and budgets to balance. On several occasions, executives have asked us to unwind internal do-it-yourself versions once the true costs are documented. It can get ugly, but rest assured the solutions are fairly straightforward.
Offshoring trading operations
The combination of cost and regulatory pressures from MiFID II in Europe and the Dodd-Frank Act in the US is encouraging many financial institutions to look at alternative ways to meet regulatory requirements while managing their business in the most effective manner. As a result, there is a growing trend towards offshoring trading operations to jurisdictions where regulatory environments are not so onerous, for example, Hong Kong, Singapore and other Asian financial centres.
Due to the effort and expense involved with relocating trading operations, it is mostly the larger institutions that have gone down this route to date. However, you don’t need to be ‘too big to fail’ to take advantage of these options. The key to unlocking value is to use managed services providers that are able to offer the technological and logistical support that is necessary to trade in new markets. This makes offshoring an increasingly practical option for smaller organisations.
Investment in emerging markets
Emerging markets have had a bumpy ride this year, but in the long term they still offer tremendous growth opportunities to financial institutions. Continuing improvements in the trading infrastructure of countries such as Peru, Chile, Mexico, India, South Africa and Turkey mean US and European institutions will want to invest in updating their own trading technology platforms so that they can trade efficiently in these markets. Further, the exchanges in mainland China and Hong Kong are steadily expanding and the linkage between them is getting stronger all the time.
Developments in fintech are making it easier than ever for traders to operate in remote markets. Silicon Valley often refers to agile development and failing fast – Perseus LiquidPath allows institutions do both, to set up trading operations in country quickly, securely and at minimal cost without the burden or tax effect of hardware ownership. With the benefit of local expertise, consulting to help you navigate the local market and economies of scale, it is quick and easy to capitalise on new, global trading strategies. It is also possible to pack them down again at minimal cost if things don’t go to plan and move somewhere else. At Perseus we coined the phrase Global Spend Mobility and this correlates directly to the cost saving trend.
Real-time market data
Real-time market data is another area that will come into focus in 2016. As the SNB crisis showed, institutions that don’t have access to real-time market data can miss out on crucial pricing, with devastating effects. Accessing real-time data over a low latency and highly reliable network will become a basic requirement, not a nice-to-have.
For institutions that want to stay ahead of the pack in 2016, low latency connectivity will be as important a component as the quality of the data. Now we see an end to the winter of zero interest rates, financial institutions need to be prepared and have the right technological platforms and connectivity to be able to act quickly and take advantage of opportunities that arise. If you haven’t taken a close look at normalised global market data delivered over the Perseus global low latency network then please let us know and we will give you every opportunity to put it to the test.
Outlook for 2016
While it is possible to predict some trends for 2016, Year of the Monkey, the markets will also inevitably provide their own surprises. Given how rapid the pace of change has been in recent years, one thing that we can be sure about is that we are bound to see some very exciting developments in the world of fintech over the next 12 months. Watch this space, stay thirsty for knowledge and be prepared.