Dealing with structural complexity in global derivatives markets

By Martin Nilsson
October 20, 2016

Much is made of the power of regulation to drive capital markets firms’ IT investment decisions. But active players in global derivatives markets are also being bombarded by mounting structural complexity, so much so that a recent TABB Group survey found that a full 50% of firms are looking to replace their trading platforms within the next three years.

Regulation is playing its role in this growing complexity. But a number of other factors are involved, and combined they are creating a derivative trading landscape that is making traditional trading tools obsolete. Making sense of the rapidly evolving market structure and the growing number of financial products has become a daily challenge that can no longer be supported through manual processes.

At the heart of the ongoing structural change in derivatives markets is investors’ need to seek out new products and regions. Increasing client demand and rising volumes against the backdrop of near-zero interest rates are forcing investors to look beyond traditional investment segments. As a result, they are expanding their use of futures and options to manage risk.

Moreover, political considerations like changes in global interest-rate policy, the UK’s Brexit vote to leave the EU and an overall uncertain geopolitical environment are all contributing to volatility. Firms are now required to manage complexity across multiple jurisdictions and product segments, while at the same time keeping on top of the constantly shifting global regulatory framework.

In many cases, regional regulatory initiatives are translated into global mandates for trading firms, shifting business IT decisions across departments and functions. Risk and compliance have an increasingly vocal role in what was once a trading desk decision, adding another layer of complexity for market participants to deal with.

Faced with this dynamic, derivatives markets participants need to keep client considerations at the forefront of their trading technology decision-making process. Traders in these markets have always needed speed, flexibility and access to global liquidity sources. But the need is growing for powerful analytics, the ability to change strategies on the fly, and consistent best-of-class capabilities spanning multiple asset classes, geographies and regulatory regimes.

The TABB Group report – drawing on interviews with 72 buy-side, sell-side and proprietary trading firms – suggests the industry is on the cusp of major technological change, as participants seek to replace antiquated trading systems with modern platforms that can meet their changing needs. With cost concerns a constant, firms are rethinking their approach to IT investments and aggressively exploring ways to lower costs while staying abreast of the technology curve.

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