After years of stagnant trading volumes and shrinking margins, sell-side institutions are now facing a new set of challenges. Increasing regulatory demands and their effects on markets put the pressure on banks and brokers to remodel their entire business approach. Conventional initiatives for cost-cutting and streamlining operations will not suffice; banks and brokers must also adjust to structural changes in the regulatory and market landscapes.
Finding their way forward while under this pressure, firms are taking a fresh look at trading technology, to find solutions that enable their adjustment to new market and regulatory realities, while making trading operations more cost effective.
Regulatory change is today the single dominating force now driving investments in trading technology, confirmed by recent TABB Group research (see graphic). More than half of all respondents cited regulatory and compliance complexity as their biggest challenge.
Source: TABB Group report “Derivatives Trading Technology: Structural complexity driving next-generation demands”, August 2016
New regulatory frameworks such as MiFID II not only means that market participants must adjust to individual requirements put on their internal operations, it will also bring about changes to market structure and the way trading is conducted. One example is the new double volume cap clause which is part of the new transparency framework in MiFID II. Another is the extended definition of the Systematic Internalisers (SI) regime.
These developments will make execution a considerably more complex exercise, both for investment firms engaged in agency trading as well as principal trading.
From a trading technology viewpoint, we have identified four key trends re-shaping the sell-side:
1. Regulatory change will drive technology landscape overhaul.
MiFID II will profoundly reshape the markets when introduced in early 2018. The regulation will have direct and indirect impact on the sell side. This is why compliance is now a critical component in any technology vendor selection process. The challenges are manageable because they are known in advance and can be prepared for by implementing appropriate technology and processes.
2. Vendor and system consolidation
As sourced trading technology is increasingly replacing in-house developed and managed trading systems, firms want to limit their number of vendor relationships, preferring vendors that offer multi-asset class solutions to reduce complexity and management overhead.
3. Managed services becoming the norm
Banks and brokers are seeking less expensive alternatives to in-house trading technology operation. Even in firms where any kind of outsourcing was unthinkable just a few years back, managed services are now increasingly becoming the norm.
4. Expansion to new asset classes and multi-asset trading
The expansion into new asset classes is driven both by regulations such as MiFID II and new market requirements. This is already evident in high frequency trading, where HFT firms have entered FX trading as the equities field became “crowded”.
For further reading, download and read Itiviti’s new article “Sell-side evolution” where we explore the trends that are now re-shaping the sell-side in greater detail.
Blog The fast pace of derivatives markets makes their participants a demanding group. Derivatives traders must be flexible to succeed, and also need functional capabilities in their technology such as speed, global access and powerful analytics. They confront these needs in an environment affected by new regulation, plus more demands for market access and lower costs. […] April 27, 2017
Blog In the ongoing pursuit of efficiency and cost awareness among market participants, trading technology is often at the center of attention. Still there is at least one key function in trading systems left largely untouched by productivity and streamlining measures, and that is testing. Manual testing of trading infrastructure solutions remains prevalent within today’s financial […] April 20, 2017
Blog The ability to respond rapidly to a new opportunity is a prerequisite for success in derivatives trading. Adding access to a new exchange or electronic execution venue, support for a new security, or compliance to the latest regulatory wrinkle is essential to making sure opportunities are realized and profits are made. As a result, agility […] April 11, 2017
Automation & Testing Whether you are deploying FIX or proprietary protocol components within trading systems, thorough testing is crucial to success. Not only do you need to test your systems for execution venue driven events but also for managing the client flow. Manual testing is a costly and error-prone process that can be significantly improved and accelerated through automated testing. Automated regression […] April 6, 2017