The most fundamental change in market structure still lies ahead as the full potential of a generational shift in technology is realised according to a whitepaper from NEX, the financial technology company.
The paper, What next? Regulation, technology and innovation in the trade lifecycle, said new rules have led to a shift from over-the-counter markets to a centralised market infrastructure with trade reporting introduced across all asset classes and where collateral is the new king.
Kay Swinburne, MEP
Kay Swinburne, chair of the NEX Forum and member of the European Parliament, said in the report: “New rules post-financial crisis have created successes, but also unintended effects, which now need to be addressed either through rule modifications or through the application of new technologies. As global financial markets continue to evolve, the real opportunities are yet to be delivered in transparency and efficiency for investors.”
Distributed ledger technology, machine learning, portfolio optimisation techniques and the cloud are being used today but the paper said the challenge for markets and policy-makers is to harness this potential while managing its new risks.
“Neither legacy systems nor policy inertia should be allowed to stifle this generational opportunity,” added NEX.
Mark Whitcroft, founding partner at venture capital firm Illuminate Financial Management, said at an ISDA conference this month that current changes in financial services technology are similar to the transformation in manufacturing through Henry Ford introducing the assembly line.
He explained that Ford made revolutionary changes to the production line through manufacturing all of its components on site for the assembly line.In contrast Tesla, the electric car manufacturer, uses best-in-class components from many vendors and only manufactures engines and batteries.
“A huge part of financial services built technology in-house or used a small number of vendors and that old model is dying,” Whitcroft added. ‘Financial services is being componentisized.”
This mean firms need to choose different components to solve specific problems, which then add together to give best of class performance. Illuminate has seen pitches from more than 1,500 firms in the three and a half years since the venture capital launched and said fintech providers are looking at every aspect of the trade lifecycle, from pre-trade through to execution and post-trade.
Collin Coleman, chief executive of Nex Regulatory Reporting, said in the study that trade reporting is the one part that has furthest to go to reach its goals due to a big increase in regulatory requirements.
“Despite the best endeavours of the majority of market participants, the data being reported is neither fully accurate nor complete,” added Coleman. “And the volume and complexity of the data is massive.”
However, he continued that this may be solved as regulators develop systems to capture and analyse reported information and firms have become more willing to store data on the cloud.
“Therefore, technology will play an increasingly major role in helping market participants and regulators to ensure the accuracy and timeliness of reported information, in particular leveraging cloud storage and DLT to facilitate distribution of data,” said Coleman.
