This article was originally published in Financial News on 24 August 2021 here.
Electronification, automation and digitisation have become essential pillars of modern finance.
As the end of the pandemic looms into view, the trading industry is at a turning point. The fundamental shift in the way we work and the dislocations in market structure caused by Covid-19 have cemented our reliance on trading technology. The flexibility to work away from the office and the increasingly global nature of the markets has made electronification, automation and digitisation essential pillars of modern finance. Digitisation, which enables trading firms to access, use and analyse increasingly complex data sets to support trading performance, is the latest frontier. In the race to digitise, firms relying on universally available ‘off the shelf’ technology products risk becoming indistinguishable from others using the same solution – diminishing their ability to service clients’ complex needs and dulling their USPs. The solution? Firms must take a radical new approach to technology and own their technology stacks to differentiate, control their innovation and futureproof their businesses.
A new age
Financial technology and electronic trading are entering a new era. The period of early digitisation, where vendors played a crucial role in taking firms with little or no technical infrastructure into the digital age, is coming to an end. The increasing complexity and interconnectedness of the markets, coupled with the availability of huge swathes of data sets, has raised the bar for trading technology. A recent JP Morgan report on the future of banking predicted that banks with the firepower to invest in technology are taking market share from those that are not – a trend the bank sees continuing. Technology is the new kingmaker and the battle lines have been drawn.
The pandemic has brought into focus the reliance on third parties to keep up with the rapid pace of change. This poses risks for trading firms, not only in falling behind, but also creating innovation bottlenecks leading to firms acquiring the same solutions to address emerging issues, thus eroding any chance of a competitive advantage.
One such example of the risk of third-party reliance is in the post-Brexit regulatory environment aimed at creating a competitive advantage for UK finance. To capture the potential benefits, firms will need to adapt to a new regulatory landscape and new opportunities by calibrating their technology. Vendors, particularly those outside the UK, may not have the requisite level of knowledge of the market’s nuances and therefore risk being outmanoeuvred by firms with control of their technology stack as they adapt to and capitalise on a rapidly changing market.
This lack of flexibility is only part of the problem. For firms that become frustrated with the limitations of third-party technology, fixing the problem by switching providers or products can be difficult. While some products can be plug-and-play, the reality is that as a business comes to depend on a product, it becomes more like a Jenga block – difficult to remove, co-dependent and risk of damage if taken out in the wrong way. There is also the added issue of rising costs once firms are locked in with a third-party provider, whether through rising platform fees as highlighted by Coalition Greenwich’s recent report on FICC trading, or through firms having to onboard multiple trading systems to service specific client needs.
Taking the reins
Trading businesses are very complex, multi-faceted entities and knowing where and how to internalise a technology stack is vital. The post-pandemic financial technology era requires a behavioural shift as well as technological change. When taking control of technology, there are three key principles to adhere to:
- Know your value chain. Choosing where to build your own technology and differentiate is important – building an internal system that facilitates internal processes, such as an HR platform, would be a considerable undertaking but would not be visible or deliver tangible value to clients. Firms should focus on what is the most visible and valuable part of their offering for clients. Focus on this part of the value chain and work with clients to understand how technology can best service their needs.
- Build and invest. Taking technology in-house is the start of a journey, not a destination. Firms should not fall into the trap of taking control of the technology stack and thinking ‘job done’. To stay competitive in a rapidly evolving market where clients’ demands change, firms must maintain an open dialogue with their clients and assess how best to fine tune their technology in the long-term.
- Anticipate the future. The pandemic has demonstrated that no one can truly predict the future. For trading technology, this means companies should stay open to emerging trends that could have an impact on their ability to service clients. Take the crypto exchange space as an example, it is hard to predict the features that will drive the market over the next few years – whether auto-connectivity, custody innovation or something else entirely. Ensure your technology stack is flexible, keep a close eye on emerging themes and adapt.
- This is a pivotal moment for financial services. As industries from automotive to music increasingly morph into technology businesses, the same is happening in capital markets as proprietary trading technology becomes increasingly important. Now is the time to act. As the pandemic cements our reliance on technology and accelerates the pace of change, decisions on the role and ownership of a firm’s technology stack will be a matter of a bright future or falling behind.
CEO and co-founder,
Adaptive Financial Consulting