Winners and losers from the post-trade tech revolution

Global post-trade infrastructure has developed over decades in a series of national silos, historically shaped and defined by domestic regulatory regimes and regional exchange requirements. While the global trading industry has radically transformed over time, the post-trade network often remains built on legacy systems architected more than 20 years ago, patched together with an increasingly complex web of financial market infrastructure providers (FMIs) and other intermediaries.

Reform of the post-trade ecosystem is set to accelerate with transformative technologies capable of meeting the ever-greater needs of the investment community and shortening settlement cycles. Meanwhile, new frontiers such as AI and machine learning will unlock new ways of providing services, sharing data, and collaborating.

Technology innovation, along with competitive pressure resulting from the enduring move towards connectivity and standardization, will drive an even greater focus on cost efficiency and the need to identify new sources of revenue among FMIs. We are therefore set for a global technology arms race across the industry that will create winners and losers along the way.

Embracing change

Through past crises, including Covid and the global financial crisis, the focus of post-trade service providers was rightly on resilience of the system, digitalization, and automation of existing operating models. Upgrades have historically been driven by a need for operational efficiency, reducing risk, or to support new business models, which in many ways are technology agnostic. This has come at the expense of more transformative investments.

However, across the industry, firms are increasingly recognizing the need to innovate and modernize their underlying infrastructure, thus allowing them to rapidly deploy new products and services while better serving a larger and more international customer base.

Cloud technology represents a significant opportunity for FMIs, which will be the precursor to an ecosystem of institutions and intermediaries, able to seamlessly connect with each other through ‘open APIs’—where software developers have access to open networks. This will ultimately support the innovation of new services and business models. Cloud technology is also a fundamental enabler to leveraging AI.

The majority of providers are yet to adopt cloud technology, with software typically hosted ‘on premise’, run off the company’s own servers physically located on-site. This can be costly to manage and maintain, difficult to scale, and very resource intensive when making software updates or integrating services with other networks.

By providing services through the cloud, where applications and infrastructure are hosted by third parties such as the major cloud infrastructure providers, operators benefit from rapid scalability, greater connectivity, and increased cost efficiency. It will also allow providers to meet the changing needs of a complex global marketplace, offering enhanced functionality and a shorter time to market when delivering new products or services.

Cloud also unlocks the ability to process, analyze, and share data in ways that were never envisaged by payment and settlement systems 20 years ago.

Shifting ideas

As the global post-trade system has grown increasingly complex, risk departments have shifted from a more traditional middle-office function to a business-critical activity, driven by both heightened regulatory scrutiny and competitive necessity. Yet many organizations have been slow to invest in the technology capable of offering a truly live risk environment, instead relying on a patchwork of asset-specific systems with little or no holistic view of risk.

Following the extremely volatile markets we have seen in recent weeks, there has been a significant surge in demand for the ability to analyze real-time risk exposure, and to do so on a single platform, with a view across asset classes. SaaS technology, available through the cloud, is increasingly sought after, with participants recognizing that it can be a source of competitive advantage at a time when industry pressures are increasingly likely to squeeze margins and impact revenue streams. For example, the ability to calculate live margin requirements will allow more efficient collateral management, helping to unlock liquidity in a high interest rate environment and allow treasuries to manage their inventory and balance sheet more effectively.

We also expect opportunities for cross-asset risk management to be further enhanced by the harmonization of digital and traditional markets. Despite the asset class still being in its early stages, there are several ways in which the technology that underpins digital assets can bring improvements to the industry through workflow efficiencies, providing a single source of truth, eliminating reconciliations and further capital benefits.

Central counterparties and central security depositories will play a crucial role in providing the governance framework and market stability required to attract institutional investors, which will drive even greater demand for standardization and harmonization of regulatory structures, solutions, and processes, and create further business opportunities for FMIs.

It’s clear we are on the verge of a seismic shift in the way the industry operates, which brings both new revenue opportunities and financial pressures to FMIs. We believe those that embrace disruptive technologies will ultimately lead a new ecosystem of service providers, capable of serving the needs of a global investor base.

Christian Sjoberg is VP for marketplace technology, post-trade, at Nasdaq