Opinion

Collateral is falling behind risk and markets are paying the price

With time becoming one of the most expensive frictions in finance, David Mercer, chief executive of LMAX Group, explores how delayed settlement and limited mobility are undermining capital efficiency, and why continuous 24/7 collateral movement is becoming the next frontier of market structure.
By David Mercer

Recent market volatility has exposed a structural weakness familiar to many trading desks: capital is there to be deployed but still cannot move fast enough when risk conditions shift.

The rally in gold prices during recent market turbulence shows investors continue to seek traditional safe havens, while crypto assets – despite trading continuously – often behave more like risk exposures than the oft‑staked ‘store of value’. This divergence highlights a deeper issue, where markets are now moving in real time, 24/7, but the infrastructure supporting the repositioning of collateral still operates at legacy pace: days, not minutes, and hours, not seconds.

The problem lies in mobility and fungibility. Risk reprices instantly, yet collateral remains constrained by dated market plumbing, pre-funding requirements and delayed settlement processes. Even well-capitalised institutions can struggle to reposition liquidity quickly across asset classes, trading venues, clearers and time zones.

The core challenge is collateral mobility. For buy-side firms and liquidity providers, the consequences are clear. Liquidity thins just when markets need it most, spreads widen and price action becomes more abrupt. As a result, capital sits idle precisely when volatility demands agility.

Time has become one of the most expensive frictions in global markets. The real cost is not only transaction fees or infrastructure spend – but in lost opportunity – when capital is left unused due to limited trading hours, delayed settlement cycles and operational fragmentation. During periods of stress, these inefficiencies quickly translate into thinner order books and higher execution risk.

The challenge facing institutions today is therefore less about access to liquidity or new technology and more about whether their operating models are built for continuous capital deployment. Markets need 24/7 liquidity and hyper-efficient collateral, yet much of the infrastructure still reflects a world of batch processing, market closures and repositioning.

Market structure has always evolved when capital efficiency improves. Electronic trading, central clearing and real-time pricing were each initially viewed as incremental improvements but ultimately reshaped markets. The shift now underway follows the same logic, but on a broader scale.

The solution is not simply more capital: it is better infrastructure. New infrastructure models are demonstrating a brighter future. Combining exchange-grade liquidity with blockchain-enabled settlement, means value can move instantly either via traditional rails or directly on-chain. Recent innovation across the industry reflects this direction, enabling institutions to exchange value across asset classes in real-time while reducing the funding and operational friction that slows collateral movement. The objective is not technological novelty, but practical efficiency. 

The impact extends beyond trading desks. Payment providers, custodians, wealth managers and digital platforms are embedding financial services directly into their ecosystems. When value moves as easily as information, transaction costs fall, liquidity deepens and capital becomes more productive and efficient across the system.

The competitive implications are clear. Institutions able to mobilise liquidity continuously will deliver tighter pricing, faster settlement and more resilient execution outcomes. Those constrained by legacy infrastructure may find that capital efficiency, rather than scale, becomes the defining competitive advantage in global markets.

Market change rarely unfolds slowly. Adoption tends to accelerate once the economic benefits become clear. Electronic FX trading and central clearing followed this pattern and continuous capital deployment is likely to do the same, as always-on markets move into the core of trading operations.

The next phase of market structure will be defined not by a new asset class or venue, but by how effectively liquidity and collateral can be mobilised when markets come under pressure.

Markets have already become faster, more accessible and more interconnected. Infrastructure must now catch up.

Until collateral can move as fast as risk, markets will continue to pay the price.

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