A range of macroeconomic, regulatory and market structure changes occurring across the world will drive the need for transformation for market operators across the globe, writes, Magnus Haglind, head of marketplace technology, Nasdaq, who points out that change doesn’t always come with a heavy price tag and substantial execution risk.
This year will drive profound change for mission-critical service providers across global capital markets
Extreme spikes in volume and volatility – triggered by election cycles and other global events – will strain markets around the world. The introduction of T+1 in the US, alongside swathes of regulatory reforms, will mandate structural change across the global financial system. And emerging technologies will expose organisations that don’t have the in-built flexibility to embrace it.
Industry leaders face a choice between gripping the opportunities of market modernisation, or in some cases simply keeping the lights on.
If we take these drivers of change in turn, firstly macro events have a habit of forcing a discussion around capacity planning.
On Nasdaq’s own US market, COVID-19 caused an increase in average message volume from 30 billion to 85 billion, and we are now preparing for a world where the average message volume up to 200 billion. However, markets around the world are bracing themselves for a tumultuous 2024 at a time when many infrastructures, particularly across post trade service providers, are already operating at near full capacity. Either they need to begin planning now, or something will have to give.
Secondly, incoming regulation in domestic jurisdictions will have far reaching global consequences. For example, the shift to T+1 in the US will make it more difficult for Asia-based firms to access US markets, given the reduced window for managing risk. Conversely, it will deter global participation in Asian markets, with participants having to pick between markets, causing friction and affecting international liquidity.
To address these concerns, markets in Asia may react by increasing the ability to trade and settle out of hours, allowing markets to serve global asset types and hedge risk effectively. Infrastructure providers may also look to new drivers of liquidity, upgrading their technology to make it easier and more cost effective for global participants to connect to their markets.
There will of course be much wider ramifications for the whole post-trade value chain. It will not just affect how settlement is conducted, but also funding, how ETFs are structured, and even how FX is handled as well.
And finally, we know that safe, robust, and efficient markets are a pre-condition to building successful capital markets ecosystems, but that is no longer sufficient for market infrastructures. The advent of transformative technologies such as the cloud, AI, and tokenisation are forcing discussions around the entire enterprise architecture of market infrastructures.
The combination of traditional finance and decentralised finance is going the be the major trend over the next few years, where participants will look to core infrastructure providers – like central securities depositories – to offer a single interface, managing assets irrespective of whether traditional or tokenized.
Now that the conversation around tokenisation has moved on from the proof-of-concept stage to how the technology can practically support automation and reconciliation, there must be a focus on interoperability. And particularly how, as an industry, we don’t create a world of digitally siloed assets that are hard to reach. That interoperability will be instrumental to building truly global marketplace, not one that is restricted to local or regional market access.
For organisations globally, it’s continually misinterpreted that seismic transformation comes with a heavy price tag and substantial execution risk. Too often the risk-reward of modernisation investment is viewed and calculated as event in time.
Given change comes in waves, it’s critical that organisations establish capabilities to view modernisation as a process. A phased transformation process, with targeted development, allows for a much easier path to realisation, especially in highly regulated markets.
Therefore, there are many ways companies can make a start their modernisation journey without significant up-front cost, as long as the target state is outlined and guided by a strong vision.