How is the role of technology changing as market structure develops?
Technology is a significant player, developing hand in hand with the market’s structure as participants, regulators and technology providers investigate the next step in its evolution, working in tandem with how the industry parameters to evolve sophisticated offerings with the tools and systems to streamline processes, reduces costs and enhance output analysis.
Another element is market disruption leading to innovation. Emerging technologies frequently disrupt existing market structures by introducing innovative products which have the potential to give birth to new markets or reshape existing ones. Added to that, you also have the globalisation and connectivity as a result of technology – as technology is embraced and spreads, trading strategies and market participants alter which demonstrates a direct correlation between the growth of markets and liquidity pools.
Further, what clients need is also a key factor in driving the technological side – for example, the data they’re asking for impacts the solutions being sourced. Data-driven decision making has come as a result of the accumulation of vast amounts of data and technology plays a crucial role in being able to analyse it. Technology acts like a catalyst for change within market structure and its evolution continually reshapes the industry, the discussions being had around business strategy, and regulatory frameworks driving the ongoing development of markets globally.
What is the most relevant regulatory change on the horizon?
It’s hard to say which the biggest changes will be because there’s so many coming through. Each asset class will have its own top two or three key impacts that will require investment from a technological and resource point of view. It depends on which angle you look at.
One of the largest is T+1 settlement – which is going live this year in the US and will be huge for global clients. Following that – maybe not be this year, but obviously in the coming years – the UK and Europe will also probably look at going T+ 1 as well, so analysing that and the implications are paramount.
Additionally, there is the treasury market reforms that are being looked at, as well as clearing being looked at from various angles. There’s a huge amount of work being done there. Then, on the digital side, the digital asset framework and tokenisation will be a key point, especially considering the Bitcoin ETF approval by the SEC in the US. But digital assets (much broader than just crypto) as an asset class or over-arching way to get exposure will become important. Additionally, post pandemic and regulatory changes are still kind of settling in and some of the changes we’re still seeing is still on the back of that volatility.
How has increased volatility led to structural changes?
Increased volatility in markets often trigger structural changes due to the approach of market participants. Firms continually assess their risk management strategy and the tools that they have which can include recalibrating risk models, adjusting position sizes and diversifying portfolios to better withstand the volatile environment as regulators seek to manage risks and economic enhanced stability. Another relevant factor is market infrastructure upgrades.
Volatility can reveal weaknesses and subsequently the market looks to re-evaluate and enhance their systems to handle this and increase trading volumes, reduce latency and ensure a smooth kind of working. Additionally, there are the measures taken by regulators themselves – regulatory bodies adjust regulations in response to the increased volatility, such as implementing circuit breakers, revising margin requirements or introducing measures to enhance market transparency. It’s about adapting. Ultimately, volatility can accelerate the adoption of technology driven solutions in trading risk management and general market analysis.
Given the changes, which asset classes are set to be most popular for traders going forward?
The core asset classes are still the same, obviously equities are popular because of the returns that they get. Others also of focus are foreign exchange, fixed income, commodities, and derivatives. But increasingly there is attention being paid to private markets – private credit.
Digital assets and tokenisation are angles that people are starting to spend time on. Tokenisation is going to be providing a huge amount of opportunity for people to look at, but it’s early days because, as you can imagine, legal and regulatory frameworks, ecosystem infrastructure for that and also the front-to-back operational setup amongst other things all have to be properly established.
Overall, digital assets are becoming a focus point, as they are a means of securitisation, fractionalisation and democratisation, easy access to investors especially in illiquid or hard to access markets. In terms of new asset classes or new ways of getting exposure, it is overarchingly digital assets, which even a couple of years ago would not have been looked at in any kind of meaningful way. It’s still early days in terms of adapting, but there’s a huge opportunity there.