While electronic trading and settlement have been eagerly adopted by market participants with positive impacts on cost and efficiency, automation of the intermediate post-trade processes of confirmation and affirmation continues to lag.
According to a recent report from consultancy Aite Group, the need to choose which supporting technology to invest in among competing alternatives is a key factor in constraining adoption.
The report describes institutional trade support technology as witnessing “a classic Wild West standoff between top-tier asset managers, large brokerages, and smaller asset management firms”. While growing pressure to reduce operating costs, move beyond support for cash equities and respond to regulatory and infrastructure changes has heightened the need for new technology, the report suggests a general fear of first-mover disadvantage.
Based on interviews with institutional brokers and asset managers across the globe, the report identifies a fear that the first to invest could be at a tactical disadvantage since only the achievement of critical mass will show whether the selected IT investment was the correct one. Implementation of new technology, while necessary for broader market efficiency, could remain stalled.
“Revenue is down, cost is up, and firms need to prepare themselves for new electronic processes in previously manual, bilateral markets,” says Virginie O’Shea, analyst with Aite Group and author of the report. At the same time, she notes, sell-side firms whose large buy-side clients are keen to be able to deploy matching technology with them are under pressure to invest further.
“Omgeo has long been dominant in the electronic trade verification space, but a number of top-tier asset management firms have begun pushing in other directions and the wider market is waiting to see whether the chosen technology can achieve critical mass and make the investment worthwhile,” O’Shea observes. This in part reflects a desire among some participants to continue to benefit from the local matching expertise they have built up and is partly a response to the relative costs of moving to a central matching facility.
Earlier this month, Omgeo announced an ongoing commitment to a pricing strategy designed to reduce costs and overall risk in the financial markets by incentivising industry best practice. It described the most recent pricing changes as designed to incentivise same day affirmation, widely recognised as an industry best practice, as trades verified on T+0 have a much higher chance of settling on time.
Marianne Brown, chief executive of Omgeo, denied to the Financial Times that the incentives were a lossmaking move designed to capture market share. “These price changes were possible due to internal infrastructure and technology investments,” she said.
As European efforts to harmonise a reduction in settlement time frames to T+2 continue with a deadline of 2014, pressure on the middle- and back-office is set to increase. O’Shea believes that Omgeo will continue to be the dominant provider in this space, but notes substantial interest, particularly in Europe, in SWIFT’s Global Electronic Trade Confirmation service, while in the US, interest is growing in using FIX for the middle office.
Reporting by Richard Schwartz