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Over the past 20 years, global equity markets have almost trebled in size, reaching a total market capitalisation of USD 109 trillion in 2023 and the fixed income market is even larger, with just under USD 136 trillion securities outstanding at the end of the year. While this is an opportunity for financial firms, many firms, specifically on the sell side, may struggle to capitalise on this lucrative potential due to various complex challenges.

By GreySpark’s Costa Victoros, Associate

Firms that fail to keep up with innovators in their peer group risk losing market share and reducing their profitability. Outdated technology can also lead to higher operational costs, in terms of maintenance and upgrades, and manual processes can add unnecessary speedbumps into processes that more advanced systems avoid with automation.

As regulation evolves, particularly in areas such as data privacy and cybersecurity, firms that do not keep up with technological advance may struggle to comply, inevitably leading to fines and reputational damage. Most especially, by not leveraging the latest technology, firms may miss out on opportunities to improve their services, develop new products and expand into new markets.

The complexity of technological challenges in the financial industry cannot be overstated. Financial firms generate vast amounts of data, and managing this data – storing, organising, and analysing it to extract valuable insights effectively – is a significant challenge. As financial firms rely more heavily on technology, they become more vulnerable to cybersecurity threats. Protecting sensitive data and maintaining the security of systems is an ongoing challenge. With the proliferation of new technologies, integrating various systems and applications is also complex and time-consuming. This includes ensuring seamless data flow and interoperability between different systems. As firms grow and expand their services, their technology infrastructure must be able to scale accordingly. This requires careful planning and ongoing monitoring to ensure systems can handle increased demand without sacrificing performance or security.

Regulatory compliance is a significant challenge for financial firms, particularly as regulations continue to evolve. Technology can help firms stay compliant, but implementing and maintaining compliant systems is resource intensive. In this article, GreySpark explores these challenges and how strategic IT planning is critical, empowering firms to transform themselves and unlock unprecedented growth.

Navigating the Low-Latency Labyrinth

A high-frequency trader can ill-afford to wait milliseconds for their sluggish trading system to process orders. The market can shift by the time the trade executes, potentially leaving the trader on the wrong side of the market. After the trade has been executed, manual compliance reporting means that post-trade processing can take a significant portion of the allotted time for settlement, while also possibly including human error and distracts traders from trading For example, post-trade processes that distract traders from trading include:

Manual compliance reporting: After a trade is executed, traders often must manually generate reports to ensure regulatory compliance. This process can be time-consuming and distract traders from their primary trading task.

Error correction: Manual processes are prone to human error, which can lead to mistakes in reporting or other post-trade activities. Traders may need to identify and correct these errors, further distracting them from trading). Collectively, these issues increase business costs and lead to missed opportunities.

Modern IT management strategies that can mitigate these issues include:

  • Custom Network Optimisation Tools: by optimising network traffic, these tools can reduce latency and improve system performance, enabling traders to execute orders more quickly and accurately.
  • AI-powered Trading Platforms: AI holds out the promise of being able to analyse vast amounts of data in real-time, providing traders with insights and predictive analytics to make informed trading decisions.
  • Real-time Compliance Integrations: By automating reporting and monitoring, such integrations can reduce the time and resources required for post-trade activities, allowing traders to focus on their core activities.

Figure 1: Low Latency Trading Enhancement Objectives and Technologies to Achieve Them
Source: GreySpark analysis

These approaches can help traders reduce latency, improve accuracy and seize transient market opportunities. As the financial industry evolves, technology will continue to play an important role in helping traders stay ahead of the competition and achieve greater success.

Scaling Beyond Physical Limitations

A typical traditional on-premises server room strains under the weight of surging trade volumes and large complex data sets. This overload can cause legacy systems to buckle, causing downtime, missed trading opportunities and disastrous reputational consequences. Managing failing physical infrastructure is also costly and cumbersome.

Cloud migration offers trading firms scalability, flexibility and cost-effectiveness, though the cost issue is now considered to be less important than other needs such as high-performance computing, low-latency networks or advanced security features. Other benefits that can be realised in a cloud environment include:

  • Dynamic Resource Allocation: Cloud solutions enable trading firms to adjust their IT resource may usage based on their needs in real time. Depending on market conditions, they can quickly scale up or down without investing in expensive on-premises infrastructure.
  • Hybrid and Multi-Cloud Strategies: By using multiple cloud providers or a mix of cloud and on-premises solutions, trading firms can improve redundancy and ensure uninterrupted operations. This is particularly important as downtime can result in significant financial losses for trading firms.
  • Containerisation: Container technologies, like Docker, allow trading firms to package applications and their dependencies into standardised units, making them easier to deploy and manage across different environments.
  • Microservices Architecture: This approach involves breaking down complex applications into smaller, independent services that can be deployed, scaled and updated individually. This enables trading firms to develop, test and release new features more rapidly, providing them with a competitive edge.

Figure 2: Overcoming Physical Limitations of Scaling and the Technologies to Achieve It
Source: GreySpark analysis

Overall, cloud migration and related technologies offer trading firms greater flexibility, scalability, and resilience, enabling them to adapt quickly to changing market conditions and focus on their core business activities.

Unlocking Insights from the Data Deluge

The increasing digitalisation of capital markets has opened up new data channels, making it difficult for traditional analytics tools to extract actionable insights from the data and filter out the noise. As a result, firms may not provide the optimal data insights for their clients and fail to identify lucrative investment opportunities.

Looking at how AI-powered analytics can benefit sell-side firms:

  • AI-Powered Analytics: Advanced AI algorithms can analyse vast amounts of data, identifying patterns and trends that may not be apparent to human analysts. This can help sell-side firms make more informed investment decisions and improve their overall performance.
  • Real-Time Risk Monitoring: AI-powered risk management tools can analyse market data in real-time, identifying potential risks and enabling sell-side firms to take proactive measures to mitigate them.
  • Portfolio Optimisation: AI algorithms can optimise portfolios based on various factors such as risk tolerance, investment goals, and market conditions. This allows firms to create more effective investment strategies and achieve better returns for their clients.
  • Sentiment Analysis: Natural language processing (NLP) techniques can analyse news articles and social media posts to gauge market sentiment and predict future price movements.
  • Fraud Detection: AI can help detect fraudulent activities such as market manipulation, insider trading, and other illicit practices, protecting trading firms and their clients from financial losses.

Figure 3: Unlocking Insights from the Data Deluge with Advanced Analytics
Source: GreySpark analysis

Real World Example

Source: CFA Institute

A wealth management firm used AI to analyse satellite imagery of oil refineries, predicting output variations and generating alpha by trading oil futures accordingly. This data-driven approach led to a 12% increase in client portfolio returns.

AI-powered analytics can give trading firms a competitive edge, enabling them to make more informed decisions, manage risk more effectively, optimise portfolios, and stay ahead of market trends. As AI technology continues to advance, its potential applications in the trading industry are likely to expand even further.

Addressing Emerging Themes

Three key trends have been emerging this decade:

1. Regulation and Market Microstructure: Real-time compliance tools can provide numerous benefits for businesses operating in financial services. These tools can continuously monitor trades, transactions or other activities to ensure compliance with industry regulations, minimising the risk of non-compliance penalties or reputational damage. Additionally, having a low-latency infrastructure that is tailored to specific regulations enables businesses to remain compliant while maintaining efficient operations. This can lead to reduced operational costs, improved risk management, and a more robust compliance framework.

2. Modernisation and System Consolidation: The process of retiring legacy systems and migrating to modern platforms can offer several advantages, including:

  • Enhanced Data Security: Modern platforms often incorporate advanced security features, helping protect sensitive data and minimise the risk of data breaches.
  • Improved Operational Efficiency: Streamlined workflows and integrated tools can reduce manual processes and improve overall efficiency, allowing employees to focus on high-value tasks.
  • Reduced Maintenance Costs: Legacy systems often require significant resources to maintain and update, whereas modern platforms typically offer easier maintenance and upgrades.
  • Improved User Experience: Modern platforms are usually designed with user experience in mind, providing intuitive interfaces and better collaboration tools.

By modernising and consolidating systems, businesses can reduce IT complexity, improve operational efficiency, and better support their digital transformation initiatives.

3. Distributed Ledger Integration has the potential to significantly enhance the efficiency, security and transparency of a wide range of business processes. When integrated into an organisation’s infrastructure, digital ledger technology can offer several key advantages:

  • Transparency: digital ledgers provide a shared, immutable ledger that records all transactions transparently and verifiably.
  • Immutable Audit Trails: Every transaction on the digital ledger is recorded and cannot be altered without leaving evidence, providing an accurate and tamper-proof, though editable, audit trail. There is still much work to be done in the area on the development of protocols and standards that will allow effective data interoperability between financial institutions.
  • Accelerated Settlement Times: digital ledger technology enables near real-time transaction processing and settlement, eliminating the need for intermediaries and reducing the time required for transactions to be completed.
  • Streamlined Asset Transfers: digital ledgers enable secure, seamless transfers of assets between parties, reducing the need for manual processes and improving overall efficiency.

In essence, integrating digital ledger technology can help organisations optimise their operations, improve customer experiences and stay ahead of the curve in an increasingly competitive business landscape.

Partnership: The Catalyst for Growth

In the financial industry, having the right technology and IT solutions is critical for success. However, simply having these tools is not enough – nurturing a solid partnership with an experienced and reliable IT service provider is also essential. Such a partnership can provide trading firms with several key benefits:

  • Access to Expertise: IT service providers have extensive knowledge and experience in developing, implementing, and managing cutting-edge technology solutions tailored to the specific needs of trading firms. This expertise can help firms navigate complex market landscapes, anticipate future challenges, and stay ahead of the curve.
  • Scalability and Flexibility: A strong IT partner can help trading firms scale their operations and adapt to changing market conditions. This is crucial in an industry where quickly adjusting strategies, technology, and resources can make all the difference.
  • Cost Effectiveness: Partnering with an IT service provider can be more cost-effective than building and maintaining an in-house IT team. This allows trading firms to focus on their core business activities while still benefiting from advanced technology solutions.
  • Continuous Improvement: An IT partner can help trading firms continuously improve their technology infrastructure, processes, and strategies. This includes keeping up with the latest industry trends and advancements and regularly assessing and optimising systems to ensure they remain competitive and efficient.

In conclusion, partnering with the right IT service provider can be a significant change for trading firms looking to grow and succeed. By leveraging the expertise, flexibility, cost-effectiveness, continuous improvement, and competitive edge a strong IT partnership provides, trading firms can navigate challenges, stay relevant, and ultimately achieve their goals.

GreySpark Partners, a capital markets business, management and technology consultancy that specialises in mission-critical areas of the industry, can be a valuable ally. We assist our clients across business and project lifecycles, from inception to completion, offering services in:

  • Business strategy and operations
  • Project and programme delivery
  • Technology reviews and assessments
  • Vendor selections and RFPs

GreySpark consultants have hands-on experience in bringing improvements to capital markets firms and have close relationships with capital markets decision-makers and industry subject matter experts. As a consequence, GreySpark maintains an overarching perspective of important changes influencing the industry, enriched by a strong track record of successful consulting work.