Why the aftermarket needs even more attention
After years of neglect, back-office processes are starting to get the attention they deserve. However, the post-trade technology landscape remains fragmented and opportunities are not being seized. By Vijay Mayadas, President, Capital Markets at Broadridge.
Most senior executives will tell you that technological innovation equals competitive advantage. Broadridge’s 2022 Digital Transformation and Next-Gen Technology Survey of Capital Markets Executives recently confirmed this, with industry leaders reporting expectations for increased revenue, improved profitability and better strategic decision-making through digital transformation initiatives. In practice, we’re seeing companies doubling down on technology investments in a tight race to secure those benefits and gain defensible market share.
At the same time, however, leaders recognize that the breakneck pace of technological change is exacerbating practical operational and regulatory challenges, putting obstacles to rapid progress on the digitalization front. Additionally, much of the added value of innovation over the years has primarily accrued to the front and middle office, leaving back-end capabilities missing.
There are many reasons for this, including an early strategic focus on reinventing customer experiences, value propositions, and retention that clearly promised increased revenue and growth through greater differentiation. This is a critical goal for leaders facing increasing competition. These highly visible parts of the business were also generally seen as offering companies “quicker wins” and “more digestible” project scopes than more ambitious plans to upgrade core technology systems in the backend. .
Where does that leave businesses today
While it might seem like neglecting the back office has been a benign compromise for sales businesses over the years, that couldn’t be further from the truth. Many of the post-trade technology platforms available to firms are not designed to meet the realities and needs of today’s investment community. As global buy-side trading volumes continue to grow and asset allocations increasingly diversify across the investment risk spectrum to include less traditional asset exposures, the mismatch of current systems has become more obvious to market players. Cracks begin to form under the pressure of increasing complexity.
Even if we ignore the increased flow of assets into alternative investments, the magnitude of the asks placed on the sell side is clear. For example, $160.95 trillion was traded electronically in 2021 out of nearly 46 billion transactions, representing a 16.9% increase in the value of shares traded and a 20.4% increase in volumes, according to the World Federation of Exchanges. Statistics from the Futures Industry Association (FIA) indicate that the total volume of derivatives traded on exchanges worldwide in 2021 recorded a fourth consecutive year of record activity, jumping 33.7% from the previous year to reach 62.58 billion contracts.
While these numbers appear to point to significant opportunities for sell-side players, they also mask brewing issues. This has manifested itself in increased settlement fails during times of heightened market volume, volatility and stress. In February, the European Securities and Markets Authority (Esma) published its first Report on trends, risks and vulnerabilities for 2022 (the second 2022 report can be accessed here), which showed that failed settlement instructions as a share of total value in the 30 countries of the European Economic Area climbed to around 14% for equities and nearly 6% for government and corporate bonds at the peak of volatility induced by the Covid-19 pandemic in March 2020.
This compares to an average range of 5-10% and 2-4% for stocks and all bonds traded between 2018 and 2020, respectively. Equity settlement fails were more frequent in 2021 than before the pandemic, and slightly above levels in the second half of 2020 in other asset classes.
Post-negotiation advantage: simplicity in complexity
These single-digit percentage point increases may seem small, but the volume of trades settled worldwide every day is in the trillions. These increases are just a glimpse of the much bigger challenges that escalate on the horizon, with the implementation of new regulations such as the European Union’s central securities depository settlement discipline regime and the decision of certain markets to switch to T+1.
Companies that do not want to improve their back-end capabilities for tomorrow’s needs will face an erosion of their competitive positioning. Most sell-side companies continue to have to manage complex and highly fragmented technology stacks. Silos divided by asset class and geographic region are common. Even as staff move to multi-asset coverage, the systems that support their businesses remain separate. Many traders use different systems to manage orders and execute trades accordingly, while operational staff struggle with multiple middle and back office infrastructures. It is no longer enough.
It’s time for the industry to embrace the simplicity of multi-asset global post-trade solutions that can enable consolidated and automated workflow across all asset classes to reduce cost, complexity and risk. running multiple operations and technology silos. Advances in artificial intelligence, distributed ledgers, and other next-gen technologies are already raising expectations and separating forward-thinking innovators from the rest.