Technology today: ditching the discourse to embracing disruption
28 May 2019
As the financial environment grows, Salvador Giglio of GLMX says when it comes to technology it becomes necessary for those standing on the sidelines to begin to play an active role
Image: Shutterstock
Lately, when discussing the future of technology, many imagine a world of autonomous cars, renewable energy, and artificial intelligence. In the extreme, this picture is often represented as a dystopian world where humans answer to robots.
Perhaps this view was fostered by the well-known 2013 Oxford University paper: “The Future of Employment: How Susceptible are Jobs to Computerization,” where the authors surmised that up to 47 percent of US jobs could be automated in the next 10 to 20 years.
In this context, automation is extremely threatening; it forces drastic behavioural changes in our generation through the adoption of technology. Headlines highlight the futuristic concept of self-driving vehicles and add to the stigma of technology as a ‘disruption’ to life as we know it.
Technology is not the sole disruptor we face, though. We live in a world where the rules that govern our personal and work lives are often changing. The securities finance industry is subject to the impact of new regulations and the whims of politicians, circumstances that we cannot change on a macro level. We also live in a world that, each day, begs for quicker, more efficient processes that we can change with the technology developed and constantly improved. In the realm of technology, what once was considered ‘disruption’ may now be seen as ‘innovation’.
Additionally, big market players are shifting perspectives, embracing the partnership between fintechs and more traditional organisations, and exploring the opportunities these partnerships can bring. Financial institutions are partnering with tech startups to provide streamlined solutions rather than disintermediate workflow. Large financial companies have created environments to support the development of new ideas and ultimately create meaningful change within the industry. For instance, J.P. Morgan launched a fintech accelerator a few years ago to allow startups to leverage their institutional network, resources, expertise and data.
At the time of launch, Daniel Pinto, co-president and COO of JPMorgan Chase, said: “We are committed to driving industry change by investing heavily in internal development, but also by collaborating with the talent of determined, young startups.”
Globally, regulation is changing, and as a result market volatility is ever-present. Stricter reporting requirements through the Securities Financing Transactions Regulation (SFTR) beg for the boost technology provides.
Automatic data-capture eliminates an imminent, additional, and manual dimension of current workflow. Why should the processes that preceded the current data-driven environment decades ago be the ones that linger today? How can legacy institutions partner with financial technology providers to adapt to the current conditions? How can we reinvent the popular discourse to include market leaders in the push forward rather than disrupt the empires these institutions have built? Each day the environment evolves, and we can adapt to be better professionals by allowing technology to do the heavy manual lifting to maintain integrity and fairness in the market. Our perspectives must evolve to consider what we once saw as a threat becoming a key asset to the way institutions, large and small, interact with broad client bases.
Keeping pace with regulation
As electronic trading greatly simplifies the broker-dealer workflow, banks are becoming big supporters of the technology. In today’s environment, inefficient processes only add to the chaos of ever-evolving market conditions. In Europe, data reporting has become increasingly important to maintaining compliance with the second Markets in Financial Instruments Directive (MiFID II). Regulation is not static, though. It constantly builds and expands at dizzying rates. SFTR goes live in Europe in Q2 2020, and firms will be required to report all securities finance transactions to trade repositories. This regulation requires reporting of over 150 data fields across repo, securities financing, buy-sell backs, and margin lending transactions. Repo markets are larger than ever before, and regulation creates an additional dimension to the daily workflow. Still, firms have resisted the change. As the start of SFTR creeps closer, firms scramble to determine the best practices to store and report massive amounts of data. Technology implementation makes this easier than ever before by capturing accurate transactional data for more granular archives on-platform in real time. Reporting requirements may be the push firms have long needed to see the benefits automation provides to sustain an orderly market. Europe paves the way with SFTR, but undoubtedly stricter regulatory conduct will become a global standard. With the growth of regulation, preparation will either make or break institutions.
Integrated front-end trading platforms have been used by sell-side repo trading desks for over two decades. Interdealer broker electronic marketplaces with basic post trade straight-through-processing have been around for fifteen years. However, the innovation around the dealer-to-client market remains woefully underdeveloped. As settlement risk due to manual errors is still prevalent, firms must be vigilant to guard against losses as a result of mismatched trades. In fact, the International Capital Markets Association (ICMA) created a trade matching and affirmation template with over 40 fields that must be confirmed by each counterparty shortly after a trade is executed. Trade matching is key to identify incorrectly booked trades. The amount of time needed to affirm each trade is significant, though. Simply implementing execution technology with straight-through-processing can eliminate the need to confirm these details.
As volumes increase and more stringent regulation begins to shape market behaviour (especially in, but not limited to, Europe), widespread technology adoption is needed to keep pace with the growth. Steady growth benefits all sides, but lack of preparation can lead to turbulence down the road. The European Repo and Collateral Council (ERCC) reported an increase in repo volumes of 6.3 percent year-on-year since the ERCC’s last survey in December 2017. Additionally, they reported an increasing market share of electronic trading in this space. Now, more than ever, we see an opportunity to integrate technology. Firms can ensure they are best prepared for consistent changes and volume increases by implementing processes that grow with the workflow imminent for firms.
As we move towards a new regulatory landscape, technology can play a key role in capturing trade details and ultimately avoiding an added step in the already-chaotic workflow. This record-keeping process provides benefit to both sides—the regulators and the member firms. Behavioural documentation provides insight into understanding deeper market trends, helps to inform future trade decisions, and offers quantitative data to back industry discussions. The popular running discourse dictates technology’s imminent control over mankind, but it is prudent to challenge this discourse and consider how mankind can control technology. If long division was still a painstaking paper-and-pencil process, our ability to do more complicated equations would be limited. Technology is a tool, and learning to utilise that tool can be monumental for the growing volumes financial institutions process each day. Beyond the processing capabilities, operational efficiency clears time for market professionals to focus on, rather than distract from, true market discussions.
This year and beyond
How do we navigate an evolving marketplace today? There will be those who lead the charge and those who follow closely behind. Some institutions have established technology-produced revenue goals, tasked employees with implementing electronic trading practices, and explored the vast array of technology offerings available. Technology has become such an integral part of our lives day-to-day. It seems counterproductive, then, to limit the leverage that technology can offer to transform manual processes into automated ones. As the financial environment grows, it becomes necessary for those standing on the sidelines to begin to play an active role.
Changing behaviour presents obstacles. At the start of the fintech revolution we are currently immersed in, large institutions feared technology as a ‘disruption’ of the industry they came to know so well. The discourse that molds technology as a disruptor demeans the true essence of what automation has brought to both buy-side and sell-side institutions. Disruption is the norm today, and with so much of it, it is important to focus on the value added from these changes. The ability to quickly adapt and respond to the changing environment around us is quintessentially human. As Elon Musk realised, after a failed attempt to over-automate the manufacturing process at one of his Tesla factories, technology should be used as a tool allowing employees to focus on value-added activities instead of mundane processes. Technology alone need not be the answer. When man and technology partner, however, our business potential exponentially increases. Facing new hurdles each day, we are asked to challenge the popular discourse. There is no passive approach to technology; we, as individuals, and an industry, can embrace it or fall behind.
Perhaps this view was fostered by the well-known 2013 Oxford University paper: “The Future of Employment: How Susceptible are Jobs to Computerization,” where the authors surmised that up to 47 percent of US jobs could be automated in the next 10 to 20 years.
In this context, automation is extremely threatening; it forces drastic behavioural changes in our generation through the adoption of technology. Headlines highlight the futuristic concept of self-driving vehicles and add to the stigma of technology as a ‘disruption’ to life as we know it.
Technology is not the sole disruptor we face, though. We live in a world where the rules that govern our personal and work lives are often changing. The securities finance industry is subject to the impact of new regulations and the whims of politicians, circumstances that we cannot change on a macro level. We also live in a world that, each day, begs for quicker, more efficient processes that we can change with the technology developed and constantly improved. In the realm of technology, what once was considered ‘disruption’ may now be seen as ‘innovation’.
Additionally, big market players are shifting perspectives, embracing the partnership between fintechs and more traditional organisations, and exploring the opportunities these partnerships can bring. Financial institutions are partnering with tech startups to provide streamlined solutions rather than disintermediate workflow. Large financial companies have created environments to support the development of new ideas and ultimately create meaningful change within the industry. For instance, J.P. Morgan launched a fintech accelerator a few years ago to allow startups to leverage their institutional network, resources, expertise and data.
At the time of launch, Daniel Pinto, co-president and COO of JPMorgan Chase, said: “We are committed to driving industry change by investing heavily in internal development, but also by collaborating with the talent of determined, young startups.”
Globally, regulation is changing, and as a result market volatility is ever-present. Stricter reporting requirements through the Securities Financing Transactions Regulation (SFTR) beg for the boost technology provides.
Automatic data-capture eliminates an imminent, additional, and manual dimension of current workflow. Why should the processes that preceded the current data-driven environment decades ago be the ones that linger today? How can legacy institutions partner with financial technology providers to adapt to the current conditions? How can we reinvent the popular discourse to include market leaders in the push forward rather than disrupt the empires these institutions have built? Each day the environment evolves, and we can adapt to be better professionals by allowing technology to do the heavy manual lifting to maintain integrity and fairness in the market. Our perspectives must evolve to consider what we once saw as a threat becoming a key asset to the way institutions, large and small, interact with broad client bases.
Keeping pace with regulation
As electronic trading greatly simplifies the broker-dealer workflow, banks are becoming big supporters of the technology. In today’s environment, inefficient processes only add to the chaos of ever-evolving market conditions. In Europe, data reporting has become increasingly important to maintaining compliance with the second Markets in Financial Instruments Directive (MiFID II). Regulation is not static, though. It constantly builds and expands at dizzying rates. SFTR goes live in Europe in Q2 2020, and firms will be required to report all securities finance transactions to trade repositories. This regulation requires reporting of over 150 data fields across repo, securities financing, buy-sell backs, and margin lending transactions. Repo markets are larger than ever before, and regulation creates an additional dimension to the daily workflow. Still, firms have resisted the change. As the start of SFTR creeps closer, firms scramble to determine the best practices to store and report massive amounts of data. Technology implementation makes this easier than ever before by capturing accurate transactional data for more granular archives on-platform in real time. Reporting requirements may be the push firms have long needed to see the benefits automation provides to sustain an orderly market. Europe paves the way with SFTR, but undoubtedly stricter regulatory conduct will become a global standard. With the growth of regulation, preparation will either make or break institutions.
Integrated front-end trading platforms have been used by sell-side repo trading desks for over two decades. Interdealer broker electronic marketplaces with basic post trade straight-through-processing have been around for fifteen years. However, the innovation around the dealer-to-client market remains woefully underdeveloped. As settlement risk due to manual errors is still prevalent, firms must be vigilant to guard against losses as a result of mismatched trades. In fact, the International Capital Markets Association (ICMA) created a trade matching and affirmation template with over 40 fields that must be confirmed by each counterparty shortly after a trade is executed. Trade matching is key to identify incorrectly booked trades. The amount of time needed to affirm each trade is significant, though. Simply implementing execution technology with straight-through-processing can eliminate the need to confirm these details.
As volumes increase and more stringent regulation begins to shape market behaviour (especially in, but not limited to, Europe), widespread technology adoption is needed to keep pace with the growth. Steady growth benefits all sides, but lack of preparation can lead to turbulence down the road. The European Repo and Collateral Council (ERCC) reported an increase in repo volumes of 6.3 percent year-on-year since the ERCC’s last survey in December 2017. Additionally, they reported an increasing market share of electronic trading in this space. Now, more than ever, we see an opportunity to integrate technology. Firms can ensure they are best prepared for consistent changes and volume increases by implementing processes that grow with the workflow imminent for firms.
As we move towards a new regulatory landscape, technology can play a key role in capturing trade details and ultimately avoiding an added step in the already-chaotic workflow. This record-keeping process provides benefit to both sides—the regulators and the member firms. Behavioural documentation provides insight into understanding deeper market trends, helps to inform future trade decisions, and offers quantitative data to back industry discussions. The popular running discourse dictates technology’s imminent control over mankind, but it is prudent to challenge this discourse and consider how mankind can control technology. If long division was still a painstaking paper-and-pencil process, our ability to do more complicated equations would be limited. Technology is a tool, and learning to utilise that tool can be monumental for the growing volumes financial institutions process each day. Beyond the processing capabilities, operational efficiency clears time for market professionals to focus on, rather than distract from, true market discussions.
This year and beyond
How do we navigate an evolving marketplace today? There will be those who lead the charge and those who follow closely behind. Some institutions have established technology-produced revenue goals, tasked employees with implementing electronic trading practices, and explored the vast array of technology offerings available. Technology has become such an integral part of our lives day-to-day. It seems counterproductive, then, to limit the leverage that technology can offer to transform manual processes into automated ones. As the financial environment grows, it becomes necessary for those standing on the sidelines to begin to play an active role.
Changing behaviour presents obstacles. At the start of the fintech revolution we are currently immersed in, large institutions feared technology as a ‘disruption’ of the industry they came to know so well. The discourse that molds technology as a disruptor demeans the true essence of what automation has brought to both buy-side and sell-side institutions. Disruption is the norm today, and with so much of it, it is important to focus on the value added from these changes. The ability to quickly adapt and respond to the changing environment around us is quintessentially human. As Elon Musk realised, after a failed attempt to over-automate the manufacturing process at one of his Tesla factories, technology should be used as a tool allowing employees to focus on value-added activities instead of mundane processes. Technology alone need not be the answer. When man and technology partner, however, our business potential exponentially increases. Facing new hurdles each day, we are asked to challenge the popular discourse. There is no passive approach to technology; we, as individuals, and an industry, can embrace it or fall behind.
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