Connecting the Dots: Why Financial Markets Aren’t 100% Electronic

By Richard Hunter, Director of Client Solutions, IPC

The “Fintech era” took off in the mid to late 1980s with the advent of the first automated tools to support financial market transactions. In a short time, these products and services have evolved from basic screen-based communication solutions facilitating instant access – initially to interbank counterparties – to more sophisticated price distribution, conversational trading and price matching systems that revolutionized the way traditional markets were traded.

The Big Bang of equity markets in the late 1980s, replacing out-of-call trading with fully automated trading, was followed in the early 1990s with the first matching systems for spot forex. Electronic trading very quickly became the dominant method for inter-dealer FX. Today, the majority of wholesale trading activity in equities, currencies and fixed income securities is conducted electronically, whether through electronic exchanges and electronic correspondence systems, or through the deployment of automated and algorithmic trading strategies.

Despite continued technological advancements and solution innovation – including single-to-multi-party client transactions and straight-through processing connectivity – and significant efforts by liquidity providers/market makers to “electronize” flows customers’ workplaces, voice communications continue to play a vital role in purchasing management. – secondary relations and commercial activities.

This remains the case even when transactions are routed through electronic channels; trading professionals still rely on voice communications (and to a lesser extent on chat/email conversational channels), especially for pre-trade interactions (e.g. receiving orders, terms of the market) and post-trade (e.g. trade instructions and performance).

In the early days of the electronicization of markets, a key criticism of automated trading was “a computer can’t buy you a beer” – a truism that sought to highlight the extent to which personal relationships (with a broker or bank’s sales team) influenced business decisions. Although this has obviously been less of a factor in interbank business, where liquidity, rates and speed were (and remain) the primary drivers of business, it is still a critical element in relationships and business. on the buyer side.

This is supported by the continued use and demand for virtual turrets which replace trading desk hardware with software applications, integrated with other trading desk tools, accessible on and off physical trading floors. Traders can carry on business as usual outside the trading room, for example on mobile phones and from their home office, without compromising stringent security and compliance requirements and obligations.

Twenty years ago, the Bank for International Settlements predicted that financial markets would shift to a fairly centralized and open network allowing all market participants to transact directly with each other, in this report on the implications of e-commerce on the financial markets. However, he could not have anticipated the rapid pace of technological advances in global market connectivity, data storage and distribution.

Today, players in traditional financial markets (TradFi) must also address the challenges and opportunities presented by new digital technologies and asset classes, particularly with regard to their potential to “disintermediate” the traditional links of the chain. value transactions; and the advent of truly decentralized, peer to peer, business models.

IPC’s recent research on buy-side participants in the US and UK shows that while increased automation and electronicization of trading channels is embraced by the majority, there is particular value in ensuring that new negotiation technologies and approaches effectively “connect the dots” between participants. – sell-side and buy-side firms, intermediary brokers, trading platforms, liquidity platforms, clearing and settlement (and broader post-trade connectivity). What is obvious is that there is no “magic pill” or 100% electronic trading solution that will replace all the moving parts of trading lifecycles, such as voice, instant messaging, chat and other “conversational” channels.

Advancements in technology continue to drive structural change and competitive advantage in the financial services industry, both in terms of market players and service providers. Institutions continue to focus on leveraging technology and information to support rapid-to-market product strategies for existing and new customer bases that can be accessed remotely, without requiring a physical presence. Service providers like IPC must stay ahead of technology innovation and anticipate changing customer demands in an increasingly complex business infrastructure where the boundaries between traditional players and roles are blurring.

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