A capital matter
09 Aug 2023
Brian Bollen on why capital markets technology needs a rapid update and how this can be achieved
Image: studybos/stock.adobe.com
Asset Servicing Times is not the first specialist publication to note that the need to update technology capabilities across the entire spectrum of the capital markets industry has become more compelling than at any time in history.
From the elevated heights of the front office, where bond and equity issues and associated products are initiated and traded, to operations in the back office, the growth of technology, in terms of sheer scale and speed of action, is defining today’s asset management industry. Continuing technological change will be a constant.
Firms who do not think appropriately about the need for technological change will inevitably sleepwalk into a world where they will risk losing out on potential new business as they will not be supporting their clients in their investment practices.
In current conversations, several key elements hog the limelight when relating to capital markets technology topics. T+1, AI, industry consolidation, outsourcing, digitisation and fraud are occupying most of the attention.
“We are experiencing a confluence of factors driving significant operational and business changes,” says Mack Gill, chief operating officer at Torstone Technology. “The post-trade world in capital markets is largely built on batch processing, based on systems that were developed 30 to 50 years ago.”
He adds: “Broadly speaking, the industry has cruised quite happily on this infrastructure, which has remained fit for purpose. However, it will not be fit for purpose in the next 20 to 30 years. The industry must move to real-time intra-day processing, as there is a clear limit to what can be squeezed out of current technology. We must get ready for the next big wave, driven by digital assets, shorter settlement cycles and automation. It is truly global.”
Neelesh Prabhu, managing director of architecture and enterprise services at DTCC, hones in on the importance of T+1 when discussing capital markets. He says: “As technology modernises, it is equally important that the industry remains focused on resiliency and stability.”
Prabhu, who is also DTCC’s chief architect in information technology, adds: “While modern technology infrastructure tends to be designed for agility, it is important that resiliency is baked into the design of modern applications so that they can withstand failure.
This is especially true in a T+1 world, where the shortened timelines will put additional demand on the stability of supporting technology.”
According to a Northern Trust industry study of 150 asset managers, conducted in partnership with Coalition Greenwich, 22 per cent plan to implement changes to their operating models to achieve efficiency and cost savings.
The statistics, outlined in the white paper ‘The Evolving Asset Management Landscape: Only the Fittest Will Thrive’, revealed a gap between the strategic priorities of asset managers and their appetite for structural changes.
Nevertheless, firms will have to meet the scale of future challenges ranging from increased competition and the impact of higher interest rates to regulatory change and technology disruption.
“Asset managers continue to face considerable adversity, and we commissioned this study to understand how the asset management industry is evolving,” said Grant Johnsey, head of client solutions, capital markets, Americas at Northern Trust.
“Information from this research can help guide our continued development of outsourced trading, investment operations outsourcing, foreign exchange and other solutions integrating the whole office to support the business environment of tomorrow for asset managers.”
The research also indicates that asset managers expect their top internal challenges over the next three years to include performance (59 per cent), talent management (50 per cent) and rising costs (44 per cent).
When asked how they expect to achieve efficiency and cost savings, 63 per cent said they would deploy new technology.
The cloud
One prominent type of technology is of course, the cloud. “The capital markets industry faces a huge amount of disruption over the next several years, largely because of the migration of liquidity to the public cloud,” says Matt Barrett, co-founder and CEO of Adaptive Financial Consulting.
“The public cloud has been around for about 15 years, however venues have lagged behind. Most liquidity executes off-cloud, on physical infrastructure that is a brake on innovation and more expensive than the potential alternatives. The billions about to be spent on migration — including investment in exchanges from Google, Microsoft and Amazon — will be the most significant expenditure in capital markets’ history and as businesses move to the cloud, the traditional venues and the ecosystem that surrounds them will face enormous disruption.”
JTC chief information officer Adam Jeffries comments: “We appreciate the impact of emerging technologies, and we are closely monitoring the advancements in AI and machine learning to leverage data analytics for more accurate market predictions and risk management.”
He adds: “We see there will be transformation with the usage of blockchain and distributed ledger technology (DLT) to enhance efficiency, security and transparency in our operations and transactions. We are working with some financial technology vendors to ensure we are well-placed to take advantage of solutions that come to market.”
However, what lies ahead in terms of infrastructure and increasing capacity? DTCC’s Prabhu says: “The asset servicing post-trade ecosystem has many constituents that are in different stages of technology maturity.
“Some firms have moved to the cloud, and others still operate legacy infrastructure. Some firms still rely on file transfer protocol to exchange data, while others are using APIs and data marketplaces. It is important that firms like DTCC keep this in mind as we develop our modernised technology offerings, building solutions that enable firms at different points in their technology maturity curve.”
However a recent report, based on PwC’s latest industry projections, and a survey of 250 asset managers and 250 institutional investors, paints the picture of an industry grappling with a set of challenges including digital transformation.
One in six (16 percent) asset and wealth managers globally are expected to be swallowed up or fall by the wayside by 2027, twice the historical rate of turnover, according to PwC’s recently published ‘2023 Global Asset and Wealth Management Survey’. As a result, 73 per cent of asset managers are considering a strategic consolidation with another asset manager in the coming months in order to gain access to new segments, build market share and mitigate risks.
Firms are also turning to technology to transform, with more than 90 per cent of asset managers already using disruptive technological tools including big data, AI and blockchain to enhance investment performance. A direct consequence of these pressures — and the drive to deliver at scale amid cost and competitive pressures — is that by 2027, PwC expects the top 10 largest asset managers to control around half of all mutual fund assets globally, up from 42.5 per cent in 2020.
Olwyn Alexander, PwC global asset and wealth management leader, says: “Existential challenges are sweeping the asset and wealth management industry against a backdrop of social, economic and geopolitical disruption. The choice is simple — adapt to the new context or fail. Firms that effectively leverage technology such as generative AI and robo-advisors, build meaningful inroads to new and existing customers, diversify their recruitment, and deliver exceptional client experiences will be well-positioned to not only survive but thrive.”
But is it that easy — shouldn’t all facets of capital markets technology be taken case by case? As Rob Cranston, global head of equity products at Liquidnet, says: “Each individual sub-sector of the industry has its own perspectives.”
He expresses concern at the lack of innovation relating to the widely discussed drop-off in equity trading volumes across the markets and subsequent lack of liquidity.
“T+1 is obviously a major area of focus for the industry and will have major ramifications from a technology perspective,” he says.
“But we should not lose sight of one element that has always been a focus for the buy-side, and that’s liquidity discovery. Now more than ever, the industry is looking for ways to address the shortage and we are working to solve this alongside our members. We have been hosting a series of Liquidnet Labs in the APAC region, the EU and the US, focusing on identifying and potentially developing solutions for which there is a clear underlying problem,” he says.
Andy Schmidt, Boston-based global lead for banking at CGI, identifies the attainment of T+1 in the US and Canada as the “most urgent for the industry to address,” rather than AI.
Commenting on the latter, he says: “Many institutional clients remain sceptical. The deployment of AI in relation to the movement of data is fine, but they are wary of predictive AI in relation to future stock performance.”
Five year’s time
Bill Prew, group director at JTC says in the immediate future, DLT will be the technology to update capital markets. “A lot of banks and infrastructure providers in the ecosystem are spending a lot of time researching DLT, and it will be fascinating to look back in five year’s time and see what impact it has had on the industry.” He wonders if it will be as transformational as people say.
In terms of what investors want from the companies in which they invest, DLT is not one of the top near-term priorities. Gerard Walsh, global head of capital markets client solutions at Northern Trust, surmises: “Managers plan to deploy new technology and implement more cost-effective operational approaches, which can be difficult to do in a contracting market.
“In the next phase of the cycle, it seems likely that firms will seek more ways to develop orchestrated ecosystems that support their alpha generation activity. We believe firms that assess their entire value chain of activities will benefit from the recent evolution of traditional outsourcing models into new areas. This will help them deliver their strategic growth priorities.”
Northern Trust’s aforementioned white paper recommends that asset managers take a “holistic view of efficiency” that includes outsourcing some or all processes, and more deeply integrating the front, middle and back office of the investment organisation.
Stephen Bruel, senior analyst at Coalition Greenwich market structure and technology (and author of the Northern Trust report), says: “While there are many unknowns in the current environment, one item asset managers control is their operating model.
“Rethinking and rebuilding with flexibility, growth and cost in mind can help bridge the gap between where firms currently stand, and where they need to be.”
From the elevated heights of the front office, where bond and equity issues and associated products are initiated and traded, to operations in the back office, the growth of technology, in terms of sheer scale and speed of action, is defining today’s asset management industry. Continuing technological change will be a constant.
Firms who do not think appropriately about the need for technological change will inevitably sleepwalk into a world where they will risk losing out on potential new business as they will not be supporting their clients in their investment practices.
In current conversations, several key elements hog the limelight when relating to capital markets technology topics. T+1, AI, industry consolidation, outsourcing, digitisation and fraud are occupying most of the attention.
“We are experiencing a confluence of factors driving significant operational and business changes,” says Mack Gill, chief operating officer at Torstone Technology. “The post-trade world in capital markets is largely built on batch processing, based on systems that were developed 30 to 50 years ago.”
He adds: “Broadly speaking, the industry has cruised quite happily on this infrastructure, which has remained fit for purpose. However, it will not be fit for purpose in the next 20 to 30 years. The industry must move to real-time intra-day processing, as there is a clear limit to what can be squeezed out of current technology. We must get ready for the next big wave, driven by digital assets, shorter settlement cycles and automation. It is truly global.”
Neelesh Prabhu, managing director of architecture and enterprise services at DTCC, hones in on the importance of T+1 when discussing capital markets. He says: “As technology modernises, it is equally important that the industry remains focused on resiliency and stability.”
Prabhu, who is also DTCC’s chief architect in information technology, adds: “While modern technology infrastructure tends to be designed for agility, it is important that resiliency is baked into the design of modern applications so that they can withstand failure.
This is especially true in a T+1 world, where the shortened timelines will put additional demand on the stability of supporting technology.”
According to a Northern Trust industry study of 150 asset managers, conducted in partnership with Coalition Greenwich, 22 per cent plan to implement changes to their operating models to achieve efficiency and cost savings.
The statistics, outlined in the white paper ‘The Evolving Asset Management Landscape: Only the Fittest Will Thrive’, revealed a gap between the strategic priorities of asset managers and their appetite for structural changes.
Nevertheless, firms will have to meet the scale of future challenges ranging from increased competition and the impact of higher interest rates to regulatory change and technology disruption.
“Asset managers continue to face considerable adversity, and we commissioned this study to understand how the asset management industry is evolving,” said Grant Johnsey, head of client solutions, capital markets, Americas at Northern Trust.
“Information from this research can help guide our continued development of outsourced trading, investment operations outsourcing, foreign exchange and other solutions integrating the whole office to support the business environment of tomorrow for asset managers.”
The research also indicates that asset managers expect their top internal challenges over the next three years to include performance (59 per cent), talent management (50 per cent) and rising costs (44 per cent).
When asked how they expect to achieve efficiency and cost savings, 63 per cent said they would deploy new technology.
The cloud
One prominent type of technology is of course, the cloud. “The capital markets industry faces a huge amount of disruption over the next several years, largely because of the migration of liquidity to the public cloud,” says Matt Barrett, co-founder and CEO of Adaptive Financial Consulting.
“The public cloud has been around for about 15 years, however venues have lagged behind. Most liquidity executes off-cloud, on physical infrastructure that is a brake on innovation and more expensive than the potential alternatives. The billions about to be spent on migration — including investment in exchanges from Google, Microsoft and Amazon — will be the most significant expenditure in capital markets’ history and as businesses move to the cloud, the traditional venues and the ecosystem that surrounds them will face enormous disruption.”
JTC chief information officer Adam Jeffries comments: “We appreciate the impact of emerging technologies, and we are closely monitoring the advancements in AI and machine learning to leverage data analytics for more accurate market predictions and risk management.”
He adds: “We see there will be transformation with the usage of blockchain and distributed ledger technology (DLT) to enhance efficiency, security and transparency in our operations and transactions. We are working with some financial technology vendors to ensure we are well-placed to take advantage of solutions that come to market.”
However, what lies ahead in terms of infrastructure and increasing capacity? DTCC’s Prabhu says: “The asset servicing post-trade ecosystem has many constituents that are in different stages of technology maturity.
“Some firms have moved to the cloud, and others still operate legacy infrastructure. Some firms still rely on file transfer protocol to exchange data, while others are using APIs and data marketplaces. It is important that firms like DTCC keep this in mind as we develop our modernised technology offerings, building solutions that enable firms at different points in their technology maturity curve.”
However a recent report, based on PwC’s latest industry projections, and a survey of 250 asset managers and 250 institutional investors, paints the picture of an industry grappling with a set of challenges including digital transformation.
One in six (16 percent) asset and wealth managers globally are expected to be swallowed up or fall by the wayside by 2027, twice the historical rate of turnover, according to PwC’s recently published ‘2023 Global Asset and Wealth Management Survey’. As a result, 73 per cent of asset managers are considering a strategic consolidation with another asset manager in the coming months in order to gain access to new segments, build market share and mitigate risks.
Firms are also turning to technology to transform, with more than 90 per cent of asset managers already using disruptive technological tools including big data, AI and blockchain to enhance investment performance. A direct consequence of these pressures — and the drive to deliver at scale amid cost and competitive pressures — is that by 2027, PwC expects the top 10 largest asset managers to control around half of all mutual fund assets globally, up from 42.5 per cent in 2020.
Olwyn Alexander, PwC global asset and wealth management leader, says: “Existential challenges are sweeping the asset and wealth management industry against a backdrop of social, economic and geopolitical disruption. The choice is simple — adapt to the new context or fail. Firms that effectively leverage technology such as generative AI and robo-advisors, build meaningful inroads to new and existing customers, diversify their recruitment, and deliver exceptional client experiences will be well-positioned to not only survive but thrive.”
But is it that easy — shouldn’t all facets of capital markets technology be taken case by case? As Rob Cranston, global head of equity products at Liquidnet, says: “Each individual sub-sector of the industry has its own perspectives.”
He expresses concern at the lack of innovation relating to the widely discussed drop-off in equity trading volumes across the markets and subsequent lack of liquidity.
“T+1 is obviously a major area of focus for the industry and will have major ramifications from a technology perspective,” he says.
“But we should not lose sight of one element that has always been a focus for the buy-side, and that’s liquidity discovery. Now more than ever, the industry is looking for ways to address the shortage and we are working to solve this alongside our members. We have been hosting a series of Liquidnet Labs in the APAC region, the EU and the US, focusing on identifying and potentially developing solutions for which there is a clear underlying problem,” he says.
Andy Schmidt, Boston-based global lead for banking at CGI, identifies the attainment of T+1 in the US and Canada as the “most urgent for the industry to address,” rather than AI.
Commenting on the latter, he says: “Many institutional clients remain sceptical. The deployment of AI in relation to the movement of data is fine, but they are wary of predictive AI in relation to future stock performance.”
Five year’s time
Bill Prew, group director at JTC says in the immediate future, DLT will be the technology to update capital markets. “A lot of banks and infrastructure providers in the ecosystem are spending a lot of time researching DLT, and it will be fascinating to look back in five year’s time and see what impact it has had on the industry.” He wonders if it will be as transformational as people say.
In terms of what investors want from the companies in which they invest, DLT is not one of the top near-term priorities. Gerard Walsh, global head of capital markets client solutions at Northern Trust, surmises: “Managers plan to deploy new technology and implement more cost-effective operational approaches, which can be difficult to do in a contracting market.
“In the next phase of the cycle, it seems likely that firms will seek more ways to develop orchestrated ecosystems that support their alpha generation activity. We believe firms that assess their entire value chain of activities will benefit from the recent evolution of traditional outsourcing models into new areas. This will help them deliver their strategic growth priorities.”
Northern Trust’s aforementioned white paper recommends that asset managers take a “holistic view of efficiency” that includes outsourcing some or all processes, and more deeply integrating the front, middle and back office of the investment organisation.
Stephen Bruel, senior analyst at Coalition Greenwich market structure and technology (and author of the Northern Trust report), says: “While there are many unknowns in the current environment, one item asset managers control is their operating model.
“Rethinking and rebuilding with flexibility, growth and cost in mind can help bridge the gap between where firms currently stand, and where they need to be.”
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