In Order to Modernize
Before proceeding any further, let’s pause to consider what core system modernization signifies to a brokerage firm. Celent surveys have found that to brokers modernization means agility in operations and reductions in IT costs.
This prompts the question of how to make modernization a reality. Celent focuses on two jumping off points or angles from which to approach this: One is trading lifecycle optimization (TLO), the second is improving risk management, that is to say, realizing of a dynamic risk-adjusted investment cycle.
Trading Lifecycle Optimization (TLO)
The digital advances in trading environments have spurred the proliferation of algorithmic trading and high-frequency trading (HFT), developments that have reduced the number of traders needed. At the same time, Asia has witnessed increasing fragmentation that is particular to the regional market, spurring the spread of smart order routing (SOR).
Social media and big data are increasingly being used as market data and exerting greater influence on the market at the same time that high touch sales by sell-side firms remains. In addition, increasing diversification is evident with significant variation in the degree of digitization across asset classes and markets, and in terms of liquidity and trade type (bulk, block order, small orders, etc.).
Against this backdrop, a new electronic “hybrid” trading that fuses traditional high-touch trading with HFT and algorithmic trading has emerged in modern capital markets and trading environments. This has extended technology application beyond traditional areas of focus such as trade execution management and portfolio management. Indeed, the role and importance of technology is only growing, particularly in these areas: linking pre-trade compliance in order management, post-trade compliance in the middle office, and the various financial intermediaries (account keepers, transfer agents, administrators, prime brokers) that work across the front, middle, and back offices.
Celent has advocated the concept of trading life cycle optimization (TLO).
TLO has come under scrutiny due to market environment changes that traders face in addition to factors including disparate or unevenly distributed trading technologies as well as trading risks (time, location, asset class, trader).
Hybrid trading environments combining traditional high-touch trading with HFT or algorithmic electronic trading, could clearly serve to benefit from TLO. Spanning the trading process—before, during, and after trading—it is vital to integrate across administration, monitoring, and auditing metrics for governance, risk, and cost (GRC). This makes extremely important to harness market data, which can serve as criteria for TLO.
Trading Lifecycle Optimization (TLO):
Areas targeted for optimization by trading technology block (types of technology used) can be broken down into the following four: infrastructure, operation, trade execution, and allocation.
These technology blocks are very important such as when it comes to audit requirements, sponsor descriptions, trader performance reviews, and identifying automated and discrete ranges. At the same time, these are also seen as crucial functional requirements for the front, middle, and back office systems in next-generation trading.
Celent believes that trading technology modernization should mean for both the sell side and buy side a focus on amending disparity and gaps in this technology.
To be continued – Click to read more
Legacy Modernization in the Japanese Securities Industry, Part 1
Legacy Modernization in the Japanese Securities Industry, Part 2
Innovation in Focus | The Age of Trade Lifecycle Optimization in Securities Trading
Market Data in Asia-Pacific and Japan, Part 2: Innovation Opportunities and Scenarios to Succeed in Growth Markets