Market makers, essential for quickly providing liquidity to retail and institutional financial firms, face new challenges in a rapidly changing market. Simply focusing on one corner of the market won’t be enough, so how do they adapt to the post-trade challenge?
brian CollingsCEO of Torstone Technology examines the specific challenges and nuances of the back office for market makers. He explains how the volume of data increases in the market as companies diversify between assets, as well as the shortening of the settlement cycle, and their impact on market makers:
The global economy is becoming increasingly interconnected and borderless, especially in the emerging digital asset space, and market makers are no different. As volatility and trading volumes increase, companies must manage huge changes in their operational infrastructure in the post-trade space to stay resilient and competitive.
One consequence of this change is that we are seeing trends develop in the way market makers approach their post-trade needs – ensuring they are able to keep pace with the massive influx of new customers as that we are entering a difficult period in global markets when access to liquidity will be more important than ever. As market makers adapt to a new market, so do we – finding innovative new ways to process and accurately report such a high volume of transactions in real time, all at the blink of an eye.
Volumes on the rise
The rapid pace of change has been a major challenge for market makers over the past decade. Traditionally, capital markets firms focused on a single corner of the market – be it currencies, fixed income or equities – but as investment firms and retail traders increasingly explore new asset classes and trading strategies, modern market makers have spread across multiple asset classes and geographies. to satisfy the demand for unique sources of deep and varied liquidity.
A layer of complexity added recently has been the emergence and adoption of cryptocurrencies as an asset class, which has also led market makers to further expand their trading operations as trading volumes have increased. .
Driven by the electronicization of the market and an explosion of retail participation and volatility, the rapid growth of the market in such a short time has strained the existing infrastructure and in some cases has proven to be inadequate to cope with such large volumes.
Faster settlement
Not only are business operations more global and multi-asset, they also need to become faster than ever. In addition to dealing with much larger volumes, market makers also have to deal with regulatory and customer demand for faster settlement.
Speed and flexibility are of vital importance to market makers and their partners. Notably, over the past two decades, capital markets have seen a trend towards increasing the speed at which transactions are settled. The United States is currently in the process of reducing settlement cycles from a two-day settlement cycle to T+1.
A reduction in the settlement cycle will likely be a good thing, acting as an accelerator of change by encouraging capital creation, reducing balance sheet risk and providing an opportunity to drive better processing and innovative use of technology for the market.
This however adds a layer of complexity for market makers and their service providers, in preparing their systems and infrastructure for a much shorter settlement time, but also in navigating the different requirements of a jurisdiction. to the other. A key consideration for global market makers is therefore how to manage the different regulatory requirements in all the regions they operate in, where the specific rules and settlement times may differ.
The post-trade opportunity
Market makers are adapting to these changes through higher levels of automation, faster settlement, and adoption of more interconnected systems, reducing their legacy architecture.
The modular, cloud-based post-market architecture has proven capable of handling huge volumes while giving companies the flexibility to add new assets, regions, and technologies as they adapt to changing markets. rapidly evolving. Legacy systems have become entrenched in the enterprise architecture, but in many cases they pose a risk as the weight of global demand pushes them beyond their capacity.
Modern market makers are among the most sophisticated businesses in the capital markets, but they need to think carefully about their post-trade needs. Front office demands, from reducing trading latency to increasing access to liquidity, will always be a top concern, but it shouldn’t be overlooked to ensure their architecture is scalable and designed to the future.
Cloud-based SaaS platforms are the answer for market makers, making it easy for firms to equip themselves with powerful technology to handle highly complex and intensive post-trade processes, while allowing them to focus on their trading technology. In a rapidly changing world, reducing operational complexity to deal with uncertain markets is more valuable than ever.
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