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Last winter, the SEC issued four proposals containing substantial reforms for the US equity markets, kicking off a flurry of discussion and debate. While the public comment period ended on March 31, discourse around the precise meaning of the proposals, the pros and cons of implementing them and the potential ramifications for our market structure has raged on.
Opinions vary widely across the industry, but the buy side has reached a general consensus. In a recent survey from IEX, 87% of institutional investor respondents agreed that modest updates to Regulation NMS will create a more transparent, efficient and competitive marketplace, while 94% agreed that regulations could be updated to better keep pace with technological and market changes. The overall sentiment among this community is clear.
What does that mean for sell-side broker-dealers? Put simply, it means they must act. Not only does change appear inevitable – their buy-side clients have bought into the proposed reforms. To remain competitive and serve as a supportive partner, these firms must prepare today for a new era in market structure.
To date, much of the focus has been around the nature of and reasons for the reforms themselves. Less has been said about the practicalities: what does the sell side actually need to do to ensure preparedness for this new paradigm? One of the most pressing needs is to have the right technology in place. To meet the new requirements at scale, brokers need a trading platform that enables automation, agility and adaptability at every step. Let’s explore how.
While these proposals involve an array of reforms in response to a range of different needs, the common thread is that they will require brokers to have access to higher volumes of more granular data. Routing decisions will become exponentially more complex, so sell-side trading platforms must be able to ingest the required inputs and enable automated workflows.
That requires a few things. First, the platform must have a flexible architecture and be vendor-agnostic, able to integrate with any market data provider. It must be able to ingest larger quantities of information and update rapidly, supporting routing decisions that can come down to the microsecond. It must be able to aggregate the cost of transacting in different lot sizes, different venues and the like, and then boil these incredibly complex calculations down to straightforward choices for the user. Finally, they must come with a robust set of workflow features, such as real-time notifications, to streamline decision-making.
All of these features can help brokers achieve greater automation in routing decisions. To be clear, we’re not talking about 100% automation – but with the increased complexity that will come with the SEC reforms, greater decision-making support will become vital. That calls for a continued hybridization of the human and the machine, with traders leveraging more sophisticated automation capabilities powered by AI and other modern technologies. From immediately responding to data and identifying logical routes to delivering performance analytics, users need tools that can inform and validate a set of potential actions in order to guard against information overload.
The potential requirement for brokers to route retail orders to intraday auctions presents additional challenges. Here, the difficulty goes beyond the order routing complexity outlined above – it requires the system to accurately identify what type of client flow it is receiving (retail or institutional) and set a decision-making framework from there.
All this complexity increases the importance of systems that not only automate key processes, but can do so in a multi-workflow capacity, across high-touch, low-touch, and risk functions. A system might have strong order routing capabilities, but how well do they perform across different order types? Are risk management workflows tightly integrated into that process? The alternatives – ignoring available risk intelligence or relying on multiple systems – invite a range of negative outcomes, from lower productivity to reduced business to substantial monetary loss.
The key is modularity – rather than monolithic, one-size-fits-all systems, the ideal sell-side trading platform should be modular in nature, made up of loosely coupled but highly interoperable components that can be integrated as needed or leveraged on a standalone basis. The ability to run a high-touch market making business and a low-touch DMA business, along with a comprehensive array of supporting tools, from a single point of access enables seamless adaptation to any market structure reform, and the SEC proposals are no exception.
The SEC’s proposal to expand the definition of covered orders under Rule 605 will increase the challenge of data storage, processing, and reporting. The need to analyze all order and trade flow and package it for the SEC involves some of the challenges already stated above – but unlike the new pricing increments and access fee caps, this is a post-trade function, requiring integration with a different set of systems.
Here, vendor agnosticism is once again a crucial priority. Sell-side trading platforms must have the ability to not only incorporate rules to fuel best execution, but also have a standardized means of providing an audit stream to third-party data analytics providers. In addition, the data needed to meet these new reporting mandates is very similar to that required by CAT, TRACE and other types of trade and transaction reporting. This presents a natural opportunity for brokers to holistically reevaluate their data strategy and consolidate these reporting workflows to fuel long-term benefits. Performance, flexibility, operational efficiency, and harmonization have always been key considerations, but thanks to a desire to protect the retail community, the stakes are being raised – and brokers cannot afford to be caught flat-footed.
These challenges are not theoretical. Brokers with outdated trading platforms will find themselves struggling to win order flow and spending valuable resources on new operational and compliance tasks, putting them at a disadvantage in a highly competitive landscape.
Fortunately, we’re here to help. Broadridge’s OMS provides everything brokers need to adapt to SEC market structure reforms with speed and precision, no matter what form they ultimately take. Our continuous investment in our platform means we are always ahead of the game from a regulatory and workflow perspective – no matter how big or small a reform, we are constantly innovating so we can meet the challenge head on. That’s key, because regulatory change is a constant – even seemingly minor shifts can catch brokers flat-footed. Our modern, modular, and scalable trading platform enables technological flexibility and automated processes, maximizing our clients’ ability to respond to new rules.
Our global technology is an ideal solution for this era of shifting market mechanics. We work with tier 1 and tier 2 banks in an array of different asset classes and in markets around the world. That’s a reflection of our recognition and industry footprint, but it also gives us a unique perspective on market structure. We have a presence in countries and regions that have already implemented reforms similar to the ones the SEC is eyeing, such as odd lots in Europe. On the flipside, working with us is an investment in the future, as we will be prepared to adapt to similar changes in markets and regions that have not made these reforms yet. We strive to comprehensively meet our clients’ trading needs, and our near universal presence is a big part of that.
Brokers are already aware that the SEC proposals will create challenges ahead, but hopefully this article has provided a better sense of the specific steps they should take to ensure preparedness from a technological perspective. Our nimble, flexible system – combined with a longstanding, industry-wide presence and expert, reliable client service – is a logical path.
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