After years of neglect, back-office processes are starting to garner the attention they deserve. The post-trade technology landscape remains fragmented, however, and opportunities are being left uncaptured.

By Vijay Mayadas, President, Capital Markets at Broadridge.

Today most senior leaders will tell you technology innovation is synonymous with competitive advantage. Our 2022 Broadridge Digital Transformation and Next-Gen Technology Survey of capital market executives recently confirmed this with industry leaders reporting expectations of increased revenues, improved profitability and better strategic decision-making from digital transformation initiatives. In practice, we are witnessing firms double down on their technology investments in a tight race to secure these benefits and capture defensible market share.

At the same time, however, executives recognize that the daunting pace of technological change is exacerbating practical operational and regulatory challenges, putting hurdles in the way of rapid progress on the digitalization front. Furthermore, much of the value-add from innovation over the years has primarily accrued to the front- and middle-office which has left back-end capabilities wanting.

There are many reasons for this, including an early strategic focus on reimagining customer experiences, value propositions, and retention that most obviously held the promise of expanding revenues and growth through greater differentiation – a critical objective for executives faced with rising competition. These highly visible parts of the business have also typically been perceived as offering companies with “quicker wins” and “more digestible” project scopes than more ambitious plans to upgrade core technology systems on the back-end.

Where Does This Leave Firms Today?

Although it may seem that neglecting the back-office has been a benign tradeoff for sell-side firms over the years, this couldn’t be further from the truth. Many of the post-trade technology platforms firms have in place are not built to handle the realities and needs of today’s investing community. As global buy-side trading volumes continue to rise, and asset allocations become increasingly diversified across the investment risk spectrum to include less traditional asset exposures, the inadequacy of current systems have become more obvious to market participants. Cracks are starting to form under the pressures of rising complexity.

Even if we ignore increasing asset flows into alternative investments, the magnitude of demands placed on the sell-side is clear. For example, USD $160.95 trillion was traded electronically in 2021 across nearly 46 billion trades, which represents 16.9% rise in equity value traded and 20.4% increase in volumes, according to the World Federation of Exchanges.¹ Moreover, statistics from the Futures Industry Association (FIA) indicate the total volume of exchange-traded derivatives worldwide in 2021 recorded a fourth consecutive year of record-setting activity jumping 33.7% from the previous year to 62.58 billion contracts.²

Although these figures seemingly point to significant opportunity for sell-side players, they also mask brewing trouble. One way this has manifested is in a rise of settlement failures during times of heightened volume, volatility and market stress. In February, ESMA published its first Trends, Risks and Vulnerabilities (TRV) Report for 2022 which showed that failed settlement instructions as a share of total value across the European Economic Area 30 (EEA 30) climbed to around 14% for equities and close to 6% for government and corporate bonds at the height of pandemic-induced volatility in March 2020.³ This compares to an average range of 5-10% and 2-4% for equites and all bonds traded between 2018 to 2020 respectively.⁴ Equity settlement fails have remained more frequent in 2021 than before the covid-19 crisis and slightly above 2H 2020 levels across other asset classes.

Post-Trade Advantage: Simplicity Amid Complexity

To some readers, these single-digit percentage point increases may not seem like much but the volume of transactions being settled globally each day is in the trillions. These increases are only a snapshot of the much larger challenges intensifying on the horizon with the implementation of new regulations like the EU’s CSDR’s Settlement Discipline Regime and the decision by some markets to move toward T+1.

Firms unwilling to enhance their back-end capabilities for the needs of this tomorrow will face an erosion in competitive positioning. Most sell-side firms continue to have to manage highly fragmented, complex technology stack. Silos by asset class and geographic region are common. Even as staff shift toward multi-asset coverage, the systems that support their activities remain separate. Many traders use different systems to manage orders and execute trades as a result, while operational staff wrestle with multiple middle- and back-office infrastructures. This is no longer good enough.

It’s time for the industry to embrace the simplicity of global multi-asset post-trade solutions that can empower a consolidated, automated workflow across asset classes to reduce the cost, complexity, risks of running multiple operations and technology silos. Advances in AI, distributed ledger and other next-gen technologies are already raising expectations and separating forward-thinking innovators from the rest.

_{1 https://www.world-exchanges.org/our-work/articles/fy-2021-market-highlights-report
2 https://www.fia.org/resources/global-futures-and-options-trading-hits-another-record-2021
3 https://www.esma.europa.eu/document/esma-report-trends-risks-and-vulnerabilities-no1-2022 and https://www.esma.europa.eu/sites/default/files/library/esma50-165-2229_trv_2-22.pdf
4 https://www.esma.europa.eu/sites/default/files/library/esma_50-165-1287_report_on_trends_risks_and_vulnerabilities_no.2_2020.pdf}