The Growing Importance of Ecosystems in the Global Capital Markets

Ganesh Iyer, Director, Global Product Marketing Financial Markets Network, IPC

Technology, innovation, and regulatory changes have dramatically changed the capital markets, since the global financial crisis. Every asset-class has been affected by the evolution in market structure with equities, fixed income, currencies, commodities, and their derivatives all experiencing major realignments. The need for market participants to rapidly acquire and share information in this new landscape is reshaping the relationship between the buy-side and the sell-side. Today, the sell-side is compelled to continually adapt to stay competitive and satisfy the buy-side’s demanding requirements.

"Today, the sell-side is compelled to continually adapt to stay competitive and satisfy the buy-side’s demanding requirements"

These paradigm shifts are creating two key challenges for market participants:

1) The need to have reliable connectivity throughout the trade lifecycle.

2) The necessity to rapidly access a ready-made ecosystem of liquidity venues, counterparties, brokers/dealers, institutional investors, trade lifecycle services and market data.

Connectivity throughout the full trade cycle demonstrates how connectivity is one of the most indispensable elements for the successful implementation of an investment thesis. It is pivotal in every aspect of the trade lifecycle— order creation, order placement, trade execution, clearing, settlement, reporting, and market data delivery.

Large ecosystems are becoming increasingly important in the capital markets. Leverage limits, stricter capital requirements and restrictions on proprietary trading is forcing many sell-side firms to focus their energy on helping clients execute trades rather than directly assuming transactions. This is spurring connectivity requirements as brokers need to find clients on both sides of the market.

The regulatory environment is placing significant constraints on the sell-side’s ability to make markets—drying up liquidity and increasing transaction costs. The situation is being exacerbated with hedge funds and other alternative investment managers deleveraging and thus no longer providing liquidity to traditional asset managers to the degree they did in the past. With both sell-side and hedge fund liquidity drying up, buy-side firms are finding it more difficult to access their counterparties. This scenario makes connectivity throughout the trade lifecycle and access to a vast ecosystem critical since it enables firms to find their counterparties more easily. The execution of the breadth of strategies employed by trading firms strongly depends on having access to reliable and operationally resilient networks. Consequently, successful market participants are making investments in financial extranets, latency-sensitive connectivity solutions, business continuity planning, voice communications and collaboration tools to execute their trading strategies, capture alpha and mitigate risk. These trends and challenges transcend asset classes. Market participants continue to feel the pressure to differentiate themselves, harvest alpha and gain a competitive edge through technology. In FX, the growing use of execution algorithms, lack of a central marketplace and the controversial last look are creating remarkably complex infrastructure and connectivity demands.

Changes in clearing, reporting and trading requirements for OTC derivatives are transforming the landscape for the asset class. The different entities that play a role in the OTC derivatives trade lifecycle need to connect and communicate with one another. As a result, end-users, major swap participants, swap dealers, execution venues, central counterparties and trade repositories are making new investments in voice recording and communications, electronic connectivity, data archiving and networking technologies. The very active secondary debt markets trading government securities, mortgage-backed securities, asset-backed securities, money markets and credit derivatives are also heavily dependent on communication, collaboration and connectivity among investment managers, brokers, liquidity venues, custody banks and clearing/ depository organizations. Market fragmentation is another important driver of connectivity and the need for ecosystems. For example, in the United States there are numerous:

• Exchanges, alternative trading systems and dark pools for equities

• Venues for trading futures and options

• Swap execution facilities (SEFs) to trade swaps

• Single bank platforms, multi-bank dealing platforms and electronic broking systems in the FX markets

• Issuers in the bond market and nothing resembling a centralized exchange

Managed Network-as-a- Service (MNaaS) Model

Leading capital market participants are increasingly deploying the Managed Network-as-a-Service (MNaaS) model to effectively execute trading strategies and manage risk. The MNaaS solution offers market participants adaptive, on-demand connectivity throughout the trade lifecycle and across asset classes. It addresses all the network infrastructure requirements of buy-side firms and sell-side firms and possesses the following characteristics:

• Financial ecosystem with global reach

• Flexible and tailored technical and commercial solutions to meet exacting business requirements

• Capital markets focus and expertise – built exclusively for the capital markets and designed for a market participant’s demanding operational needs

• Competitive service level agreements under a single global master service agreement

The key benefits of the MNaaS model for market participants include:

• Ability to focus on core competencies such as alpha generation and execution of complex strategies

• Access to industry best practices

• Mitigation of business, operational and market risk

• Increased speed to market

• Keeping ahead of technology obsolescence

• Reduced capital and operational costs

In today’s environment, profitably trading, hedging or arbitraging in the global capital markets is governed by connectivity throughout the trade lifecycle and access to a ready-made ecosystem. Partnering with a MNaaS solution provider can be a key determinant in helping to ensure the successful execution of trading strategies by capital market participants.

Read Also

Tuning into the Collective Voice of Our Customers

By Rahul Merchant, EVP & CIO, TIAA-CREF

Custom Development for Increased Sales

Brent Bailey, CIO, GPS Capital Markets