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Connecting the Dots: Why Financial Markets Aren’t 100% Electronic

By Richard Hunter, Director of Customer Solutions, IPC

The ‘Fintech age’ took off in earnest in the mid to late 1980s with the advent of the first automated tools to support financial markets trading. In short order, these products and services evolved from basic, screen-based communications solutions facilitating instant access – initially to interbank counterparties – to more sophisticated price distribution, conversational trading, and price matching systems that revolutionized the way traditional markets were traded.

The equities markets Big Bang in the late 80s, replacing open outcry trading with entirely automated trading, was followed in the early 90s with the first matching systems for spot FX. Electronic trading very quickly came to be the dominant method for interdealer FX. Today, the majority of wholesale trading activity for equities, FX and fixed income is transacted electronically, whether through e-exchanges and e-matching systems, or through the deployment of automated and algorithmic trading strategies.

Despite continuing technological advances and solution innovation – including single to multi-party client dealing and straight-through processing connectivity – and huge efforts by liquidity providers/market makers to ‘electronify’ customer workflows, voice communications continue to play a vital role in managing buy-side relationships and trading activities.

This remains the case even when trades are routed through electronic channels; trading professionals still rely on voice communications (and to a lesser extent chat/email conversational channels), particularly for pre-trade (e.g., order receipt, market conditions) and post-trade interactions (e.g., trade instructions and performance).

Back in the early days of markets electronification, a key criticism of automated trading was “a computer can’t buy you a beer” — a truism that sought to highlight the degree to which personal relationships (with a broker or a bank’s sales team) influenced trading decisions. While this was evidently less of a factor in interbank activity, where liquidity, rates and speed were (and remain) the key business drivers, it is still an essential element in buy-side relationships and activities.

This is supported by continuing use and demand for virtual turrets that replace trading desk hardware with software-based applications, integrated with other trading desk tools, that can be accessed on and off physical trading floors. Traders can carry on business as usual away from the trading floor, for example on mobile phones and from home offices, without compromising rigorous security and compliance requirements and obligations.

20 years ago, the Bank for International Settlements predicted that financial markets would transition to a fairly centralized and open network allowing all market participants to transact directly with each other, in this report on The implications of electronic trading in financial markets. It could not, however, have anticipated the rapid pace of technological advancements with respect to global markets connectivity, data storage and distribution.

Today, traditional financial markets (TradFi) players are also having to navigate the challenges and opportunities presented by new digital technologies and asset classes, not least with respect to their potential to ‘disintermediate’ traditional links in the transaction value chain, and the advent of truly decentralized, peer to peer, trading models.

IPC’s recent research of buy-side participants in the US and UK shows that while increased automation and electronification of trading channels is embraced by the majority, there is a particular interest in ensuring that new trading technologies and approaches ‘connect the dots’ effectively between participants – sell- and buy-side firms, interdealer brokers, trading platforms, liquidity venues, clearing and settlement (and broader post-trade connectivity). What is evident is that there is no ‘magic pill’, or 100% electronic trading solution that will replace all of the moving parts in transaction lifecycles such as voice, instant messaging, chat and other ‘conversational’ channels.

Technological advances continue to drive structural changes and competitive edge in the financial services sector, both in terms of market participants and service providers. Institutions continue to focus on harnessing technology and information to support fast-to-market product strategies for existing and new customer bases that can be accessed remotely, without requiring a physical presence. Service providers like IPC must stay ahead of technological innovation and anticipate the changing demands of clients in an increasingly complex trading infrastructure where the lines between traditional players and roles are getting blurred.