Automated Trader - Adam Cox


The financial industry has embarked on an intense construction project, building the market infrastructure of the future as CSDs, CCPs and trade repositories take on core roles in the post-crisis era. What does the new plumbing mean for the development of automated systems? Adam Cox takes a look.


The Hollywood legend Spencer Tracy once made a wry remark about keeping his profession in perspective: "Acting is not an important job in the scheme of things. Plumbing is."


The importance of plumbing is also not lost on sophisticated trading firms in today's post-crisis markets. A plethora of regulation-driven infrastructural changes in recent years has dramatically changed the way markets function, requiring huge investments in new reporting systems, placing far greater emphasis on the traditionally less glamorous back office and offering both buy-side and sell-side players opportunities to compete in entirely new ways.


Firms seeking to work efficiently, comply with regulatory rules and introduce even greater levels of automation have no choice but to make major system decisions based on this new infrastructure. What's more, financial executives say a great deal more change will be needed if the new plumbing is to deliver what regulators want it to in the OTC derivatives space that it was designed to address.


'A completely different industry'

Chris Smith, head of post-trade services at MarketAxess subsidiary Trax, is a 30-year market veteran who can remember what it was like when markets were far, far simpler.


"I've been around a long time and I was looking back at some things I was doing in the early 90s and it's amazing how the volume of exchanges was so much lower and the infrastructure so much simpler. In that time, I was working with a large investment manager, running what was known as the middle office and trying to cope with the amount of paper even then. And then you scroll forward to 2015 and look at the volume, the complexity, the different instruments and asset classes that firms cope with - it's a completely different industry."


Executives noted three important times in recent decades when market infrastructure changes came to the fore. The first of those began in the late 1980s, when electronification began to gain momentum. The second came with the market harmonisation efforts around 2006-2007, with the first MiFID regulation changing the landscape for European equity trading. The final period is the post-crisis era, during which international regulators have sought to transform the nearly $700 trillion OTC derivatives market into something much closer to exchange-based trading while at the same time creating a whole new level of trade reporting.


But post-trade and market infrastructure experts say that many firms have not grasped the nettle when it comes to adapting to the changes that have been wrought.


"I think we are still in the learning phase of what the regulators are trying to do," Smith said, noting the level of complexity of what has been introduced.


"What you're seeing is that complexity has not really come through yet in the sophistication of the systems put in place to deal with the regulatory change. In other words, you've put in place what you think is the bare minimum for your firm to meet that regulation. Now as an industry what we have to do is take a step back and say, 'What were we trying to achieve and what tweaks, what changes, what modifications can we make to have a better outcome?'"


If the market is to achieve that 'better outcome', firms will need to focus on some issues that go beyond the walls of individual entities. Market watchers say that first and foremost, regulators and industry bodies will need to make greater progress in establishing standards. Beyond that, the industry will need to become increasingly collaborative. Finally, firms will need to take a more holistic approach about what regulators are trying to do and what the new infrastructure requires.


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