By Ed Tyndale- Biscoe, Head of Product, Secured Funding at ION Markets 

Trading processes in the secured funding market have historically relied on manually run technology infrastructure. In doing so, it lagged behind other asset classes which have been swift to digitalise. The last 20 years, however, has witnessed an accelerated transition to electronic methods as firms seek increased efficiencies to remain competitive.

For the most part, this has driven surging trading volumes across capital markets, with repo volumes in particular seeing extensive growth. Alongside this, there has been a parallel increase in the amount of transactional data available to traders and business managers, which has grown at an exponential pace.

The search for a more modern approach

Firms have woken up to the potential of this data-driven environment. Today, traders wish to understand how to capitalise on this to boost both productivity and product development. This has compelled organisations to adopt more modern approaches, as traders have realised that success hinges on the capabilities of their technological infrastructures. In many cases, with those hosted in the cloud determined as the best way forward.

Now able to capture, process and analyse data at scale, these solutions have increased the pace and improved the standard at which trading desks can operate. However, the transition to these platforms has not been smooth in all instances. Vendors have taken note and shifted their focus and investment to ensure they keep up with advances in technology and architecture, creating adaptable solutions able to interoperate more easily with existing infrastructures, without compromising security. These platforms create a much more flexible trading environment in which repo traders can operate more cost-effectively.

A slow transition

Capital markets technology is commonly considered to be at the forefront in relation to the use of advanced technology for trade processing and order management. Legacy technology and infrastructure are being replaced, at scale, with a goal across the industry to automate and digitalise manual processes, reduce business friction and increase operational efficiency. Until recently, the repo market has been slower to embrace this trend; however, a series of recent, interrelating factors have driven this market towards electronification.

Increasing regulatory requirements, such as ESMA’s enforcement of the Securities Financing Transactions Regulation (SFTR), or MiFID II’s electronic trading requirements alongside continued demand for productivity have made traders realise the benefits of electronic features.

This transition has also been driven by a demand for reduced friction between areas of the trading lifecycle, as market participants realise that to improve fluidity in their operations, efficiency must occur front to back. Many automated platforms now provide integrated post-trade functionalities, with capabilities across asset classes, further enabling the shift to electronification.

A challenging environment

Despite developments in electronic trading, the recent evolution has not been without its challenges. Against this backdrop, we are yet to see a full embrace of automation in the securities finance space, with manual processes still prevalent, front to back. As a result, the current trading environment remains inflexible and unconsolidated, with increased trading volumes adding complexity to this situation.

To manage this, many market participants have refocused on efforts to upgrade their technological infrastructure. Due to concerns around cost and complexity, this has occurred in a fragmented manner.  What’s more, the multitude of legacy systems in operation today, based on different technology infrastructure, must be managed in different ways. This presents a time consuming and inefficient task for firms.

Overcoming obstacles

Technology vendors have been forced to refocus their efforts to provide services which can effectively process and visualise the information from multiple locations, all within a time frame which ensures firms can remain productive and profitable. As a result, there has been significant investment in innovative data-led platforms in recent years, typically focused on three key areas: cloud computing, artificial intelligence and data science. The transparency, flexibility and scalability provided by these platforms, and the real-time nature in which they can aggregate and then analyse information from different data sources, provides firms with the ability to identify previously unobserved data patterns.

This awareness enables vendors to formulate hypotheses more efficiently and build predictive models which provide improved market knowledge. This provides greater flexibility around decision-making, meaning traders can confidently make investment decisions and assess risk in minutes rather than days. In turn, this improves efficiency, reduces costs and boosts the overall productivity of the trading desk. 

The scalable and interoperable nature of these platforms, particularly those based in the cloud, overcomes other areas previously deemed inflexible. Easily integrated into existing systems, these platforms create hybrid models, enabling firms to enhance their trading ability in a seamless way and avoid large scale build projects that are often viewed costly and complicated. What’s more, this added flexibility allows firms to adapt to changing market conditions in real time. Firms that choose this path can keep pace with, and even outperform, their competitors.

So, what next? 

The unpredictable nature and impact of the global economy on capital markets, particularly reinforced by recent events is certainly front of mind for traders. What’s become clear is that they will undoubtedly face challenges and roadblocks to efficiency if their internal infrastructure remains inflexible.

Modern systems, based around cloud architecture that can natively leverage the data analytics capabilities, are emerging. With the benefits of these platforms increasingly apparent, we should only expect their adoption to expand further and become the norm.

For the repo market, these systems will be even more important. The pending move in 2024 to next-day (T+1) settlements in the US and Canada will further expose those relying on manual processes to even more risk, heightening demand for real-time abilities. More innovation into automated systems will follow.

Speed, flexibility and adaptability are key to an efficient trading experience. Continued adoption of these platforms will not only improve product standards and make repo an easier market to navigate. It will also reduce the remaining resistance to a whole-hearted adoption of digital transformation.