Those of us in the post-trade world are not used to seeing our behind-the-scenes industry on the front page of global business press and being debated in US Senate hearings. However, the rapid convergence of a number of trends in early 2021 has put us clearly in the public spotlight. This year’s highly publicised saga of meme stocks, payment for order flow, settlement cycles and margin requirements has quite unexpectedly brought the world of legacy post-trade technology and market structure to the forefront of global policy and regulatory review.
Some key underlying long-term trends are behind this, including the growth of retail trading activity, which has reached 25% of US volume at points. Increased retail flow along with general COVID-related volatility contributed to record trading volumes in US equities in January 2021 when SIFMA reported volumes were 104% higher than January 2020 and up 41.5% on December 2020.
A lot of these new traders are members of the digital generation, used to living in a world of one click real-time data, with little patience for a T+2 settlement cycle. This trend is not going away any time soon, as the cost of trading continues to drop to zero for retail clients in a number of countries and more people open retail trading accounts.
With all of this, the question of real-time settlement has resurfaced. The importance of efficiency in post-trade was clearly demonstrated during the GameStop retail trading spike on 26-28 January. On 28 January the US clearing house NSCC sent retail trading platform Robinhood Securities a notice stating that it had a deposit deficit of approximately $3 billion having risen from a collateral obligation of approximately $124 million on 25 January, according to the testimony of Robinhood’s CEO. He stated that as a result of the T+2 settlement delay, and the resulting capital buffer needed to cover outstanding trades, his trader clients were unable to buy and sell as they wanted.
At a (much!) earlier point in my career in the dot.com boom of 1999 I remember our marketing team’s excitement at branding our trading software with a “T+0.com” label. Needless to say, then as now, the challenges of real-time funding without the significant benefits of netting are a clear argument against adopting real-time settlement; however there is opportunity to move in the right direction and shorten settlement cycles. DTCC’s recent proposed move towards T+1 in the US is a clear sign that the industry is starting to embrace this trend, which will limit default risk in the settlement cycle and reduce margin and capital requirements.
In parallel, as post-trade market infrastructure such as central counterparties (CCPs) continue to upgrade their own systems and move to more real-time intraday margin and collateral management, this will also drive the industry to have a much tighter real-time view of their positions and risk across all trading activities. Front-office traders, risk managers, and regulators all want to have an improved, real-time handle on trades, all the way through the settlement cycle, and the upcoming Centrals Securities Depositary Regulation (CSDR) implementation is just one example of new regulation forcing firms to get better control and visibility over their post-trade operations.
Digital assets are now also seeing much greater institutional acceptance, albeit with a number of caveats and questions remaining, and the potential of using securitised tokens to electronify and bring liquidity to a range of non-traditional markets is driving significant institutional investment in new infrastructure to manage this new issuance and trading activity.
On top of all this, we have all lived with the impact of COVID leading much of our industry to work remotely in the midst of soaring volumes, which has put significant stress on legacy systems and traditional high touch people-centric operations.
I have covered a number of different developments here that have come to light over the past twelve months, but they share a common direction of travel, one that we have all experienced having lived through the biggest global proof of concept ever for going digital. The key takeaway here? To paraphrase the economist Rudi Dornbusch: in financial markets operations and technology, things take longer to happen than you think they will, and then they happen faster than you thought they could. Legacy batch processing technology and their associated ossified post-trade operating models may have held on for decades longer than expected following the front-office electronification of many financial markets in the 1990s, however the digital transformation of our industry is now happening faster than many had anticipated.
We have seen a decade of change in our industry over the past 12 months. Those firms who can react quickly and execute a true digital transformation will benefit from operational alpha, with a widening gap from firms still reliant on legacy infrastructure and highly manual operations. Real-time, digital cloud platforms that scale and adapt swiftly to our accelerating markets – this is the future of post-trade technology, and it is happening now.