HFT, data, regulation, integration, cryptocurrencies and more data – these are the topics that will occupy capital markets firms in 2018 and beyond.
Capital markets are among the most digitally mature industries in the world, and thus face increasingly more complex challenges. This year will see these firms get to grips with new rules and a multitude of data challenges, putting their digital maturity to the test.
- High-frequency traders are the big MiFID II winners
Trading at microsecond speeds will allow HFTs to become the best systematic internalizers (SIs).
Under the new MiFID II rules, trading venues can either match other firms’ orders as multilateral trading facilities or trade against their own book as SIs. Those firms able to consume data the fastest and make proprietary trading decisions in a split second are high-frequency traders, giving them the best profile match to the new SI regime.
HFT firms that register as SIs will be able to provide the market with a certain amount of dark trading – mostly for large in-scale orders – and play to their strengths.
- Data-as-a-service will have its moment in 2018
The demand for more data balanced against cost of ownership makes outsourcing a strong option.
Firms that already own and manage data will find that clients are increasingly looking to source information from them; this will give them insights that compete with firms who have built in-house data platforms. While some capital markets rules are forcing firms to aggregate ever-larger sets of data for reporting purposes, many will struggle with the cost and risk associated with aggregating data and developing user interfaces.
By providing insights via a user interface without transferring raw data, firms will be able to provide data-as-a-service (DAAS) offerings using clients’ own data to support their businesses.
- Bitcoin will challenge systemic risk controls
Clearing bitcoin futures on shared market infrastructure mutualizes risk.
The creation of bitcoin derivatives, which are both traded and cleared via the same brokers and central counterparties as regular derivatives, will create an interesting dichotomy for regulators.
Post-2007, when the market leads in product development without regulatory oversight, authorities will get wary and an assessment of the systemic risks involved with Bitcoin are likely to crop up in the first half of the year.
- Connectivity is king
Greater demand for quantitative analysis will drive an interconnected market.
The need to provide analysis of best execution and trading decisions in Europe is driving demand for the quantitative assessment of markets. In equities this is well established, however in other asset classes such as fixed income, a more qualitative approach to trading is taken.
Firms will need to see greater connectivity between their trading platforms, trading venues and market data providers if they are to increase the level of trading they can process electronically and gather data on execution quality.
- More data, more problems?
The drive to increase transparency has implications for information leakage.
As US and European market regulators drive to increase the amount of trading conducted in lit markets, there is growing impact on traders. Greater levels of post-trade transparency potentially expose the position-building of firms. Pre-trade transparency will increase the potential for having a trade picked off.
Consequently, capital markets firms will need to get a better understanding of market activity and liquidity pre-trade in order to minimize the amount of time their orders spend in the open. That will require sourcing of data – through internal and external routes – and greater application of tools such as machine learning, in order to see the big picture.
See more of our 2018 predictions by clicking the link below.