When we hear the word — Capital Markets, the first thing striking our minds is the complex financial instruments & long term securities. The primary function of a capital market traditionally has been to provide ease of transaction to both investors and the capital raising companies.
With Industry 4.0 being at the epicenter of long term strategies of key sectors, democratization of IT and growing customer expectations — the capital markets industry is no stranger to the impact of technology disruption.
What further fuels the need for technology to step in to shape the way capital markets will operate in the future is the rapid growth of data circulating the capital markets, need for efficiency across processes and the rising intensity of security threats.
Incumbents are embracing emerging technologies to transform their legacy system & infrastructure and generate value — by reducing operational costs, improving productivity and creating new revenue sources.
Let’s take a look at how the broad technology trends are deriving business benefits for the capital market ecosystem
1. Advanced Analytics & Artificial Intelligence
With the increasing volume of market, financial and economic data, the use of analytics & AI to derive actionable insights is the front-runner amongst the various technology adoptions in the capital markets industry.
AI has the potential to enable firms automate mid and back-office tasks & meet regulatory compliance with ease.
Capital market firms are poised to automate bond pricing and risk management by using predictive analytics for better pricing and liquidity in the market. A global financial instituiton’s analytics tool has aided faster pricing decision in 90% of trades and a 25% reduction in trading costs. The traders also increased their frequency of offering clients the best price by 4x.
AI-backed algorithms enable capital market firms make quick decisions and trade smaller tickets more frequently
For Capital Market Infrastructure players (Stock Exchanges), advanced analytics & AI provide innovations across the value chain. Let’s delve a bit deeper..
Capital Access: New assets, markets & connections
Use cases range across predicting counterparty default, analyzing contract terms & related risks
Solutions to predict market liquidity, margin calls, impute implicit cost of trading and conduct trade surveillance
Solutions enabling identification of fraudulent payment instructions and aggregation of reference data
Implementations include ability to generate predictive trading indicators, real time shareholder/trader insights, Trade flow analytics
Operations & Technology
Solutions span across predicting system breakdowns, optimizing procurement process, creating transparency on IT efficiency, predicting and preventing ‘Fat Finger’ errors.
2. Distributed Ledger Technology
Distributed ledger technology (DLT) is a cryptographically encrypted, immutable ledger of transactions, distributed across a public or private network promising benefits of transaction speed and security, process efficiencies, and cost savings.
DLT can find applications across the value chain from capital raising to regulatory reporting.
DLT is poised to have massive impact in the field of clearing & settlement with benefits including shortening of settlement time to a few minute, mitigation of counterparty risk and reducing the amount of collateral posted against trades.
OTC derivatives, repurchase agreements, equities are the most promising markets where DLT can match assets, manage collateral, and synchronize cash movement.
The Australian Securities Exchange has launched a DLT based platform for equity post trade processing which is deemed to be the first large scale implementation of DLT. Reduced reconciliation brought about cost savings. Other benefits include — greater scale & speed of operations, greater fin-tech innovation, and shared costs of development
Nasdaq has developed a blockchain platform called as Linq. One of its first uses was to record a trade in shares of a private company in the Nasdaq Private Market. The platform ensured comprehensive records of share issuance and transfer.
Infusing DLT in Post Trade services of Clearing & Settlement, KYC and Proxy Voting have been undertaken by many exchanges worldwide including NSE, Moscow Exchange, Tokyo Stock Exchange, DTCC, Euronext and more. These initial cases are encouraging but large scale implementation will require long term commitment co-ordinated within the industry as a whole.
3. Automation & Robotics
Automation and robotics built into trading, clearing, and settlement operations is poised to lower staff costs, reduce errors, and enable automatic adjustments to changes in trading volumes — raising efficiency levels within the cost curve.
Robotic process automation simplifies client on-boarding process ensuring greater customer satisfaction & optimized costs
As per a report by WFE, potential cost reduction from automation and robotics can reach as high as 20 %, depending on the existing level of automation
In areas that require frequent intervention- such as client service and back-office management, savings are lower in the order of 10%.
Cost savings can rise to 15 to 25% as tasks become more repetitive, in areas such as custodian services, maintenance of client reference data, and collateral management.
The greatest efficiencies — estimated at 25 to 50% — are found in areas where work is highly repetitive, but not automated- such as reconciliations, confirmations, settlement, and payments.
4. Cloud & Quantum Computing
This finds great applications in spheres of matching technologies and driving expansion towards new asset classes.
In addition to moving their own systems to the cloud, exchanges have started delivering a variety of cloud-based services to their clients: deep & broad historical market information, big data handling, collateral management, and regulatory reporting, along with risk analytics and valuation.
These allow for more agile development and cost-efficiency, with the additional benefit of creating stronger connections with clients through open application programming interfaces (APIs), data exchange and ecosystem creation.
With Data management & Reg-tech focused players like Fintellix and broking business disruptor — Zerodha being pioneered in India in the first decade of 2000, it can be comfortably said that India has been making modest advancements in the technology areas disrupting the capital market ecosystem.
Nomura, Zerodha have set up Fin-tech incubators in the country to fuel start-ups solving the most challenging problems of the capital markets industry. India’s Fin-tech sector might not be comparable to the exploding traction in North America & Europe; however, the macro-economic factors in the country and investor sentiment are big positives for the growth of Fin-tech providers in the country.
While creating a technology adoption strategy, capital market leaders must first focus on protecting the core business from erosion, then move on to modernizing existing business and finally explore capturing new business opportunities through technology collaboration & investment. All these three strategic directions are paramount to creating a long term competitive differentiator using technology as a lever.