The word “consolidate” comes from the Latin words con (together) and solidare (to make firm). We often think of it in terms of combining multiple things into a cohesive whole. But the word also has a second meaning, which is to make something stronger.
For the financial sector, the term is likely to be in focus in both senses as companies prepare for the year ahead. Given the trends in trading volumes in the past year, there is an odds-on chance of more pressure on trading firms to keep a lid on costs.
If the market environment does change abruptly, and trading margins become healthier, that focus on costs may dissipate.
But barring such a development, there will be strong incentives to optimise spending. That could take the form of being more selective in terms of trading venues or identifying savings opportunities on the infrastructural side, such as using third parties for computing power.
Here are three major themes we’ve identified for the industry as a new decade gets underway.
Forecast is cloudy
We can expect more financial activity to move into the cloud, particularly in the crypto arena as firms become more comfortable with it and traditional funds begin to treat it as a viable asset class.
In fact, effectively bridging the gap between established liquidity venues and the new breed of cloud-based crypto venues is likely to become a common infrastructural requirement in the year ahead. Trading firms will need deterministic latencies and guaranteed availability.
High-end tech gear
Another development to watch out for will be take-up of some of the more sophisticated high-performance tech hardware such as FPGAs.
For Tier 1 and Tier 2 banks, performance is likely to be a top priority when they are moving into second tier markets or updating their infrastructure. There were signs of this in the tail-end of last year and we expect that trend to pick up steam.
Jockeying among trading venues is set to continue. Whether we will see outright merger activity is an open question, but certainly, we can expect exchanges and other venues to review their positions and offerings when it comes to infrastructure, market data distribution and technology.
Exchanges have a built-in incentive to monetise their technology and information streams. But what form that will take, and whether any spin-offs, acquisitions or combinations are imminent is more difficult to predict.
Navigating the times ahead
To help trading firms make sense of it all, we will be publishing a major white paper soon on overcoming the barriers to entry for new markets, particularly in Asia.
The latest GFCI report on global financial centres shows that half of the world’s top 10 centres are now in Asia. As a result, it has never been more essential to understand exactly what is needed to start trading successfully there.
The paper will look at all of the factors that firms need to take into account as they branch out. It will address challenges ranging from infrastructure to compliance and regulation, with a sharp focus on how trading firms can tilt the risk-reward ratio in their favour.
If you would like to find more about our products and how they can help your business, contact us here.