Shifting sands: The harsh realities of executing in today's markets
The electronic execution landscape has undergone a steady transformation. The underlying infrastructure provides essential functionality, but few brokers see it as a means of gaining competitive advantage. Today’s differentiators are found higher up the chain: Sophisticated algos, execution consulting capabilities and other innovations. However execution is something that brokers have to get right, and getting it right has become a lot more difficult.
The costs associated with execution have ballooned during a period when brokers’ margins are already under tremendous pressure. The execution landscape has become far more complex too. Electronic trading has spread into new regions and new asset classes, each with their own regulatory dimensions. The increasing need to be everywhere and support everything, but do this in a controlled and consistent manner, will define the battle for supremacy between global and super-regional brokers.
The last decade has seen a staggering proliferation of new venues around the world, all of which come replete with their own subtleties and idiosyncrasies. Additionally, each venue typically makes one or two mandatory upgrades a year. That alone means brokers are running pretty hard just to stand still.
A new regulatory consensus with a focus on transparency is compounding the issue. The regulators' belief that lit markets are good and OTC bad means trading is being pushed onto the former. This will put further pressure on margins and accelerate the spread of electronic trading to new asset classes.
In the United States the plans to move OTC derivatives trading onto exchanges has resulted in the creation of more than 20 SEFs (Swap Execution Facilities) since 2013. At this stage brokers have no way of knowing for sure which will make the cut, so they need the flexibility to switch in and out of new markets with speed and ease, and the ability to test the waters with minimal risk.
With a number of European reforms underway, such as MiFID II, execution quality has been placed firmly in the spotlight. Brokers will need to make major changes to their execution infrastructure in order to support new monitoring, control and transparency requirements.
Because this shift has been gradual, many brokers’ electronic execution capabilities evolved in a patchwork manner. Market access infrastructure has been bolted together piecemeal as firms have expanded their capabilities. The upshot is a multitude of systems underpinned by different technologies, duplicating routes to market in some areas, and failing to provide any route in others.
This approach simply no longer suits the vastly different trading environment that brokers now find themselves in; it’s time for a new approach.