Unifying a Fragmented Market: Operational efficiency and securities trading in the European Union

Europe’s multi-venue environment is placing considerable pressure on trading firms’ middle and back offices. Automation provides the key to meeting increasingly sophisticated client demands while keeping control of costs.

Introduction

With the profound changes taking place in Europe’s securities markets, trading firms are now more focused on the middle and back offices than in the past. Whereas the middle office was once regarded as a control step in the trading chain, regional and specialist brokers now realise they can exploit the middle office to deliver superior service to their clients. Additionally, the middle office is playing a role in unifying back-office systems for prime brokers, bringing together the data residing in disparate silos.

MiFID unleashed competition through the introduction of multilateral trading facilities (MTFs), which entered the market with lower cost offerings than those of the incumbent stock exchanges. Along with the MTFs came new central counterparties (CCPs).

This fragmentation in trading and clearing venues was accompanied by a surge in market volumes driven by smart order routing, direct market access and algorithmic trading technologies. MiFID also enabled a move to systematic internalisation, with large broking firms breaking trades up and executing them against their own books.

The financial crisis has also had an impact. All financial institutions are facing greater regulatory scrutiny, risk challenges and competition. Trading firms will have some important decisions to make about their business models and operations during the coming year.

CHALLENGES

This evolving securities landscape in Europe presents a number of challenges to trading firms as they seek to achieve the MiFID requirements of ‘best execution’ for their clients. These challenges include:

1.     Market access & more complex instruments

The trend for investment firms to trade ‘anywhere at any time’ has put pressure on trading firms to provide access to a burgeoning number of trading venues.

Post-trade, firms must have access to multiple CCPs, but without widespread interoperability between CCPs they are faced with a plethora of clearing venues with which to connect.

The growth in structured products, exotic derivatives and hybrid instruments is likely to continue. In many cases, trading firms have managed such instruments manually on external spreadsheets or in-house systems at considerable operational risk.

2.     High frequency trading

HFT puts significant pressure on trading firms’ operations – being able to handle the throughput of trades in the middle and back offices has become an issue. Moreover, as their clients increase their appetite for more complex instruments, trading firms must also rapidly calculate the complex charging rules associated with those instruments. The ability to provide real-time information has become a competitive differentiator for broking firms.

3.     Risk management

Since the collapse of Lehman Brothers counterparty risk has risen to the top of the agenda, a consideration that generates an almost insatiable requirement for data. An automatic assumption that trades will settle is no longer made, and trading firms want to know their exposures to counterparties before they accept an order.

4.     Cost pressures

Downward pressure on fees has been exerted all along the value chain. The introduction of competition led to reduced costs in trading, which highlighted the costs of clearing and settlement. In the competitive European landscape, efficiency is being sought all along the trading chain to drive out further costs.

5.     Prime brokers' challenges

In addition to all of the above, the largest broking firms also face a challenge in tracking multiple systems in their global operations and consolidating the information they receive into a single place from which they will have a consolidated view of their position.

SOLUTIONS

There are a number of solutions that will help trading firms to control middle and back office costs while meeting increasingly sophisticated client demands.

1.     Netting

The Stream RIMS Netting module can deliver significant cost savings – for example, a user can net down 10,000 or so messages a day to 100-125 per day.  Stream RIMS Netting is a stand alone ‘service based’ solution that automatically captures trades from third party front-office systems, identifies them as requiring netting and then automatically creates the net trades from user defined criteria such as counterparty, market, currency and value date etc.

ASP Services

In order to deliver flexibility at lower cost, SunGard can deliver hosted services for middle- and back-office processes via Stream RIMS. This ASP-based service helps brokers to outsource the maintenance of securities processing systems, thus freeing up resources to focus on core business and value added post-trade tasks.

2.     Real-time information

SunGard’s Stream RIMS Middle and Back Office brings timely information to the front office and to clients without interfering with core processes.

At the middle-office level, brokers use the real-time capabilities to confirm allocations and to calculate charges. A real-time dashboard gives a global view of exceptions across all post-trade operations. For the largest firms, transparency of information is also crucial. The middle-office layer in these firms must be able to take information from disparate silos and feed it into a range of back-office systems, a capability Stream RIMS delivers.

3.     Flexibility

Stream RIMS provides access to multiple venues and its Smart Settlement Routing capabilities ensure settlement instructions are formatted and routed to the correct destination according to business rules.

4.     Scalability

The HFT and the multi-venue environment in Europe have increased trading volumes, and as a consequence the number of post-trade operations that must be carried out. Via the new EON module, Stream RIMS can support very high trading and messaging volumes as well as managing peak loads according to clients’ business priorities.

CONCLUSION

The impact of fragmentation in the European securities markets on the middle- and back-office operations of trading firms has been significant. To offer access to multiple pools of activity while controlling costs requires a thorough examination of how technology is deployed not only in the front office, but also in the middle and back offices. Automation, in the form of netting, ASP Services and real-time information will deliver the efficiency, transparency and flexibility that trading firms, and their clients, require to compete in Europe’s evolving securities markets.

To find out how SunGard can help you face challenges of middle- and back-office processing, come to the SunGard Paris City Day on June 3^rd, at Westin Paris. Registration is free: http://events.tenfor2010.com/citydays/paris/register.aspx