Why Post-Trade Data is Key to Digitization

Justin Llewellyn-Jones makes the case for an evolutionary approach to digitization.

Last month, Justin sat down with FTFNews for a Q&A session around one of the most strategically important topics for modern capital markets firms.

Q: How does a securities firm quantify that it has a pattern of problems such as friction points from slow trading and/or operations errors?

A: Most firms have targets that they look to adhere to or beat when it comes to best execution, straight through processing, and exception or fails management. Firms struggle with determining the best course of action to optimize activities and to move toward a future-state operating model. Typically, the technology ecosystem that supports those activities has been built up over time, and firms struggle with identifying a starting point for simplification.

Q: Why should firms aim for an evolutionary rather than an initially satisfying Big Bang overhaul?

A: Firms may want the ‘Big Bang’ approach, but the reality is that the end-state benefits take multiple years to achieve.

Typically, the bigger the change, the larger the risk and expense. By using an evolutionary approach, firms can avoid the risks that large-scale projects typically entail while tapping into annualized change budgets without breaking the bank!

By taking an incremental approach, firms can take a componentized approach, deploying solutions that help simplify single areas of their business. They can recognize that value while limiting the impact on other applications.??

Q: Is there a single regulatory initiative that is contributing to the need to simplify technology across the trade lifecycle? Or is it a combination of regulatory efforts?

A: The perennial issue for firms is the constant cycle of regulatory and industry change and the complexity and costs that then drives their ecosystems.

We can be certain that there will not be ‘less change.’ As new business models and asset classes are introduced, we are absolutely going to see more change.

In addition, the industry is slowly embracing fundamental changes like T+1 and the electronification of trading in certain asset classes.

The way to reduce the impact of these changes is to simplify the ecosystem. So, the fewer trading systems a firm has, the smaller the overall effort to keep them current and fit-for-purpose.

Q: How does simplifying the technology across the trade lifecycle ultimately lead to lower addressable costs? It would seem to spur a lot of upfront costs.

A: We think of overall simplification and modernization across two vectors.

The first vector is horizontal, functional activities performed in multiple places within operations that can be consolidated to reduce risk and costs. This also boosts business agility and resource fungibility. A good example is consolidating middle-office operations across asset classes and geographies, leading to a single place to manage allocations and trade capture. Of course, you can do that anywhere in the trade lifecycle where you have disparate systems that are redundant.

The second vector is vertical, where firms streamline the interoperability among applications. Vertical simplification is focused on making the integration among front-, middle-, and back-office systems frictionless while focusing on pain points like ensuring all applications use the same reference data golden sources.

These two vectors have different value levers, but the most fundamental for horizontal simplification is removing duplication and redundancy while freeing up capital and resources for more value-added activities.

When it comes to vertical simplification, many firms say that the integration of disparate systems is where they burn the most time and effort, so removing that burden is beneficial.

Still, eradicating the need for reconciliations has tremendous benefits. ??

Q: How does a firm balance all the IT needs of key stages such as the front, middle, and back offices in the trade lifecycle? Should one group get priority over another?

A: The journey that firms take is almost always unique. While many pain points are uniform, the order in which firms choose to tackle them depends upon a firm’s business strategy and growth focus.

Typically, the front office gets a tremendous amount of focus as it’s the revenue driver. However, post-trade operations, including the middle office, are taking primacy, and this is for two reasons.

The first is because of industry and regulatory changes, such as the shortening of the settlement cycle, give firms an opportunity to renovate their applications while enacting required changes.

The second is the value of the data locked up in the post-trade systems. Firms are looking to drive client and activity-based analytics back into the front office to improve client engagements and streamline overall operations.

Q: Some firms may have internal, organizational turf wars that have led to problematic workflows, redundant solutions, data formatting woes, manual workarounds, and siloed systems. How should a firm address those dynamics in a way that allows for change????

A: It is very normal for a firm’s ecosystem to evolve. It has also been typical for businesses within a firm to own IT stacks that support them. These are the reasons why we find complex ecosystems vectored in on asset class, geography, or business type — sometimes all three! Firms need an impartial third-party to view their existing operating environment across trading and trade processing, so that they can evaluate a future state operating model.

Q: What new technologies give you hope and may help firms truly streamline the IT paths of their transaction lifecycles?

A: There has always been a big focus on automation and overall digitization to remove mundane activities from users, whether traders or operations staff. They also can remove the ‘human factor’ from activities to reduce overall risk. Staff can then refocus on value-added activities, such as client engagement, moving to an exception-based thought process.

Despite great progress, the benefits derived from rules-based and algorithmic engines and approaches such as RPA are beginning to hit diminishing returns. So, firms are looking for ways to continue their digital transformation.?

At Broadridge, we believe that our component-based and modular design principles, coupled with our approach to data, will facilitate the next wave of simplification and, ultimately, digitization.

By wrapping the entire ecosystem, front to back, with uniform API frameworks using a common data ontology, we’re enabling firms to derive the most value from their data. We are also ensuring that firms have access to the right data pools to benefit from the progress being made in artificial intelligence and machine learning.

There are three significant areas of focus: automation, data, and interoperability.

There’s a tremendous amount of focus on automation or digitization. Firms are not trying to get a version 2.0 of what they’ve got today. They’re actually looking at really transforming things. How do I automate? How do I change the point of view of the end-user? What is the role of the sales trader or the execution trader in that paradigm?

We also see the industry developing specific areas of focus around things like data and client engagement.

So, as we're beginning to simplify the stack and data becomes more available and more harmonized, how do we bring to the surface insight derived from front-, middle-, and back-office data?

The final thing is interoperability.

More and more, we’re seeing people focused on the ‘vertical consolidation.’ How do I ensure that the interoperability among my front-, middle-, and back-office applications is as streamlined and automated as possible? That requires thought processes beyond function and feature.

Now, you’re into technology enablers and ensuring that you have the right API frameworks and the right data models that are the catalysts for modernization.

Talk to Broadridge about your challenges .