The total transaction volume of exchange traded derivatives (ETDs) has ballooned this year on the back of robust investor demand and increasing trading sophistication at all levels – from retail right up to the institutional. While this points to healthy growth prospects for the industry, it also highlights the rapidly rising competitive pressures facing broker-dealers hoping to stay relevant and get ahead.

Read this article by Lewis Richardson, Asia-Pacific Director at Broadridge, to learn more about innovation in the listed derivatives space.

Comparing recent growth trends at the regional level, however, shows the center of gravity for ETDs activity is shifting toward Asia. The region is now home to four out of the top five exchanges by derivatives trading volume globally. In fact, closer examination of FIA data shows Asia accounted for almost 46% of total trading volume seen in H1 2021, with regional volumes up a staggering 57% on the same period last year. The region’s attractive economic trajectory, favorable demographics and maturing capital market regulatory environment will likely support the continued expansion of the ETDs industry in this part of the world.

While all these figures point to healthy growth prospects for the industry, they also highlight the rapidly rising competitive pressures facing broker-dealers hoping to stay relevant and get ahead.

Technology Innovation: The Frontline

The frontline of this battleground for expanding market share is increasingly one of technological superiority. The ability to innovate and adapt to the evolving needs of customers with ‘sticky’ client experiences, while at the same time delivering enhanced operational efficiency is paramount today. Much easier said than done.

This exact issue was discussed at length during a recent conversation I had on innovation in the listed derivatives space. During my chat with TK Yap, Group Chief Transformation Officer at one of Asia’s leading integrated financial services firms CGS-CIMB Securities, he spoke from first-hand experience driving comprehensive strategic transformation initiatives and summed up the primary challenge facing all firms so succinctly, albeit accurately, into three words; “Adaptability defines survivability.”

A point that rings truer by the day, but what does this look like in practice? One area that has embraced innovation over the years are advancements in front-end digital trading platforms. The rising level of technology investment undertaken by brokers is readily apparent in the numerous high-quality platforms on the market today compared to just a few years ago. The pandemic has provided significant impetus to this ongoing trend, accelerating digitalization efforts, and reaffirming the primacy of digital customer touchpoints in business strategies. We can be sure that current trading platforms will quickly reach obsolescence as iterative improvements are ambitiously rolled-out across the industry.

Indeed, the future of trading platforms will likely look very different in the coming years. Yap explained, for instance, that they will take “a big leap” beyond serving as just execution tools to become highly interactive customer experience (CX) platforms, complete with intelligent virtual assistants and chat bots, able to offer increased utility across the continuum of users – who are now putting a higher-value on self-sufficiency and customization.

In our own experience, we believe these described outcomes are more than plausible, as improved data structures and strategies empower better utilization of machine learning- and artificial intelligence-powered solutions. While, at the same time, the flexibility and modularity provided by open architecture tech stacks and a growing library of third-party APIs will speed up time to market for new products, as well as drive innovative capabilities going forward. Our current multi-asset post-trade technology platform has already been designed to capitalize on this digital-first reality, by putting painless system integration, intelligent automation, and modular API-driven personalization at the heart of the offering.

Managing Digital Transformation End-To-End

We are well on our way to this exciting future, but technological progress seldom comes without its own challenges. A lot of the solutions that we rely on in our industry everyday are viewed and improved upon in silos and, in some cases, depend on legacy systems that are decades old. Age in and of itself is not an issue, however, what is a cause for concern is when the new clashes with the outdated leading to interoperability issues, lost efficiency, and risk vulnerabilities.

Consider post-trade settlement for example. Where the front-end has benefited from rapid innovation and interactive improvement over the years, middle office and back-end workflows and systems have been slow to progress. In some cases, they have not kept pace with front-end advancements at all. As ETDs volumes continue to rise and client-facing trading platforms bring more traders online there is growing concern over the problems this presents for legacy infrastructure. Beyond this there is also a pressing need to lower costs and maximise efficiency throughout the entire trade lifecycle. Stressing this last point, Yap highlighted that “at the end of the day, it is all about reducing cost per trade. This is what gives you economies of scale, the flexibility to price aggressively and the ability to meet the needs of customers.”

The key with innovation and transformation programs is taking a full trading lifecycle view. That is, working through the implications of technological advancement in one part of the value-chain and translating this across the entire workflow to streamline duplicative processes and ensure intended benefits are realized. It is even more important considering middle- and back-end workflow engines will become less process driven and more API driven with the adoption of software applications conducting core functions like e-KYC and e-AML. These tools open new pathways to completely reimagine existing workflows and technology systems in an integrated fashion.

Getting this right could mean establishing end-to-end competitive differentiation for a broker-dealer – an advantage that is hard for peers to replicate. That said, the speed at which these coordinated projects need to be realized is accelerating. Yap explained that today finding the right technology vendor, with experience delivering a fully integrated platform solution, so the firm can focus on running its core business is becoming more important. Success, he adds, boils down to looking for two simple things in any solution offering “efficient technology and effective scalability.”

Marrying access to best-in-class technology solutions across the entire value-chain, at a scale commensurate with the digital transformation ambitions of our global client base, has been at the core of what we do for more than 60 years. It is safe to say that when it comes to solving some of the most challenging technology projects facing financial institutions today, we have probably been there before. This experience brings not only a deep understanding of the complex interplay between various organizational functions to all our client relationships, but also confidence to innovate and the capacity to do so quickly.

Embracing Next-Gen Competitive Advantage

As a whole, vendor-client relationships are being forced to evolve as firms double down on high-tech spending to keep up with ‘next-gen’ innovation. The Broadridge Next-Gen Technology Survey, a recent global survey of C-level executives from 1,000 financial institutions found that, on average, firms will increase next-gen technology spend from 11.8% to 15.7% of IT spend by 2023, with leaders in this space planning to increase their technology investment to almost 20%. Rising technology investments means managing a growing number of complex innovation projects at a speed and scale that necessitates a shared responsibility in the client-vendor relationship. In short, a true partnership that builds on mutual understanding of business objectives and leverages the respective expertise of both partners to achieve market leading outcomes.

The fact is firms need to embrace cutting-edge technologies at an unprecedented pace to remain competitive and future-proof their operating models. Failure to do so threatens long-term survivability. While there is no doubt in the need to adapt, the question remains, how does a firm begin planning an innovation roadmap that is clear and, perhaps more importantly, actionable amid all the noise in the current technology environment? At Broadridge we simplify this complex landscape into four fundamental disruptive technology buckets called ‘The ABCDs of Innovation™, which includes AI, blockchain, the Cloud and digital. Each of these core underlying technologies will play a significant role in driving the future of innovation across the financial services industry. Therefore, we believe this is where the entire financial services industry should focus its attention and resources when developing a sustainable long-term digital transformation strategy.

In line with this belief, we have already been applying various aspects of these four next-gen technologies in many of our existing solutions and have deployed them at scale to help solve real world mission critical issues for our clients, as well as industry partners around the world. Take for example our Anti-Money Laundering Solution (AMLS), which applies innovative machine-learning techniques like AutoML, federated learning and network science to enhance real-time surveillance and risk mitigation for financial institutions. Or the work we are doing to help our clients prepare for the Australian Securities Exchange’s (ASX) transition away from CHESS to a new, first-of-its-kind clearing and settlements platform built on distributed ledger technology (DLT).

On the face of it both examples showcase the tangible benefits of working with a technology partner who has the right expertise and understands the potential opportunities of emerging technologies, but they also highlight what can happen when you take this a step further. With the proper scale, relationships, and independence a client-vendor partnership can become a significant force toward mutualization within any transformation strategy. This unlocks better cost savings, solutions, resiliency, and access to innovation through compounding network effects that are just not achievable in more traditional project partnerships. Understanding this fact and being able to lean on a carefully selected partner who can share the costs and risks of accelerating change will become an increasingly critical component of defining a firm’s competitive advantage going forward.