A milestone for electronic trading – but what’s next?

Monday, 26 October 1986 marked a momentous day for London’s financial markets. 30 years ago brokers abandoned physical trading floors in favour of computer-based stock trading, which heralded a new dawn in trading and financial markets. This programme of deregulation later became known as ‘The Big Bang’.

Led by a major Government initiative and supported by many of the biggest banks, which recognised the opportunities this presented, the industry experienced unprecedented growth in stocks, bonds, currencies and other financial products over the next two decades.

While few could have predicted how influential technology would play at the very heart of financial markets, the perennial question remains; how will it influence the markets over the next 30 years?

Electronic trading fuelled the expansion of the global financial services industry, connecting new and existing markets with a wider range of financial institutions and reducing barriers and the cost of trading for all.

Regrettably it also helped create the very conditions that would lead to a global systemic financial crisis in 2007/08 – a major turning point for the industry.

But every cloud has a silver lining and the difficult events of that period paved the way for the wholesale reform of financial markets; greater regulation and innovation surrounding electronic markets shaped the way in which counterparties interact, clear, settle and report transactions.

Dodd Frank, Volcker Rule and MiFID II, amongst others, sought to introduce greater transparency, risk mitigation and accountability. Central clearing, trade reporting and more stringent Know Your Customer (KYC) requirements have been among the central planks of the new trading architecture, allowing regulators to better monitor behaviour and risk.

This instigated significant advances in state-of-the-art trading technology such as distributed ledger technology, big data, AI and algorithmic trading. The latter enabled financial institutions to automate a number of trading processes that previously required manual intervention – from price discovery and trade execution to payment netting, post-trade processing and reporting.

So what does the future hold?

Any response to a question exploring the future of trading technology day is likely to involve the word ‘blockchain’. The nascent technology is already on the verge of transforming the way in which the financial services industry operates.

The technology has been touted as transformative in a number of areas, from capital markets trading to trade finance. To this end, R3, a global consortium behind the development and application of distributed ledger technology in financial markets, is making the source code platform for Corda publicly available, paving the way for it to become the industry standard.

But beyond the integration of emerging technology, trading systems and processes are also adapting to evolving regulatory conditions and market structure.

The growth of all-to-all trading is a reflection of changing market conditions, as non-banks play an increasingly important role as providers, rather than simply consumers of liquidity.

Elixium, a new all-to-all marketplace for the repo market, recently hit the headlines after developing a pioneering model that facilitates direct access to a much wider base of market participants.

While it is difficult to paint a comprehensive picture of electronic trading in five or even 10 years’ time, it is likely that emerging technologies such as blockchain and evolving market structures will have a big part to play.

The foundations are being put in place for technology to be at the heart of the next Big Bang.