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Technology and Market Structure
BY Audrey Blater, Coalition Greenwich

Modern Technology and the Trade Lifecycle

Most buy-side and sell-side firms are seeking to implement modern technology across the trade lifecycle for numerous reasons, targeting certain workloads. As with much of today’s tech, some elements are ripe for the cloud, APIs and other advancements while other areas lag and are still residing in the stone ages of excel spreadsheets and post-its. Such is the dilemma of the fixed income desk where, in some cases, professionals are hesitant to move full steam ahead citing structural, regulatory and security concerns. From the purview of cloud providers, the pace of technological change is extremely fast – a phenomenon that spans broad areas well beyond capital markets. However, different nuances across asset classes have led to different outcomes along the adoption curve. For instance, fixed income and foreign exchange (FICC) desks are lagging tech adoption in more developed and data-centric asset classes like equities.

Is Peer Pressure Having an Impact?

Many industry professionals agree attitudes towards new technology are changing as market structure and fixed income “culture” evolve – albeit with some help. ICE’s cloud spend with AWS and Azure, Nasdaq’s partnership with Amazon, LSEG’s relationship with Microsoft, and CME Group’s decision to move market data to Google Cloud over a ten-year timeframe put exchanges in the driver’s seat when it comes to technology prioritization. In fact, they now appear to be forcing it to some degree – at least from a “withitness” standpoint. According to Coalition Greenwich research, nearly one-third of sell-side firms studied believe these recent initiatives have accelerated their own cloud adoption.
Even the infrastructure crowd seems to have gotten with the program as CAT runs Amazon for FINRA. This of course brings up more use-case questions across the entire trade lifecycle with plenty of nuance baked in. Fixed income professionals must consider not only their own business but a myriad of vendor, platform and exchange dependencies in some of the workloads. But does this mean there’s a ton of impetus to shift FIX engines on cloud? Although API use has become the gateway drug, many just don’t view full modern tech adoption as anything realistic for some time in traditional areas – no matter the peer pressure.

What is hindering the use of modern technology by fixed income teams?

According to recent research by Coalition Greenwich, set up costs are a massive barrier according to nearly 60% of both buy-side and sell-side firms in a recent study. This sentiment was most acute in the regtech functions. But should this be really surprising? Sunk costs, particularly in tried and true systems a regulator may often turn to, may prevent future spend on modern technology. For fixed income desks in particular, latency will also determine tech prioritization. Outside of US Treasuries, most products trade at a very low frequency. Although data is growing it’s tough to justify increased spend on data consumption and analysis tools.

There’s a Lot to Think About

Although there is much of talk that more data equates to more tech, in fixed income markets, this may simply not be the case for very practical and economic reasons. While reality may be a bit gloomy today, there are some bright spots for modern tech adoption, including the cloud, particularly in FICC where nearly half of study participants agreed the space was ripe for a tech upgrade. At the end of the day, while this is likely true, whether or not firms will all fall in line and do and how quickly it happens remains to be seen. Perhaps the industry just needs a little more peer pressure.