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The Trading Mesh

London’s Innovating Enterprises Helping Derivatives Traders

Mon, 09 Jun 2014 09:43:59 GMT           

2014 is commonly recognised as ‘crunch year’ with new asset classes being systematically pushed onto regulated exchanges as part of the G20 drive towards increased transparency in financial markets.  Investors managing those asset classes, including OTC derivatives traders, have to grapple with the best way to undergo this transition.  The ultimate result of these recent regulations, such as EMIR, MiFID II and Dodd-Frank, is a rush by asset management firms towards automation.  Some players in this market are mirroring their existing equities infrastructure.  But it begs the question; are there simpler, more cost-effective solutions for derivative traders out there in the quest towards regulatory compliance?

A Push to Automation

Under the new regulations the central clearing, reporting, standardisation and trading of OTC derivatives contracts need to be made on exchange-like platforms wherever possible.  A recent Greenwich Associate report notes, however, that despite the growing use of electronic messaging to confirm trades, the process still remains largely manual.  Less than half of asset management firms confirm and reconcile trades in real-time, whilst two-thirds of investors rely on phone, email, fax and instant message as their tools of choice.  For the sell-side, the growth in cleared derivative volumes is leading to further problems as dozens of connections are needed to carry the data from front to back office and then pass it on to SEFs, futures exchanges, clearing houses, affirmation platforms, credit hubs and swap data repositories.

So, an industry ripe for modernisation.  And the stats reflect this.  Back in 2007, TowerGroup predicted that spending by institutional brokers on derivatives trading technology applications would rise by a compound annual growth rate of 9.5% over 5 years, from £543 million (US$915 million) to a total of £0.8 billion (US$1.3 billion).  Stephen Bruel, analyst in TowerGroup’s Securities & Capital Markets practice explained at the time: “Due to the fast moving nature of the OTC derivatives environment, the industry is seeing increased spending on technology as well as increased pressure on technology firms to keep up with derivatives innovation. The successful management of these challenges will e nable broker dealers to reap the rewards associated with this high growth, high margin derivatives business.”

Innovation is Key

Fast-forward to 2014 and London’s financial services and technology sectors have seen a dramatic step-change in recent years.  While some of the new regulations are in implementation phase (and we're still holding out for developments under MiFID II), significant new trading and reporting infrastructures are expected to emerge, requiring the industry to develop and deploy systems dealing with real-time risk management and big data analytics & storage in order to be regulatory compliant.

What we see now is a new wave of innovation in the financial services technology world, providing broker dealers with systems incorporating a wide range of specialised tools, including risk analysis, decision-making support, trade entry, execution, and operational support.

London Calling

New companies have sprung up in the heart of London’s financial centre.  According to report by Accenture, statistics from the Mayor of London's office show that the financial services and technology sectors made up nearly 40% of the London workforce in 2013, and London’s tech sector has seen more than 24,000 tech firms set up shop there, supporting some 48,000 jobs, roughly three-times the number of its nearest European rival.

These London FinTech start-ups are based around the premise of addressing key regulatory challenges by providing simple, cost-effective solutions (without the overheads) dealing in areas such as compliance, analytics, risk & portfolio management, and reconciliation services.  A large percentage of these companies (such as DerivitecDerivation, and Duco) are offering their platforms as SaaS, or cloud-based systems, providing OTC traders and asset managers with the following services:

  • Equity derivatives analytics for real-time risk and portfolio management for both the buy-side and the sell-side;
  • Portfolio management system with risk analysis, monitoring real time risk, analytics, pricing, P&L and positions across a large range of asset classes;
  • Hosted matching or reconciliation service for financial services organisations, harnessing artificial intelligence to match data in different formats without reconfiguration.  Areas covered include trade, portfolio and cash reconciliation, ensuring details of a brokers or buy-side firm’s trade match the clearinghouse’s records.

Connectivity at the Core

The quality of infrastructure supporting this dramatic growth is critical and central London’s digital infrastructure has thankfully improved dramatically over the past few years.  From the construction of new high-spec data centres, such as Volta Data Centre’s refit of the Reuters building in Great Sutton Street, to the improvement of fibre optic connectivity as witnessed by the19 connectivity providers (9 with their own diverse fibre links) into our building.  Specialist system providers, such as the ones listed above, as well as general cloud services providers need to weigh up important factors when searching for a data centre tha t inevitably provides an important part of the overall infrastructure.

Lee Norvall, CEO of cloud services provider Fusion Media Networks, outlined their approach to the underlying infrastructure when recently choosing Volta as its latest data centre; “The geographical location of Volta is pretty key to what we’re looking to do. The financial industry is on the doorstep… and this allows us to provide the connectivity that these guys require going forward.” 

Volta is thrilled to see this kind of growth in the financial services technology industry occurring, literally, all around it.   Providing a part of the infrastructure that is critical during such innovative times, we are excited to be a part of this growing scene.  Service providers are coming to Volta as part of a strategic decision because we can provide a clear growth path, world-class connectivity, and a geographic location that fits their customer profiles.

Solving new challenges

The world is changing, with new technology and regulations being two of the key drivers.  As specialist providers spring up to help companies solve new challenges, development of the underlying infrastructure to help run these companies needs to keep pace.  Volta’s brand new location at the heart of London’s data infrastructure means it is in prime position to help London’s hottest new companies create a European tech powerhouse.

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