October 19, 2023

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The prospects for a robust recovery of the world’s economy still remain dim, according to the UN’s World Economic Situation and Prospects: June 2023, due to stubborn inflation, rising interest rates and heightened economic and geopolitical uncertainties. 

 

Of course all these factors remain true, but what if we take a deeper look at specifically how capital markets infrastructure providers (CMIPs) are impacting growth? 


A well-functioning and high-growth economy needs to be backed by adequate and efficient infrastructure, according to a study of the capital market infrastructure in Asia Pacific, reminding us that, “[i]nfrastructure provides the networks that facilitate trade and exchange, increase output capacity, reduce congestion, improve productivity, and lower public and private transaction costs.”

Is legacy infrastructure in capital markets impacting the growth of national economies?

There are two recent examples, however, where the infrastructure behind trading technologies has done the exact opposite of protecting growth as it has endured considerable constraints in the face of events and approaching trends.

Collapse of crude oil

The first example occurred in April 2020, when US crude oil futures collapsed below $0 in the midst of a pandemic-induced oversupply. The inflexibility of legacy tech meant that systems could only deal in positive numbers and were entirely unable to process negative numbers. Any attempt to input negative numbers ran the risk of crashing the entire system.

 

The underlying difficulty was due to the fact that the legacy systems of financial market infrastructures were designed in the interests of speed and cost, keeping the architecture simple and robust. Moreover, it was unthinkable at the time of their development that oil prices would go below zero or sterling could dip below the dollar. “It’s like trying to explain something that is unprecedented and seemingly unreal,” Louise Dickson, oil markets analyst at Rystad Energy, remarked to Reuters at the time. 

 

While work-arounds have subsequently been attempted, there is no guarantee that these complex problems can be adequately solved. In fact, whenever stock exchanges do need to implement something new, they have to be extremely careful that changes do not have unintended ramifications elsewhere in the system. Instances have been known in the past where alterations have resulted in extremely large consequences occurring very far from the original point of change – sometimes even in a completely different organisation.

Digitised securities trading

A second example is the increasing popularity of trading digitised securities. Previously, only whole quantities of traditional securities could be traded, yet digitised securities are generally traded in fractions. This trading of fractional quantities has enormous implications for legacy technology trading anything but FX, simply because the data fields for quantities were not designed to handle decimals at all, and price generally limited to two decimals. 

 

Furthermore, when trading digital securities, infrastructure needs to possess the ability to be integrated into completely different settlement and custody systems – a hugely complicated task when it comes to dealing with legacy technology.

Don’t hold back

Put bluntly, the creaking legacy infrastructure behind our financial exchanges is increasingly unable to cope with modern-day demands. One possible solution would be to spend the majority of investment budget on maintaining legacy infrastructure. Yet can CMIPs honestly convince themselves that this approach is indeed good enough to securely back a well-functioning and high-growth economy – especially at a time when the world needs it most?

 

Alternatively a new approach can be considered. Modern infrastructure can be adopted, such as a continuous SaaS delivery platform built in a modular fashion. This technology is light to deploy and flexible, and can rapidly scale, providing quicker time-to-market and a better approach to managing risk. Companies can, therefore, take advantage by starting small, testing the market, innovating, pivoting, and eventually, scaling. Further, these technologies can be deployed in parallel with existing legacy systems, allowing an innovative, low-risk, short time-to-market approach to exploring both new asset classes and products, as well as new technologies. 

 

It’s never too late to start. The world’s economy depends on it. 

For more information

Regulated Exchanges and AI: What’s Behind the Hype

The topic of AI has been the subject of a number of panels at recent industry events attended by Exberry. We thought it would be helpful to provide a snapshot of some of the leading thinking on AI, particularly how it is predicted to affect regulated exchanges.

Key Insights from WFEClear 2024 Conference

A few weeks ago, along with my colleagues, I attended the WFEClear 2024 Conference in Madrid, which focused on clearing and derivatives. Many relevant topics were discussed in the well-attended event and, specifically, I noted the panel on “Practicalities of DLT and Clearing” explored advancements in distributed ledger technology and its potential intersection with central clearing.

Modernising Post-Trade Systems: A Journey, Not a Destination

Post-trade processing is an integral part of the financial services industry as it verifies the details of very often instantaneous transactions. Similar to shifts in the rest of the financial services industry, clearing and settlement firms are being influenced by the emphasis of real-time risk management and data-driven decision-making.

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