BOSTON, MA (TowerGroup Annual Conference) May 27, 2005 - As the wave of automation continues to sweep across the global securities industry, TowerGroup foresees two major growth areas in the race to electronify the global markets. The first is the geographic spread of automation, as emerging markets in Asia and Europe begin to close the gap with automation leaders in North America and western Europe. The second is the automation of markets beyond equities and bonds, including the spread of greater automation into foreign exchange and derivatives.
Yet as automation continues its advance in front-office functions like trade execution, the efficiency of back-office functions like clearing and settlement is becoming increasingly mission-critical to overall market performance - as well as to the ability of individual brokerages to compete.
"Clearing and settlement have been unsung heroes in the securities industry," said Dushyant Shahrawat, senior analyst in the Securities & Capital Markets practice at TowerGroup. "The back office tends to be the weakest link in the chain when it comes to advancing automation, even though it takes relatively simple levels of automation to hugely enhance the process. While the U.S. now has this area under control, the fragmented state of clearing and settlement in Europe is currently one of the significant barriers to achieving a pan-European financial market."
Shahrawat shares his insights today in a presentation titled "Stocks and Bonds and Currencies: What's Next in the Race to Electronify the Global Markets" at the 2005 TowerGroup Financial Services Business & Technology Conference & Exhibition, being held in Boston. More than 600 financial services industry professionals are attending the event, themed "Road Maps for Growth."
Highlights of the presentation include:
- Automation levels across the global capital markets vary widely, in terms of trade execution and back-office activities. Both Asia-Pacific and South
America have made strong inroads into automating equities and are now moving to electronify other product classes like foreign exchange. Among world
regions, Africa shows the lowest levels of automation across all categories.
- Derivatives are ripe for automation. Despite the fact that the many types of derivatives make this a complex market, skyrocketing volumes underscore how quickly the area is "democratizing." Futures markets are already going electronic, while both options and swaps show tremendous potential.
- As automation spreads to other product classes like foreign exchange and derivatives, TowerGroup expects to see the same kind of bifurcation of order flow witnessed in equities - where "self-service" functions are separated from high value services. For example, small orders or highly liquid securities have tended to go electronic, while larger orders, those "matched" internally, or more illiquid securities have continued to be traded through traditional channels.
"There is no doubt that the advance of automation across the global financial markets is changing the brokerage game," said Shahrawat. "Automation itself is not to blame for disintermediating brokers from their traditional role, nor is it a panacea for a weak business strategy. While technology intensifies competition, reduces barriers to entry and changes overall industry structure, it also creates the opportunity for brokerages to offer higher-value and higher-margin services. And it enables new growth areas, such as we are seeing in derivatives and emerging world markets."