Electronification of Markets – FCA latest guidelines and what to do next.

In the 66^th edition of their Market Watch newsletter. published on the 11^th January, the FCA firmed up its guidance on recording communications whilst out of the office.

At the start of the pandemic there was some leeway but the FCA now explains that “Given the extensive duration of these arrangements, we now expect you to record all relevant communications (including voice calls) when working outside the office”.

This means all relevant communication when working from home needs to be recorded which is problematic for all regulated activities that are not conducted digitally. This takes me back to a time sitting in “arbitration” with another trader with the pit observer listening to tapes and watching the recorded video of the Bund Pit activity on LIFFE to ascertain, from all the noise and hand signals, which one of us had the outtrade highlighted by the mismatch. This could take hours and in a fast market could be very costly indeed.

Just as so many sectors, such as the high street to eCommerce, have rapidly accelerated digitisation in recent lockdowns and restrictions, the move from archaic mediums of phone, email and chat to electronic execution is also being accelerated. Interestingly this is not just for vanilla products but also for even the most complex products and strategies.

Worryingly, if a prescient signal, the on-line migration of the high street destroyed those businesses that could not keep up with devastating consequences for employees and the economy. Big names with large bricks and mortar footprints have disappeared becoming just a tradeable commodity in the form of a brand snapped up by their nimbler online pretenders to the throne.

The parallels with the financial services sector are obvious and we would be very short sighted to think otherwise.

Regulations, convenience, consistency, and efficiency should always have been the reasons to ensure rapid electronification of markets, but it has been the effects of the pandemic that finally catalysed the transition.

What is clear is that the return to the office is a long way away and when it does return will certainly not be for 5 consecutive working days per week.

Therefore, the uptake of e-matching solutions in Structured Products for retail clients as well as the move by real money, LDI managers, pension funds and hedge funds to electronify the arrangement of OTC Interest Rate Derivatives demonstrates a clear step change in behaviour driven by a need to have an accessible, accountable, visible, and structured audit trail.

The use of innovative B2B fintech represents this and is by far the fastest and most reliable way of accelerating the transition. Buy versus build will win out as IT departments work closely with B2B SaaS providers to solve industry problems.

Market makers are also accelerating their ability to service the buy side via Fintech SaaS solutions. These smaller, nimbler, and more innovative firms with auto-pricing services are driving a shift to upskilling sales teams to be more cross asset for a wider, more diverse coverage with subsequently lower key man risk.

Auto pricing and click to trade is now available for very complex products now with optionality and path dependency packages.

The advent of structured communication also means that there is much more data produced which can be applied to producing reports for best execution, TCA, hit ratios and quite frankly anything you wish to analyse.

As a follower of our series on the “Electronification of Markets” you will be aware of our view on the progress made to date and that we feel there is still so much more to be done. However, this particular transformation genie is out of the bottle, the pace of change is gathering and starting to snowball with far reaching implications for market structure into autumn and for years to come.