Do you build and own all of the functions related to your provision of trading services—from pre-trade analysis and trade capture, through execution algorithms and routing, to clearing, settlement and corporate actions? If so, you’re not alone. In fact, this operating model is often the norm at larger investment banks. However, as digital disruption increases, a new trend is emerging: the trade lifecycle will be split among the best-in-class providers.
Investment banks are turning to industry utilities
Digital technologies that enable connectivity, workflows and transparency within the trading lifecycle give banks the potential to split the trading component functions among the leading providers. Enter industry utilities. Industry utilities will, in a new industry ecosystem, take on functions that are identified as commoditized and not leading to competitive advantages, or those functions where the investment required to be market-leading is not aligned with a firm’s strategy.
The creation of utilities means the most efficient providers in each segment of trading can sell their services to other firms. Think central securities depositories and providers of standardized FIX messaging. These already are all examples of utilities—and their benefits are considerable.
An attractive option
Utilities enable the mutualization of costs and/or risk across a number of market participants. They give participating firms access to lower unit costs due to scale efficiencies, and they enable firms to focus on the specific areas of the trading value chain where they can best compete and provide differentiated value.
How to make utilities work
Three main technology requirements lie at the foundation of these industry utilities:
- Connectivity to sustain smooth, efficient and seamless communication and transfer of trade information.
- Workflow to help ensure clarity and standardization across the steps in the process.
- Transparency to enable participants to track and monitor progress.
Those banks that can use utilities stand to gain cost efficiencies, reduced operational risks and the ability to offer straight-through-processing. Now is the time for banks to evaluate each piece of their trading lifecycle and consider how to provide it to their clients cost effectively and with the highest efficiency, functionality and value-added.
Next week I’ll conclude our series on digital disruptions in investment banking by looking at what the future holds for the traditional banking model.
To learn more in the meantime: