The Market structure debate in Asian context

Post by Arin Ray

The recent debate about the impact of High Frequency Trading (HFT) and on the issue of market structure in general is no more confined within the US market. Regulators and market participants worldwide are discussing this issue seriously. The chairman of the Australian Securities and Investment Commission (ASIC) recently detailed the position of the Australian authorities in this regard. Incidentally Australia, along with Japan, is one of the few Asian countries that have multiple trading venues, a necessary condition for the growth of advanced trading and order routing capabilities, including HFT. It is worthwhile to look at the state of adoption of the Asian region in terms of adoption of advanced trading tools, and the role of the Asian exchanges in that regard.

The different Asian markets are at different levels of maturity, and therefore it is difficult to analyse the region as a single homogenous entity; rather the Asian markets can be grouped into two broad categories. The first category belongs to the advanced economies like Australia, Hong Kong, Japan and Singapore which have well developed capital markets. Exchanges in these countries are at par with western competitors in terms of latency and adoption of advanced trading technologies. The second category consists of exchanges in emerging economies like India, China, Malaysia, Korea which are somewhat lagging their Asian counterparts in the first category.

However, there is a common factor that runs across the two categories of exchanges – lack of competition from alternative trading venues. This means that most of the Asian exchanges are largely national monopolies without significant competition from alternative providers, though the situation is slowly changing in some markets (e.g., Australia, Japan). This is one aspect which distinguishes Asia from the western markets where the competition among exchanges and alternative trading venues is severe.

Another key challenge in Asia is the fragmentation of markets and lack of harmonization – regulatory, economic, monetary and technological – in trading and settlement practices. This restricts the growth of cross border trading volumes and greater regional integration at an Asian level. The ASEAN initiative is a move in that direction, but it is still early days to judge its potential for achieving regional integration.

Asia has also lagged the western markets in terms of adoption of advanced trading tools and technologies (like DMA, algorithmic trading, high frequency trading etc). Some of the Asian exchanges, particularly the ones in the advanced economies, have adopted latest technologies with low latency and colocation offerings, but some of the above mentioned factors still present challenges. For example, lack of multiple trading venues limits arbitrage opportunities. Lack of regional integration means cross border flows have yet to realize its full potential. These prevent growth of trading volumes, need for advanced trading tools and technologies, and participation of foreign players in domestic markets.

Regulators in Asia are traditionally very conservative. Therefore decision making for significant changes in market structure and practices takes time. In a rapidly evolving trading world, this means Asian exchanges find hard to stay abreast with global trends. Also because domestic exchanges are perceived more as national utilities, any proposal that threatens the position of incumbent exchanges is met with resistance and difficult to implement.

Some of the Asian exchanges have been very aggressive in exploring newer avenues beyond the traditional revenue sources. The Singapore exchange is a good example of that. It started offering clearing services for commodity derivatives through its AsiaClear offering a few years ago. In addition to providing CCP services as mandated for OTC derivatives under the proposed reforms, the SGX is collaborating with the Korea Exchange to develop the latters’ OTC clearing capabilities. Therefore in some markets (like Singapore) the incumbent exchanges are taking a leading role in clearing of OTC derivatives as proposed by new regulations. It will be interesting to see if new players will be able to enter and succeed in this business. Low volumes in the Asian markets, proliferation of CCPs, and competition from international ones may result in each CCP specializing in specific niches along product lines or local currency instruments.

The upcoming Securities & Investments / Wealth Management webinar on 8th May will examine how the retail investor landscape has evolved and what online brokerages can do to differentiate themselves. Celent will discuss the challenges facing the industry, and take a prospective look at the future role of digital strategies in the retail investor market.

Join Isabella Fonseca, Research Director within Celent’s Wealth Management group and Ashley Globerman, Analyst within Celent’s Wealth Management group, as they examine the latest trends and developments in the retail investor market.

The retail investor market across Europe and North America continues to evolve in the face of more stringent regulations, overall slow economic growth, an increasingly sophisticated client base, and a growing number of digital channels. Retail investors are a unique group with differing levels of affluence, investment knowledge, investment product preferences, and expertise.

Technology continues to play a significant role in the evolution of the retail investor and how businesses will establish themselves in the post-financial crisis environment. With the proliferation of the internet, social media, and smartphones, the way in which clients prefer to perform banking or trading activities is evolving. As such, the continued enhancement and development of digital strategies, including social media presence and mobility are at the forefront of firms’ strategic plans.

This event is free to attend for Celent clients, flex-plan clients, and the media. Non-clients can attend for a fee of US$250. If you are unsure of your client status, please contact Andrew Renzella at +1.617.262.3124 or

Register at:

: Virtual Event
: May 8, 2014
: 12 p.m. EST (New York City), 5 p.m. GMT, 9 a.m. PST
: 45 minutes
: Ashley Globerman, Isabella Fonseca, Wealth Management, Securities & Investments

Emerging Trends in the Post Trade Industry

Post by Arin Ray

We identified a number of drivers that will have significant impact on the post-trade industry going forward. While some of them act in opposite direction, some reinforce others’ impact. Based on our analysis for each of the several drivers, and interaction with several market participants, we see the following trends emerging in the post-trade business:

  • Regulatory and market pressures will force investment managers to reassess their business models. Limited revenue growth opportunities have meant they are now focusing on optimizing cost and improving efficiencies to remain competitive.
  • There is a move toward automation of processes, upgradation or replacement of legacy systems in the mid-back office, and integration of disparate systems to obtain a more holistic approach.
  • Firms are working under severe budget constraints. A large portion of the technology budget is being spent on addressing regulatory and compliance issues, often in a reactive way. Thus significant investments to achieve true process efficiency and improvement are difficult to come by in the short run. However, automation of large number of manual processes frees up resources, and some firms are looking at the problem from this perspective.
  • Budget constraints are pushing them toward considering outsourcing mid-back office operations. Given that all firms have to adhere to a same set of regulatory requirements, some vendors are considering coming up with a utility model of offering that will allow multiple firms to use a basic core platform to address many of these issues. However, customizing such an offering to suit firm specific needs, especially for large financial institutions, will be a challenge.
  • Growth of alternative trading venues is presenting new opportunities to broker-dealers. They can now internalize trades carried out between two counterparties both of whom are their clients. Institutions with large client base are best suited to take advantage of this. The number of institutions in this market is not large and going further down; therefore share of internalized trades will increase in future.
  • Regulators are trying to achieve harmonization across markets by planning to come up with common legal and tax norms. This trend is particularly visible in Europe. The success of such initiatives depends on political actors and is difficult to predict. They can potentially encourage more cross border trading which should contribute to the growth of settlement volumes.
  • There is also a move toward achieving shorter settlement cycle. While participants in most markets are either operating in, or getting ready for, a T+2 environment, plans to move to T+1 model will have major impact across the board. That is unlikely to happen in the near term.
  • Growth in volumes can be potentially offset by other developments, such as interoperability of CCPs, which can increase netting of trades and therefore suppress settlement volumes. This would be further aggravated by consolidation among market infrastructure providers.
  • Regulators are also promoting competition among market infrastructure providers, particularly among CSDs. Many of them will have to change their business models to stay alive in the market. They will be forced to compete more directly with sub custodians in the asset servicing business. Achieving scale will be important to stay alive in the business and smaller players will be driven out or get acquired.

Celent Roundtable: Exploring Digital in Financial Services

Will Trout

Post by Will Trout


If you get together a room full of bank and insurance executives and ask them to define the term ‘digital’, don’t be surprised if you get a lot of different answers. Some view digital in terms of devices, others think of delivery channels, a third group understands digital as a marketing tool.

We surveyed the participants at our recent Digital Roundtable in New York and got all those definitions and more.

What is incontestable is that digital, with its outsized impact on the customer experience, has become part and parcel of the front- or customer-facing end of the banking, investments and insurance businesses. Back-end processes that enable scale and automation, such as documentation and STP, are being lumped under the rather inglorious label of ‘e-business’.

That raises the question: given that many customers are ahead of their financial institutions in terms of technology use and adoption, what are the requirements for a powerful customer experience? If digital is going to anchor the client-advisor relationship (or the financial institution to client relationship), what needs to be in place?

One bank participant noted that digital offers must be ‘contextual’. An example of this might be mortgage offers prompted by a customer virtually touring a house for prospective purchase.

Digital interactions become even more powerful when context is coupled with data.  Presenter Tsukasa Makino of Tokio Fire and Nichido Marine insurance showed how his company used data to market special policies, such as one-day car insurance, to non-car owners, as well as medical insurance offers linked to the physical activity levels captured in clients’ mobile devices.

In the wealth management arena, evolving client characteristics are presenting new opportunities for remote servicing, including via video, chat and tablet. Time-starved and increasingly tech savvy clients, 20% of whom live more than 50 miles from their advisor, often prefer mobile delivery. In the same vein, firms need to step up efforts to develop real-time, device-neutral client reporting systems, while encouraging advisor use of social media for thought leadership and networking. Today, 98% of affluent investors choose not to use the same financial advisor as their parents, and social media is one of the first places they look for ideas and recommendations.

It’s clear that the financial services industry has entered a new, more competitive era. From the mass market to the ultra-affluent, customers are increasingly collecting more data about themselves, and they are largely willing to share. Inspired by the example of non-financial firms such as Zappos, Amazon and the airlines, these customers are driving the most fundamental change in delivery that the industry has ever seen. They ask: As a flier, I can pull up real-time seat assignments on my phone; why can’t my bank let me do cool and convenient stuff, too?


The Next Generation Investor

Isabella Fonseca

Post by Isabella Fonseca

The “next generation investor” will leverage digital channels provided by brokerage firms to better enhance their user experience. These tech savvy investors are well educated and tend to be of high socio-economic status.  As the market evolves and investment needs continue to change, this group will rely on a new breed of interactive, data-driven tools to help them save time and generate new investment ideas. Online brokers have been leading the charge as early adopters in developing a digital strategy that delivers a more customized, end-user experience. Self-directed brokers and full service firms are increasingly looking to develop innovative technology solutions as a competitive differentiator. . So what are the key, user-focused functionalities the next generation investor is looking for in the online brokerage space?


For investors that utilize a brokerage firm for both banking and brokerage services, they will look to a single-sign-on authentication process and common User Interface to eliminate the hassle of multiple log-ins. The ability to view holdings and move money across multiple accounts, combined with traditional banking/brokerage app functionality (remote deposit capture, place trades, access news, etc.)  will create a more seamless end user experience.

-For apps targeting the traditional investor segment: the ability to contact an advisor or representative directly through the app will save time.

-For more advanced traders: adding FX and/or futures trading into one platform, more technical indicators, customizable/configurable layouts, streaming videos, and second-level details.

-For all investors: increasing focus on new charting, usability enhancements. Tablet apps will also facilitate more configurability/custom layout tools.

Large firms are continuing to focus on developing native apps to drive their mobile experience. However, smaller players are beginning to develop hybrid applications that support a wide array of devices and user interfaces.  The rise in custom applications that can adapt to various mobile devices will drive new business opportunities and capture additional market share for these players.

Social Media

Within the world of social media, there has been little change in the online brokerage space, but those firms that have remained active are continuing to attract new business  from retail investors. Some of the key functionality that will be attractive for the next generation investor will focus on:

-The ability to engage with customer service representatives and traders within the community platform.

-Building and developing more interactive functionalities such as sharing trades or trading ideas.

-Offering new “sharing” or “community-like” features that can be available in private trading networks, including the ability to follow other investors, share charts, view top performers, and compare portfolio performance.

-The ability to review and tailor individual portfolios and the ability to discuss  investment ideas in an online forum.

-Crowd-investment – investors can view investment activity and communicate with peers in real-time.


In summary, the next generation investor will leverage  digital capabilities as an integral part of their relationship with and the services provide by their brokerage firm. On the other end of the spectrum, brokerage firms will look to integrate digital strategies with existing business service models, while continuing to provide innovative solutions that provide a more seamless user experience, differentiating themselves from competitors.

This blog is also available on

The Real Driver Behind Cost Basis Reporting Spending

Isabella Fonseca

Post by Isabella Fonseca

Celent recently conducted research which confirms that financial institutions continue to face a number of challenges that are forcing them to reconsider their overall cost basis reporting strategy.  During our nearly 60 interviews with financial institutions for Cost Basis Reporting: Total Cost of Ownership, firms stated that they were neutral in their assessment of satisfaction with either third party systems or in-house systems. What we found though, is firms that decided to build in-house CBR systems have undergone significant growing pains. One of the most significant challenges has been the maintenance of the technology development, making the size and scope of CBR projects difficult to manage.

Research confirmed that the larger firms typically deploy a mix of build and buy best-in-class tools. Medium-size firms are more open to a SaaS environment due to lower costs. Smaller firms are more apt to obtain CBR functionality from back office solutions, rather than buying expensive CBR specific suites.

Ultimately it all comes down to cost, and many firms have underestimated the resources necessary to customize their requirements and keep up with on-going regulations.  Since firms began to implement systems in 2010, perspectives on CBR systems cost have evolved.  Developing the technology has been a larger project than previously expected; and maintaining the technology and making the necessary enhancements have proved more difficult than anticipated. This has led to higher than expected costs. During our interviews, we asked participants to express their views on cost basis reporting spending over the next year, and the majority stated that it would be higher than the previous year, as shown in the Figure below.

So in either scenario, where firms had built in-house systems, or worked with third party solutions, there are gaps and challenges to overcome on existing workflows and operations:

Consolidating and integrating systems. Firms are looking to consolidate their systems. Tighter integration of cost basis reporting solutions is one of several projects that increase operational efficiency.

Increasing collaboration across systems. There needs to be collaboration between operations and tax staff.

Client service. As more securities become covered under the cost basis reporting regulations, firms expect increased call volumes. As tax reporting season approaches, firms are gearing up by adding new staff members to handle client inquiries. This year, firms have considered adding more information to investors earlier, such as more client facing tools and email blasts.

Overall, the results from our research demonstrated that many firms have been stymied by the high costs associated with developing their own CBR solutions whereas third-party providers have used their expertise and economies of scale to optimize processes, reducing costs and enhancing client service.

This blog is also available at

Flash boys…flash in the pan?

Post by David Easthope

April 1st, 2014 | Tags:

What the Michael Lewis article (Flash Boys) in the New York Times shows is that there are:

• Simply a variety of market centres (including exchanges) out there with different business models.
• Long gone are the days of utility-like exchange models out there for US investors.
• Trading needs can be organized (mostly) by speed or by price. The HFT guys mostly care about speed, and the long only funds care most about price.
• Market centers (exchanges, ATSs, dark pools) are typically good at either speed or price.
• Readers of our execution quality reports know this aspect of the market. @JaswalCelent (see the latest here:
• Non top-tier investment banks, have been squeezed by the technology arms race and need to find innovative ways to compete beyond IT spending and hiring smart coders. They can also buy or lease tech from the top banks.
• Market structure expertise is not a nice to have, it’s a must have, for desks of serious money managers. Firms like Rosenblatt offer this advice.
• Some exchanges have known about and have used order book ‘throttling’ for a long time
• Observers of the market have long known that location of data centers, order types, and the rules of engagement in dark pools are important.
• Others are simply catching up. Saying co-location is an unfair advantage, if it’s offered at an equal price to all comers, is not reasonable.

All in all, the book (excerpt) is a good read and good story, but it mostly catches people up on some of the things that have been happening in the last decade and only covers one potential solution to the issue of market impact, when there are many possible solutions.

Outsourcing in Capital Markets

Post by Arin Ray

Since our last blog on the issue of back office outsourcing by capital market firms, we have received quite a few questions and comments on the issue of outsourcing/ shared services in the capital markets. Here is a quick summary of the key themes that run across most of the queries we receive.

Drivers for adoption of Outsourcing

There are broadly three or four forces that are forcing capital market firms to outsource more:

Over capacity – till 2007-08 buoyed by favourable economic climate capital market firms had built up significant capacities (many divisions, larger teams, multiple platforms for several asset classes). Often capacity was built on an ad-hoc basis from a technology point of view without a holistic firm wide strategy. In the aftermath of the crisis profitability has been hurt and firms have taken recourse to short term measures like shutting down divisions and headcount reduction. Now it is time to take longer term approach to reduce costs on a longer term basis by focusing on core business and getting rid of non-core parts by outsourcing.

Weak volumes – due to the weak macro-economic climate trading volume has suffered drastically resulting in lower commission revenue for capital market firms. At a time when top line has been hurt and unlikely to recover quickly firms need to manage costs better to stay competitive.

Electronification of markets – Electronification in the areas of trading and execution in recent years and intense competition among providers of electronic trading tools have put further pressure on profitability as fee per trade is continuously declining.

Regulations – While firms grapple with the above challenges, they have also had to adhere to a plethora of regulations, which not only increase the cost of doing business, but also impact how, or if, they can carry out certain businesses.

Many of these regulations require firms to make changes in operations (e.g., reporting, compliance etc) under a shrinking technology budget. Outsourcing is being seen as a viable route to manage all these challenges. Since many firms in the ecosystem are having to adhere to same regulations and therefore make similar changes in their technology and processes there is a case for shared services to gain traction. Moreover, many firms are deciding to limit building in-house technology capabilities; rather than becoming technology behemoths they are deciding to focus on their core businesses. Sensing this opportunity some outsourcing service providers are considering developing a common platform that firms can use on a pay per use basis. Service providers are unlikely to do this all by themselves, rather they are partnering with product-platform providers to come up with a complete solution. While the ultimate goal is to develop an end to end shared platform, it is unlikely to happen in the short term. The instances that have emerged so far are more on provision of shared services for particular functions/modules (e.g., regulatory reporting, client on-boarding etc).

Outsourcing at the industry level

Target2-Securities (T2S) in Europe is a good example where the settlement of trades is being outsourced to a common platform developed and run by industry and the Eurosystem. Beyond that, most initiatives in this regard are being carried out by individual firms. Typically it takes the form of partnership – either between a financial institution and a technology vendor, or between technology service and platform providers. Any initiative at an industry level will be a long drawn process (T2S has been in development since 2006-07) and therefore in the short-medium term we are likely to see more partnership type of offerings.

Emerging areas in Outsourcing

Wealth management is definitely an area that has traditionally not been outsourced, but is being outsourced now.

Functions that are still unlikely to be Outsourced

For outsourcing, almost everything in the mid/back office can be, and is being, outsourced. This includes: order management, risk management, risk analytics, regulatory reporting, reconciliation, fund accounting, fund administration, corporate actions, clearing and settlement. However, extent of outsourcing in the front-office is less as that is sensitive to end clients and therefore firms want to maintain more control over those functions. Even then, we see functions like client on-boarding, certain aspects of customer relationship management (e.g., reporting, portfolio viewing, portfolio aggregation etc) are being outsourced. Research, marketing and product development are areas that have gained limited traction in outsourcing.

Shared services is still a nascent phenomenon and what can and cannot be outsourced to a shared platform still remains to be seen.

Furthermore, in the aftermath of the crisis, some financial institutions themselves are offering their proprietary technology and platforms to other firms. We have seen brokerages offering their electronic trading execution tools, technologies, and even white labelled algorithms to smaller firms that do not have the necessary resources to build it themselves. Many prime brokers are doing the same by offering their trading and clearing platforms to new start-up hedge funds. This offers the provider firms with fee income which is more stable and less volatile compared to trading commission.

Risks involved with Outsourcing

Outsourcing in capital market firms, particularly in mid and back office area, is not a new phenomenon and has been in place for well over a decade now. Over this period of time, firms – both financial institutions and their service providers – have developed set of best practices that alleviate concerns about risks on outsourcing. Regulators have also come up with broad guidelines to address management of risk for outsourced functions and accountability issues.

Outsourcing in wealth management is a recent phenomenon. Because of privacy and confidentiality issues involved in the wealth management business, wealth managers have traditionally been reluctant to outsource. The situation is changing now and some have started outsourcing their mid-back office functions. Safeguarding client confidentiality and potential for reputational damage due to lack thereof are perceived as areas of concern.

Regulators’ attitude

As discussed above, regulators are not particularly concerned about outsourcing at the moment as they have already addressed them over a period of time and also because they are having to deal with several other issues (e.g., market reforms, oversight etc). Outsourcing is not a top priority at the moment. Shared service is an emerging area and has not gained sufficient traction in the market to come under regulators’ purview. Therefore some concrete guideline is unlikely to come by in the near term.

In the second of three reports that analyze the retail investor market, this report addresses six Western European countries with respect to their retail investor market, country’s overall economic health, regulatory drivers, and wealth management market maturity and sophistication. Celent will conclude by stating its findings on these six countries and in which of these countries wealth management solutions providers should focus their attention in the near term.  The other report in this series is entitled, Sizing the Retail Investor Market: An Analysis of the North and Latin American Markets and Sizing the Retail Investor Market: An Analysis of the Asian Market.

The following countries are included in this report: France, Germany, Italy, Spain, Switzerland, and the United Kingdom.

European retail investors are a diverse group with differing levels of affluence, investment knowledge, preferences, and expertise. Factors such as investor confidence and regulatory reform in the aftermath of the financial crisis and the ongoing European debt crisis are some of the many factors influencing the size and characteristics of the retail investor market.

Since the financial crisis, there has been a mixed growth rate across Europe in terms of retail investor population. A few of the many factors contributing to the retail investor population growth rate include: cultural and historical views towards financial markets, loss and recovery of financial asset due to financial crisis, and more stringent regulations of financial markets. It is without question that the financial markets play a significant role in European household and personal wealth regardless of country (albeit to varying degrees).

The other report in this series is entitled, Sizing the Retail Investor Market: An Analysis of the North and Latin American Markets and Sizing the Retail Investor Market: An Analysis of the Asian Market.  This series of reports will be available to subscribers in Q2 2014.