Modernizing Operations in the Capital Markets

Disruption is creating opportunities and challenges in today’s ultra-competitive capital markets. Participants expect the same high-tech experience from their operations systems that they’ve become used to in their everyday lives.

As consumer technology rapidly advances, traditional operations systems in the capital markets seem even more outdated and limited in their ability to meet these demands. To stay ahead of the competition, buy-side and sell-side firms should embrace new technologies like cloud computing, APIs, and modern data analysis.

Beyond technology shifts, modernization programs are particularly crucial when firms go through important changes like substantially growing AUM, merging with another firm, or diversifying into new asset classes, like adding fixed income to an equity fund, or taking on low-liquidity alternatives. Likewise, modernization programs are often needed to keep up with changes in market structure and other regulatory demands, like the SEC’s proposals on new investor communication processes, core trading changes, new position reporting demands, and the shortening of the settlement cycle to T+1.

At Clear Street, cloud technology powers our operations with increased flexibility, scalability, and security. We can store and process vast amounts of data, enabling us to make better decisions and respond quickly to market changes. Our API-based systems allow us to integrate various systems and data sources, streamlining operations and reducing manual processes. Modern data analysis techniques provide us a deeper understanding of market trends and conditions, enabling better decisions, and enhancing risk management strategies.

Achieving this means scrutinizing existing workflows and their limitations to identify inefficiencies, opportunities for automation, risk areas, and more. It means end-to-end transformation with the goal of building a better ecosystem. Keep reading for a step-by-step guide for market participants implementing a modernization program, including challenges and potential solutions.

Transitioning from Traditional Operations

Traditional operations, typically involving varying degrees of manual processes and limited automation, have been the standard in our industry for years. These limitations can be broadly summarized as follows:

• Legacy Systems: Relying on legacy systems means slow and manual processes and responses, and highly siloed and inaccessible data.
• Inefficient Workflows: Time-consuming processes, such as manual trade reconciliation and reporting, lead to delays and errors and yield increased operational risk.
• Lack of Transparency: Limited visibility into the status of trades and portfolio positions results in less informed decision-making.
• Limited Risk Management: Manual risk management processes make it difficult to monitor and mitigate risks in real time.
• Poor Data Analysis: Lack of effective tools to analyze and use large amounts of data results in limited insights.

To overcome these challenges, market participants need to streamline their processes to reduce manual intervention, providing advantages across the spectrum of front-to-back businesses.

The Benefits of Modernizing

In contrast, operations systems built on today’s technology can leverage the latest data analysis techniques to improve efficiency, transparency, risk management, and decision-making:

• Increased Effectiveness: Automating manual processes reduces the time and effort required to complete tasks and increases overall efficiency.
• Improved Operational Insight: Using market and operational inputs for status of trades, internal processes, and insight into interactions with counterparties, utilities, and markets.
• Enhanced Risk Management: Leverage proper data sets to monitor, identify, and act on risks in real time.
• Better Decisioning: Provide access to previously siloed or unusable data, enabling more informed, data-based decisions, better insight into overall workflows, and more meaningful KPIs.

The Steps to Modernization

With so many moving pieces, updating operations requires careful planning, cross-functional teams, and a well-executed strategy to ensure success. Firms making a transition can consider following this process:

• Current State Assessment: Identifying manual processes, legacy technology, creating relevant OKRs, and business expansion goals.
• Selection of Technology and Data Analysis Tools: Evaluating cloud technology, APIs, and proper data analysis tools to determine which best meet the specific needs of the firm.
• Integration of Tools: Ensuring that the new technology and tools work seamlessly together and are integrated with existing systems and data sources.
• Streamlining of Processes: Reducing manual intervention, creating appropriate workflows around products, reducing the risk of operational errors.
• Teaming: Create cross product and cross functional teams from investment, trading, finance, stock loan, legal, compliance, operations, product, and technology.

Overcoming Roadblocks

Legacy technology built on mainframes can create significant barriers to adopting a new approach to operations. These systems often lack the necessary scalability, flexibility, and security to meet today’s demands. Manual processes also increase the risk of operational error and limit the ability of many firms to respond quickly to market changes, or regulatory shifts, such as the transition to T+1.

Potential challenges on the road to modernization are often a combination of technology and culture:

• Cultural Resistance: Ensure suite buy-in to overcome the tendency to resist change and to continue business as usual, rather than adopting new technology and processes.
• Improper Planning: Contextualizeoperational shifts driven by market, firm, and regulatory changes through the lens of strategic business expansion into new geographies or asset classes.
• Legacy Systems: Many legacy systems have been in place for so long that it’s difficult to make changes without creating substantial disruption.
• Resource Constraints: Implementing new work streams and technology may require significant resources. Ensuring that these resources are available is critical to success.

In sum, modernizing operations is a significant undertaking that requires careful planning, execution, and management across all types of capital market participants. However, the long-term benefits outweigh the short-term discomfort. Increased efficiency, improved transparency, enhanced risk management, and better decision-making makes it worthwhile for organizations looking to stay ahead in today’s ever-shifting and ultra competitive capital markets.

At Clear Street, we’re proud to provide prime brokerage services built on modern, cloud-native infrastructure, taking proven technology from the Silicon Valley world and applying it to finance.

It’s time to update the infrastructure powering capital markets. To keep up with the accelerating pace of modernization, firms will need to invest in technology to meet the needs of investors and regulators. Those who do will be part of building the modern, scalable future of capital markets.