Since the global financial crisis in 2008, we have seen a shift in the way that different asset classes trade.
There have been a number of profound changes in market structure, regulation and business models, which have had a significant impact on capital markets. No asset class or product – from equities, fixed income, the foreign exchange markets, commodities and their derivatives – has been immune from the impact of these major shifts.
This has been particularly pronounced within fixed income markets, as increased transparency, rigorous risk management practices and a more focused regulatory regime have become enforced. Banks are now much more heavily regulated, and with MiFID II now less than a year away, this trend will continue.
As a result of these changes, there are stricter capital requirements and leverage limits, which means banks are unable to warehouse the risk associated with illiquid fixed income products on their balance sheets and facilitate liquidity like they used to. Traditional market makers are retreating from the market and who the buy-side is trading with is evolving. Indeed, shrinking dealer balance sheets are minimising liquidity, which is providing new players the opportunity to come to the fore in an effort to provide liquidity. For example, many non-bank entities that are attempting to fill the void left by exiting major dealers.
More and more fixed income traders are looking for ways to source liquidity, generate alpha and mitigate risk effectively, while still remaining compliant. We are increasingly seeing institutional investors, including pension funds, endowments, sovereign wealth funds, insurance companies and corporate treasuries sourcing liquidity from other buy-side firms as well as non-dealer banks.
Communication, collaboration and connectivity are key as market participants need to be linked to one another. As the buy-side increasingly looks to trade with other buy-side firms and non-dealer banks, they need to have reliable connectivity throughout the entire trade lifecycle and the ability to rapidly access a ready-made ecosystem of liquidity venues, counterparties, brokers/dealers, trade lifecycle services and market data.
Almost every trading strategy of the buy-side, such as institutional investors, asset managers, hedge funds and commodity trading advisers, depends on access to ecosystems. This is critical in the effort to mitigate the operational, market and business risks associated with the trading and investment processes of the buy-side. Connectivity is particularly critical for hedge funds, given that they have greater investment flexibility than the traditional investment vehicles as they frequently use leverage, derivatives strategies, structured products and short positions.
More and more notable buy-side firms, both institutional investors and buy-side intermediaries such as asset managers and hedge funds, are deploying an Ecosystem as-a-service model to effectively execute trading strategies and manage risk. An Ecosystem as-a-service solution offers market participants adaptive, on-demand connectivity throughout the trade lifecycle and across asset classes. As a single-service solution, it addresses the entire buy-side’s communication, collaboration and connectivity needs.