The Dawn of Open Platforms in Capital Markets

By Eiichiro Yanagawa

The past decade has witnessed incredible innovation in global capital markets, and the rapid pace continues. Regulatory changes designed to seek risk mitigation and boost transparency as well as enhance asset stability have drastically changed the economics of capital market technology demands and business models.

In recent years, EU-based sell-side financial institutions have put immense effort and substantial resources into compliance efforts for the second version of the Markets in Financial Instruments Directive (MiFID II) regulations. The industry must now rush to prepare technology responses to other major pieces of regulation, such as the Fundamental Review of the Trading Book (FRTB) and LIBOR migration.

Responding to growing regulation is made increasingly complicated when coupled with a worsening macroeconomic environment. European financial institutions face a number of challenges including record-low interest rates that underpin weak economic forecasts for the Euro sphere compounded by possible Brexit-related turbulence. Growth in the leading developing markets of China and India has been muted, and the future outlook is cloudy. There has been increasing uncertainty over global growth with U.S. economic momentum continuing against a backdrop of rising volatility due to geopolitical factors in major economies and the possibility of a trade conflict.

On top of all of this, the COVID-19 pandemic in 2020 raised the specter of even more challenges. A fundamental rethinking and assessment is imminent—not just for capital markets but across consumer lifestyles overall, from private consumption to medicine, education, and more.

Both market volatility and the speed of change exceed anything anyone anticipated, and the end result in terms of scale of change and exit point remain unclear. Right now, the only certainty may be that innovation will continue and will be driven by technology.

Celent is paying careful attention to the surge of technology transformation in open platform initiatives in capital markets. To better gauge the direction of new technology trends, Celent has also conducted multiple surveys  of capital market participants. The results hint at these companies pioneering new frontiers in capital markets. 

For the purposes of this report, open platform refers to the following: Platforms that, through the offering of published external programming interfaces, enable connection, conversation, creation, and value exchange between multiple platform participants (producers and consumers). For example, technology vendors and third parties will be able to build new products and services on their platform and offer suites for use by third parties (other vendors, service providers, financial institutions). Financial institutions will be able to use the new products and services of those vendors, add features and functionality to the system and integrate the platform with other systems and/or data to streamline their operations.

Celent - The Dawn of Open Platform in Capital Markets

The following insights can be gleaned from the market participant responses provided in the Celent open platform survey. 

  • How are market participants tackling innovation? Increasingly, global companies are promoting technology innovation via partnerships with fintech firms. Cutting-edge market participants are looking for easier ways to find reliable fintech companies, expediting steps to commence partnerships and integrate solutions more easily.
  • Where are market participants currently and what challenges do they face? What is the awareness level of open platforms? Awareness among all capital market participants in Japan and APAC is universal. The majority of market players are mulling participating in such a platform. Amid this surge in interest, the most explosive factor driving companies to act is the lowered cost to participate in innovation and increased ease of partnering with reliable fintech firms. Moreover, sell-side efforts in Japan and APAC are ahead of global initiatives. 
  • What are the expectations for open platforms? What future developments do they portend? Market players at the vanguard are exploring open platforms in search of new opportunities. They are seeking to secure flexibility for their IT systems to accommodate the cloud and open APIs while enabling the ability to immediately connect to and use external agents. These developments and trends hint at a new marketplace of providers and users of technology solutions to come.

Open Platforms: Reshaping the Market Landscape 
At this point in time, the predominant area of interest among global buy-side entities is in discovering new solutions via open platforms, as indicated by more than 90% of the respondents . Many of these market players are looking for innovative solutions to vexing business problems. Moreover, the criteria they bring to this topic is wanting solutions to be credible and vetted by the platform or platform participants and easy to procure from a vendor risk management perspective. They also want them to be easy to integrate with existing internal systems. The backdrop to this is that currently not all market participants are willing or ready to make significant internal changes to connect with the open platform ecosystems at this stage. This presumably is a challenge that some financial institutions are reluctant to tackle or for a variety of reasons a step they are unprepared to take.

For market participants, 2020 was a target year and a milestone for completing and revamping technology strategies for the coming decade. Financial institutions are moving to implement the next leg of the roadmap on their transformation journey, with a view to the next 10 years. Mounting uncertainty makes forecasting for the future more challenging than ever, but two things are certain. First, market players will continue to operate in an increasingly complex and opaque market, regulatory environment, and business environment, as they strive to steadily generate transactions and revenue.

The second certainty is that in capital markets, as in other industries, technology will become even more central as new technologies proliferate, enticing new market players into the arena and dramatically transforming the market landscape.
Already many market players have embarked on a search for new models in anticipation of the unprecedented market to come. This is a reflection of the strong interest and various perspectives that cutting-edge financial institutions have on open platforms. In short, the shift to next-generation models could happen quite rapidly. At the same time, financial institutions are typically risk averse and generally slow to lead but fast to follow when it comes to adopting new models that have proven effective. Technological flexibility, however, will in part dictate how this "chase" or "follow the market leader" plays out. More progressive market players will, from the perspective of risk avoidance, adopt cloud and API solutions—increasing IT agility and accelerating the speed of this "chase." Presumably, in the heightened uncertain of today's world this will become the "new normal."

Success with open platforms will hinge on business models. Open platforms may be the solution that can transform the industry while simultaneously bringing the industry participants closer together. Market players should seek to heighten the modularity of their business operations and systems and re-evaluate their firm's position in the capital market value chain. Some forward-looking players have already moved beyond the traditional sell-side and buy-side relationship to become capital market platformers in their own rights. 

Market participants at the forefront of the industry are already looking ahead to the creation of a new capital market value chain that will be enabled through technology transformation.

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