Servicing the new financial giants: tackling post-trade in market making

The balance of power is shifting in global markets. While banks are still powerful institutions, underpinning much of the functioning of global finance, the growing influence of electronic market makers – responsible for vast volumes of institutional and retail flow – are reshaping markets.

Where some banks have stepped back from providing liquidity in recent years, market makers have stepped in where gaps have been left. Through Covid volatility and the surge in retail trading in recent years, market makers have grown to become some of the most influential firms in markets.

For these new giants of the global financial system there are several critical challenges – how to offer clients the lowest trading costs, dealing with an ever-growing number of asset classes, and process incredible trading volumes.

A key but sometimes overlooked challenge however is in post-trade. How do these firms with such colossal and wide-ranging operations ensure that they are compliant with regulatory regimes across jurisdictions, across traditional asset classes, but also in emerging ones such as in crypto? While market makers harbour some of the most sophisticated technology in finance, its focus is usually in the front office – reducing latency and feeding the complex algorithms vital to their success – rather than thinking about meeting regulatory requirements.

The result of market makers’ emphasis on developing their front office to gain a competitive edge is a critical reason behind outsourcing post-trade operations to third parties – giving them more time and resource to focus on their secret sauce. For these third parties, market makers are very different beasts to more traditional incumbents. They require a highly nuanced approach, backed by cutting edge technology that can handle vast trading volumes accurately in the blink of an eye. Central to effective post-trade operations are three key principles:

• Cross-asset coverage: Central to market makers’ success is their ability to offer liquidity across assets – from tradition stocks and bonds, to complex derivatives and emerging digital assets. They therefore require post-trade providers that can match their offering across asset classes, while anticipating new ones. Post-trade providers need to be able to provide this support across jurisdictions but also anticipate new regulatory regimes (such as T+1) and the emergence of new asset classes – being able move as quickly as the market maker, ensuring they’re not caught out by a gap in their post-trade provider’s coverage and risking them falling behind.  
• Scalable infrastructure: Market makers have experienced extraordinary growth in recent years. Market volatility caused by Covid and the recent conflict in Ukraine has meant that investors have needed fast, reliable access to liquidity regardless of underlying market conditions. Post-trade providers need to have the flexibility and scalability to adapt to a steep growth trajectory. Growing market makers cannot afford to run with third parties that are unable to service their business in the long-term – having the right APIs and infrastructure to support this growth is therefore essential, giving market maker clients the reassurance they need to focus on setting their firm apart.
• Cloud-based solution: Whether adding scale or new asset classes, these need to be added quickly and often remotely to avoid disruption – upholding the smooth running of the market maker’s business. Cloud-based infrastructure facilitates this – allowing post-trade providers to leverage powerful computing power, while working seamlessly in the background to support complex post-trade operations.

Servicing firms at the forefront of finance is not an easy task. These highly sophisticated and high-octane firms need partners that can match the speed, scale, and intensity of their operations – no mean feat.

Cutting edge cloud-based technology supported by a network of highly specialised global experts are key to supporting market makers focus on generating value for their own clients. Market makers need long-term partners that take the stress out of post-trade – for this to be a success it is vital that they can support across asset classes, globally, and at scale.