What is Capital Markets Technology?

Capital markets technology is the technology that is used in the capital markets in the conduct of trading, investment and other financial transactions. As technology reshapes industries, capital markets tech is now revamping the ways in which equities, bonds, options, futures, and foreign exchange are bought, sold and operated.

The Rise of Fintech and Proptech

In the last ten years, the startups in the financial technology (fintech) and property technology (prop-tech) sectors have disrupted the conventional financial and real estate markets. These are flexible new generation firms that are using advanced technologies such as artificial intelligence, big data and block chain to offer unique products to the investors, traders and consumers.

Fintech businesses are automating manual tasks downstream in capital market to streamline processes for automating manual tasks upstream. For instance, algorithms creating and managing investment portfolios such as robo-advisors have assets totaling $ 1 trillion.

Key Areas of Innovation

There are several major areas where capital markets technology solutions are driving transformation:

Trading Platforms and Infrastructure

New trading systems or stock markets that allow quicker, better and more widely available trading are currently being made. Some of them include Virtu Financial’s electronic communication networks (ECNs) and others such as Members Exchange (MEMX).

Ultra-low latency network infrastructures and sophisticated algorithms are used in high-frequency trading (HFT) to place orders in microseconds. High-frequency trading is considered beneficial because it leads to tighter spreads between buying and selling prices as well as better money making opportunities.

Many organizations have also taken interest in the use of blockchain technology as a way of improving clearance, settlement and record keeping process.

Analytics and AI

Cutting-edge analytics, quantitative models, and artificial intelligence are helping investors and traders glean actionable insights from market data. Applications include algorithmic trading, predictive analytics, sentiment analysis, risk management models, and more. Startups like Sentifi and Yewno are pushing the envelope of what's possible.

Alternative Data

The analysis of alternative, non-traditional data sets is becoming vital for gaining an investment edge. This includes the parsing of satellite images, credit card transactions, web traffic, mobile data, and more for clues about company performance. Leaders in this space include 7Park Data, Eagle Alpha, and Thinknum.

Robo-Advisors

Robo-advisors like Betterment and Wealthfront provide automated investment management by constructing portfolios, managing rebalancing, facilitating tax-loss harvesting, and often providing access to human advisors. By minimizing fees, robo-advisors are making sound investing easier and more accessible.

Crowdfunding and P2P Lending

Platforms like Kickstarter and LendingClub have opened up capital raising and lending to retail investors. This is expanding access to growth capital for businesses and returns for investors. Blockchain platforms like Ripple allow for faster cross-border payments and settlements.

RegTech

Regulatory technology (RegTech) aims to help financial firms more efficiently meet compliance requirements related to knowing your customer (KYC), anti-money laundering (AML), and fraud detection regulations. Leaders include ComplyAdvantage, IdentityMind, and Sigma Ratings.

Benefits of Adoption

As capital markets technology becomes more ubiquitous, certain benefits should follow, including:

1. Greatly increased liquidity and tighter spreads leading to reduced transaction costs for investors and traders. This allows capital to flow more efficiently.
2. Faster trade settlement and clearing times through automation, reducing risk and freeing up capital to be reinvested sooner. Settlement times could be cut from days to minutes or seconds.
3. New and improved routes to raising growth capital for businesses and access to credit for consumers through crowdfunding, P2P lending, microfinance platforms and embedded fintech. This supports economic growth.
4. Greater transparency and democratization of access to financial products, services and markets. Retail investors can access tools previously only available to institutional investors.
5. Advanced risk analytics, AI models and simulation tools lead to better risk management, stability and crisis prediction. Systemic risk could be reduced.
6. Greatly enhanced operational efficiency and scalability allows financial firms to reduce overhead costs. Shared market infrastructure also cuts duplicate costs.
7. More robust and lower cost regulatory compliance through regtech automation of reporting, surveillance, KYC checks etc. This eases the compliance burden.
8. Conversational interfaces like chatbots and interactive voice response cut costs while improving the customer experience. Questions can be answered 24/7.

Risks and Challenges

However, there are risks and challenges to address with further adoption:

1. Transition risk moving from fragmented legacy platforms and systems to new consolidated, cloud-based market infrastructure. This is a complex multi-year endeavor.
2. Potential for overcomplexity as technology stacks grow. This could reduce transparency, increase cyber risks and make systems more fragile. Simplicity should remain the goal.
3. Continuing fast evolution requires flexibility, interoperability and future-proofing. Solutions can't be static or rigid. Change management is critical.
4. Unequal access and adoption if solutions primarily cater only to institutional investors rather than retail investors and SMEs. The democratization promise may be unfulfilled.
5. Major data privacy, data rights and cyber security vulnerabilities emerge with growth of data and third-party fintech providers. Attacks could trigger financial crises.
6. Regulatory uncertainty or delays stifle innovation if new technologies like blockchain or AI remain in legal grey zones. Regulations and laws would need modernizing.
7. Lack of operational resilience, single points of failure and overreliance on third parties raises stability fears, as seen by exchange outages and flash crashes. Frequent stress testing is imperative.
8. Job losses in financial sector due to workflow automation could be sizable. New jobs would emerge but displacement may be significant in the interim. Proactive transition programs are vital.

With prudent governance, investment and responsible innovation, capital markets technology can transform markets for the better. But it requires acknowledging and proactively addressing these risks and challenges. Both technology and regulation will need to co-evolve rapidly. But if done right, a far more efficient, accessible and stable financial system could emerge.

The Future of Capital Markets Technology

Capital markets tech will continue to advance and reshape investing and trading. Key developments to expect include:

1. Open banking expands access to financial data.
2. Further automation of manual processes like settlement.
3. Mainstream adoption of artificial intelligence and machine learning.
4. Blockchain and cloud solutions are improving security and resilience.
5. Rise of digital assets and tokenization of traditional securities.
6. Retail traders leverage technology to compete with institutions.
7. Embedded fintech delivers financial services through non-financial apps.
8. Comprehensive regtech compliance solutions.
9. Conversational interfaces like chatbots improve customer experience.

While promising, capital markets technology brings risks. However, with smart governance and responsible innovation it can usher in an era of faster, fairer, more efficient financial markets.