May 2016: The Back Office Must Be Loving This

Ever since I can remember, the front office has been the center of attention from a technology and resource perspective for buy-side and sell-side firms. Over the last 15 years, capital markets firms have systematically and consistently rolled out order management systems, execution management systems, algorithmic trading and smart order routing platforms, a variety of decision-support tools, transaction-cost analysis functionality, and, more recently, compliance systems. The front office really has ruled the roost.

Then, in the wake of the financial crisis, the middle office had its turn. Risk management upgrades and new rollouts seemed to be everywhere, as firms scrambled to get their heads around credit, counterparty and liquidity risk, three measures inextricably linked with the crisis, although prior to 2008 they were considered far less significant than the classic risk measure: market risk. And while we're in the middle office, let's not forget performance and attribution, two sides of the same coin that have driven buy-side technology spending to a large degree for the best part of two decades.

But that's all about to change. Distributed-ledger technologies and blockchain are looming large, and capital markets back offices must be, in the words of Dr. Frank N. Furter from The Rocky Horror Picture Show, "shivering with anticipation." Why? Because, if all the really smart people working with those technologies are to be believed, it is back-office activities-clearing, settlement and reconciliations-that are the most likely beneficiaries. As Dan DeFrancesco explains in this month's cover story on page 16, blockchain is squarely in Nasdaq's sights. Bob Greifeld, CEO of Nasdaq, believes that blockchain will "change everything over time," although the exchange's current focus is on delivering solutions over the next 12 months. It is already some way down that road, however, by virtue of it executing a private securities transaction via its distributed-ledger-based Linq platform on New Year's Eve last year. Naturally, industry-wide adoption of these technologies will take some time, although, according to Greifeld, their impact will be felt: "I think the clearing infrastructure we know today will be entirely different," he says. "It will be eviscerated within a decade."

Eviscerated is a beautiful word, although whether such back-office activities will be so dramatically affected is a moot point. And while on the subject, a word of caution: Unless the new, distributed-ledger-driven systems are as efficient, robust and reliable and the incumbent platforms, going through the pain of rolling out the new technologies is simply not worth the gain-an inconvenient truth that technologists tend to forget. Make no mistake, fingers will be burned along the way, but if the oracles are correct, the initial steps of the back-office revolution have already been taken.