Best of 2017: The Top Trends

Regulation

There’s no surprise that regulation has been one of the most influential trends on the capital markets over the course of the last year, as preparations for the incoming revisions to the Markets in Financial Instruments Directive (Mifid II) reached fever pitch.

Whether it is the unbundling of investment research payments from commission, the double volume caps on dark pool trading, the contentious issue of systematic internalizers aimed at replacing broker-crossing networks, or trade and transaction reporting requirements, there’s been no shortage of work to do in preparation for January 3 next year. Despite the challenges, there has been plenty of optimism in the market over the arrival of Mifid II, with some going so far as to compare it to Christmas.

Aggelos Andreou had the rare chance to sit down with Mifid II’s architect and chair of the European Securities & Markets Authority (Esma), Steven Maijoor, to discuss the directive in more detail. Maijoor also punctured any ideas that continent’s market regulator is working on Mifid III. Waters also profiled Christoph Boschan, Wiener Börse’s CEO, who was heavily involved in the creation of the directive.

But it hasn’t all been about Mifid II. The General Data Protection Regulation (GDPR) will hit on May 25, introducing wide-ranging rule changes on how financial institution’s data governance obligations, while the Fundamental Review of the Trading Book (FRTB), a new market risk capital regime due to begin testing 2019, has also begun to cause some concerns.

In case it’s all a bit much to keep track of, Waters has put together a handy feature on the key facts you need to know about Mifid II, GDPR, the Benchmark Regulation and Brexit going into 2018.

Artificial Intelligence

If distributed-ledger technology (DLT) or blockchain was the tech trend of 2016, artificial intelligence (AI) has surely achieved the same status this year, and with good reason. Wherever you look across the financial technology stack AI, or a technology that fits under it as an umbrella term, has an application.

Anthony Malakian took an in-depth look at a number of case studies where AI implementations are already underway and Waters got an inside look at IBM’s famous Watson platform. Other examples included Malaysia-based asset manager Farringdon Group introducing its AI-based investment strategy that is underpinned by a neural network named Algebra, while regulators have also climbed aboard the train, with the SEC using AI for better risk assessment.

With projects underway or live with advanced robotics and automation, deriving greater value from data and the emergence of alternative datasets, new life being breathed into natural-language processing to improve research and analysis, and the obvious benefits to market surveillance and compliance – which can sometimes be a double-edged sword – there’s plenty of investment focused on pushing the AI agenda.

However, the incautious adoption of AI does inherently create risk and the threat towards jobs is still a major industry concern, although there are those that believe that scenario is some way off yet. Many within the industry are also grappling with high demand for AI-skilled technologists as a barrier to adoption.

Cybersecurity

Similarly to regulation, cybersecurity is a trend that is top of the priorities list for many institutions and an issue that never really goes away.

The most notable of the year’s cybersecurity events occurred in September, when the SEC disclosed that it had suffered a major security breach back in 2016, later announcing that personal information, including social security numbers, was exposed.  Regulators have also been leading the charge for higher standards of cybersecurity systems across the industry and implementing regulation to that effect, such as the New York State Department of Financial Services’ (DFS) Cybersecurity Regulation in August.

But it’s not just external security issues that financial firms have been contending with.  Those pesky millennials are causing security headaches because of their blasé attitude to tech said panelists at this year’s North American Buy-Side Technology Summit, although our own Emilia David refutes that idea.

The proliferation of mobile devices and the Internet of Things is also raising serious questions about security risks that are much more insidious and harder to protect against, while the dark web is apparently allowing cyber criminals to weaponize trading insiders. Even our former SST editor, Dan DeFrancesco, had his own run-in with a phishing scam.

It’s a hefty burden for the industry’s CISOs and other c-level executives to deal with, as some of Water’s profiles with JPMorgan’s Anthony Johnson and US Bank’s Jodi Richards show. But vendors such as IBM, with its IBM Z Pervasive Encryption suite of solutions, are making strides in rolling out new tools to shore up defensive systems to combat the ever-evolving threat.

Cryptocurrencies

Despite some false starts and an unsuitable market infrastructure, the bitcoin/cryptocurrency train has truly built a head of steam this year, culminating in valuations of over £12,000 in early December. Capital markets participants haven’t been ignorant of this either, with a number of US-based exchanges readying the commodity for trading.

In November the Global Digital Asset Exchange released its criteria for admitting cryptocurrencies to trading, while the Chicago Mercantile Exchange (CME), world’s largest futures exchange, launched futures on bitcoin, with Nasdaq and Cboe preparing for similar launches next year. Bitcoin fever isn’t just limited to the Western markets either, as Wei-Shen Wong examined, with Asian markets taking a more open approach to digital currencies.

All of which creates something of a headache for regulatory bodies. The SEC said in July that bitcoin and other cryptocurrencies that are based on blockchain may be classified as securities – a situation which may well wipe out either technology in the long run – while the CFTC has also stepped in to warn that market of potential risks these contracts could pose to clearinghouses.

Of course, there are still skeptics to be won over, not least JP Morgan’s CEO and chairman, Jamie Dimon, who said anyone buying bitcoin is “stupid” in September, before the institution quickly pivoted its position to back digital currency.

Honorable Mentions

Blockchain/DLT: You didn’t think we’d leave blockchain off the list did you? The hype did cool on blockchain this year, but investments certainly haven’t, as various industry consortiums and institutions draw closer to introducing the technology to the live markets. Next year, according to some, could be the year when blockchain moves into full production.

Environmental, Social & Governance (ESG): Between the trend towards passive investments and the growing voice of the end investor, ESG has quickly taken on a prominent position over 2017. Assets invested globally in sustainable strategies stood at $22.9 trillion in 2016, and technology providers are also working to further ESG-related data and analytics solutions to meet increasing demands.