EXCLUSIVE: ‘The squeezed middle’ – Brian Collings, Torstone Technology in ‘The Fintech Magazine’
The pandemic, with its associated cycle of lockdowns and restrictions, has significantly shaken up the trading sector, not least by challenging high-touch middle office processes, often now carried out in a remote-working environment. We spoke to Brian Collings, Chairman and CEO of Torstone Technology, to get his take on COVID-induced market volatility and what it means for post-trade processing.
It’s a hectic time for the world’s traders. Increased market volatility and volume are putting pressure on existing infrastructure, which is straining under the weight of operational changes prompted by the all-encompassing pandemic – most significantly homeworking.
Markets have yo-yo’d with every lockdown/relaxation, vaccine progress/shortage announcement, signalling flights to and from assets as investor confidence waxed and waned. Bored newbie retail investors, stuck at home, piled into (mostly day) trading, in unprecedented numbers, creating swings last seen during the dotcom bubble – a trend that will likely continue into 2021.
Then, there has been the dramatic shift of capital away from badly-hit sectors such as high street retail and transport, and towards others, specifically tech companies, which attracted never-before-seen wads of cash. Even within sectors, markets quickly followed consumers as they redirected spending from one category or channel to another, be that fashion to home improvement, or in-store to ecommerce. Between mid-March and the end of August 2020, for example, computer game company Nvidia was up nearly 95 per cent, according to Morningstar Direct. Delta Air Lines, meanwhile, plunged by more than a third.
As equity prices hit new highs at the start of 2021, trading volumes for stocks and options also set new records.
With all this unprecedented activity going on, no wonder trading houses have been reaching for better tech, particularly as operational changes – most significantly, working from home – put additional strain on traditionally high-touch processes… an area that’s become a key, middle-office issue now for many of Torstone Technology’s clients.
A leading provider of post-trade securities and derivatives processing via its Inferno platform, Torstone has offices in the key trading hubs of New York, Toronto, Hong Kong, Singapore and Tokyo, in all of which it’s seen interest in its Cloud-based, software-as-a-service (SaaS) solutions surge, prompting plans to increase its workforce by a third this year
At the core of the platform’s appeal is its ability it allow clients to flex quickly to new requirements, help them navigate the chaos and future-proof their organisations for what Brian Collings, chairman and CEO of Torstone Technology, predicts will be another equally-challenging 12 months.
“Unlike the credit crunch in 2008, banks and brokers have done well. We’ve seen some of our clients’ daily volumes going up fivefold,” says Collings. “But you’ve got to have infrastructure to cope with that. And we’ve other things around the corner – the ongoing impact of the US elections and Brexit –that are going to bring more operational issues along with those transaction volumes increasing.”
According to a recent report published by Firebrand Research and Torstone, pandemic-led market volatility and the resulting industry-wide shift to remote working have highlighted multiple post-trade challenges for trading firms. The most significant include a higher number of exceptions to resolve in a shorter timeframe than normal, and pressure on collateral management systems as firms are required to engage in a significant increase in substitutions and margining activity.
“Some of the operational processes in legacy systems just can’t cope with those volumes and increased workflow around the margining,” says Collings.
“Being on the Cloud has been a saving grace for much of this increase in operational flow, because I think where we’ve seen some of the operational issues highlighted is in those manual processes; those necessary interactions between people that have now moved to email, phone and video because they are not in the office. Those processes are now being really closely examined.
“We’ve seen a particular focus on the middle office, which is the area that has struggled most. I think, because of decades of underinvestment as firms prioritised the front offices they saw as profit centres, people are now having to move pretty quickly to make sure that automation is there.
“Generally, I think the scalability of what the SaaS platforms can provide has been the key to getting through parts of this pandemic.”
There have been some notable new client wins over the past few months for Torstone, such as Credit Suisse, which has now automated the post-trade operations of its institutional equities trading business in Canada after going live on Torstone’s platform.
Torstone has also partnered with Tosho Computer Systems to administer connectivity to the Japan Securities Depository Center (JASDEC), the central securities depository for Japan. Financial services hosting provider Tosho will provide its own data centre to administer proximity connectivity services, as well as expertise in the Japanese securities market. The direct connectivity to JASDEC completes a full post-trade life cycle solution for both domestic and foreign brokers in Japan, while reducing operational costs for both yen and non-yen products.
Staying ahead of the regulatory curve
The efficiency of post-trade processing has been a hotly-discussed topic in the broker community, and the next wave of EU regulation, in the form of Central Securities Depositories Regulation (CSDR), adds yet another challenge to the mix.
CSDR, which has now been delayed until February 2022 in light of the ongoing pandemic, is predicted to directly affect brokers’ performance and ability to make markets in certain sectors, according to the myriad concerns raised at a recent roundtable discussion hosted by Torstone.
While the industry debate rumbles on, Torstone itself is well-positioned for such upcoming regulatory changes, thanks to its 2019 investment in Percentile, a Cloud-based risk and compliance technology specialist.
“These regulatory changes coming in are putting more pressure on settlement; with the type of volumes we’re talking about, even a 0.00001 per cent failure rate is going to be costly,” says Collings. “That’s why the middle office is becoming an increasing focus for us, because the more you can get right there, the better the picture becomes in terms of downstream settlement.”
Torstone is ready to help lead firms into the new normal, which, says Collings, will see significant mutualising of the cost base.
“The pandemic has put extra cost pressures on everybody, and nobody can do everything themselves – not to the specialist degree they need. It’s about making sure processing works efficiently and firms aren’t giving away the crown jewels if they outsource their middle and post-trade areas to providers like us. We, in turn, need the support of the infrastructure. So we’ve outsourced to Cloud providers, because we’re not specialised in that.
“So you can see this ecosystem is very much coming together with standard APIs between financial firms and vendors creating the glue.”
The adoption of APIs is encouraged by the use of processing protocols such as SWIFT for post-trade activity in the middle office and FIX, which is all about speed, volume and low latency, in the front.
2021 will see more volatility, changes around digital assets and increased pace of regulation, foresees Collings.
“Legacy systems will find it harder to adapt to such profound changes,” he says, “and that will drive further acceleration towards Cloud-based platforms.”