Sunday, March 16, 2025

FLASH FRIDAY: T+1 is Coming to the UK and Europe

FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.

With ESMA recently reiterating the importance of harmonisation of shortening settlement cycles across Europe, it in effect signalled an appetite to move in sequence with the UK (provisionally end of December 2027 per task force recommendations) and Switzerland.

James Maxfield, Duco

While nothing has been set in stone, these signals will trigger strategic and tactical planning across the post trade ecosystem in Europe, looking at readiness for just over two years’ time. While that may seem like a long time, the reality is most will need to be thinking about budgets and timelines immediately.

The impact of the recent T+1 shift in North America and the lessons learned from it were a key theme at the recent AFME OPTIC conference in London. What Europe and the UK should look to do differently in terms of preparation was a key focus. There was a lot of good discussion across the different participants but here are the top 5 things the industry needs to be thinking about.

1. Cash continues to be king

Much has been made of the margin benefit that both sell-side and custodians took from the shift to T+1, with a 30% reduction in clearing margin. However, this has come at the expense of funding inefficiency for the rest of the market, with much of the buy-side noting an increase in funding costs as a result of the reduced settlement window.

SWIFT was one of the panellists at AFME OPTIC, and noted that while buy-side FX payment volumes have gone up as a result of the move to T+1, the average size has decreased. This indicates a loss of efficiency in cash management overall as a result of more frequent trading in smaller sizes.

The cost and operating model considerations of expanding the scope of T+1 to a wider universe of currencies and assets shouldn’t be underestimated. This creates both a challenge for the industry and also an opportunity for service providers to play a more global role in insulating participants from this effect.

Custodians and service providers bringing together settlement processing, cash management and funding into a 24/7 model will become increasingly attractive. But they will need to show value – operationally, commercially and from a client service perspective – which hasn’t always been the case and has led to the current fragmented processes.

2. Affirmation, affirmation, affirmation

The role of the affirmation process has undoubtedly contributed significantly to the lack of market disruption from the move in the US. This was a relatively new concept for many outside of the US, but its value in driving settlement discipline has been clear to see.

Driving adoption as part of the march to T+1 however will be much harder within the UK and the rest of Europe, as it will require regulators and the industry to agree on the right framework that incentivises take up (and dis-incentivises non-compliance). This is easy to say, but much harder to do in practice, and locking effective affirmation processes into the migration timeline will require intensive collaboration.

3. Securities lending is a game of moving parts

The relative lack of automation, allied to the global nature of liquidity pools within securities lending, created a major cause for concern with the move to T+1 in the US. While the key metrics – fail rates as an example – would imply there hasn’t been much market impact, the reality is that liquidity has reduced as a result of the need to maintain higher inventory buffers and a general risk reduction across trading desks. 50% of the industry are now citing securities lending as the single biggest impact of the move to T+1, which has increased from 33% 12 months ago. (Citi Securities Services Evolution 2024

The marketplace across the UK and Europe is much more complex than the US – different taxation regimes, business models like synthetic prime brokerage, ETF complexity, investor behaviour – and securities lending is a critical component of efficient market practice.

The role of collateral mobility, both to support trading activity as well as margin and funding, is critical to enabling these businesses. But though the growth of tri-party providers and automation solutions has increased over the last decade, the market is still heavily reliant on people and legacy processes to make it function.

It is hard to imagine that an equivalent reaction in terms of liquidity and risk appetite won’t fundamentally alter the economics of doing business. So being able to efficiently mobilise collateral across a wide spectrum of uses, locations, clients and business units will become a critical piece of the puzzle.

4. Automation everywhere (or not actually)

While the role of the affirmation process in driving smooth implementation in the US has been well publicised, what is less obvious is how participants have actually achieved dealing with compressed timelines.

The perception that the industry was in part ‘throwing people at the problem’ vs re-engineering systems and processes has been borne out by some of the recent industry feedback. 31% of the industry confirmed they had achieved compliance by simply adding people to their operations teams, which compared to only 18% 12 months ago. And anecdotally, this number increases to > 50% in some of the larger brokers and custodians, many of whom have been reported to have added significant headcount. (Citi Securities Services Evolution 2024)

This would potentially imply two things:

  • The industry underestimated the challenge and impact to their operating models and had to invest more in people as the deadline neared.
  • Organisations left it too late to get mobilised, leaving insufficient time for automation and ultimately compensating with people to plug the gaps.

This latter point would also imply there is an element of catch up within investment cycles going into 2025 and beyond – which is going to create capacity challenges as organisations balance investment in remediation vs planning for 2027 and beyond. Organisations in the UK and EU would do well to apply the lessons their US counterparts learned, particularly into investment thinking.  But, as we’ve seen in the past, the industry frequently talks a good game and then reverts to tactical compliance to hit the dates.

One panellist at AFME shared an excellent analogy from a recent post trade conference, stating that “the industry is currently very focused on the shiny T+1 penthouse but is ignoring the fact that the foundations are cracking”. This underlines the challenges that many organisations face: they are unable to mobilise effectively to unpick what are extremely complex legacy architecture and process challenges so paper over the cracks instead.

Focused on the ‘penthouse’

These are not simple challenges to solve (otherwise they would have been solved already) but warrant serious attention as the industry considers its next steps. Adding headcount to deal with a relatively simple set of market infrastructure practices (in the US) vs trying to replicate that approach across a region with almost 40 financial market infrastructures (FMIs) is clearly not realistic.

The positive adoption of AI and other trade process automation tools has shown in part what can be achieved through leveraging the types of innovation that were not present 10 years ago. But technology in itself is not going to deliver automation, it is merely an enabler and the industry will need to mobilise quickly if it is to learn from the global experience of T+1 to figure out operating model optimisation.

5. Governance is not sexy, but it’s necessary

What the North American regulators did well was communicate clearly and often, creating momentum and also certainty (the slipped milestones that characterised Dodd Frank and other regimes in the past weren’t going to happen here). This energy pushed the whole industry towards the end goal, with working groups mobilised and being visibly active around decision making on key points of contention. 

Replicating this across multiple jurisdictions is going to be much, much harder and regulators, FMI’s and the industry working groups that guide them need to be highly focused on mandating the right structures and behaviours to lead the industry forward.

The US experience has shown a blueprint, but it doesn’t have to be adopted – there is a much greater degree of complexity across the UK and Europe, which can’t be ignored in attempting to globalise T+1. The industry shouldn’t be blind to this and has to balance pragmatism with market impact – for no other reason than the sheer scale and complexity of cross-border flows across the region.

Looking ahead to 2027

The experience of the T+1 shift globally has shown some positive signs, but that doesn’t mean one-size fits all in terms of implementation. The costs of compliance will be significant and the economic benefit of the change has not been equally distributed across all market participants. Individual firms should not be reliant on moving with the herd, as the nuances of systems and process, business mix, investor and client mix and geographical reach, will all ensure that no one firm’s challenges (and opportunities) are the same.

The US experience has signposted what the future could look like in terms of market efficiency and standardisation, but this should not be viewed as a ‘cut and paste’ around what will work elsewhere. Bringing similar value will require collaboration and consensus across a fragmented post trade landscape across the European region, which is not in itself a trivial exercise.

James Maxfield is Chief Product Officer at Duco

The Chapter After the US Election

The disconnect between betting markets, and actual asset moves, versus the polling messaging magnified the level of shock at the strength of the victory, according to Jeff O’Connor Head of Equity Market Structure, Americas, Liquidnet. 

“Really, the equities market has been responding with near certitude to the “Trump Trade” for several months,” he told Traders Magazine.

“There was some waffling late, and may have been driven by profit taking, but what the election did was qualify the accuracy of what the markets were telling us which hearkens back to the old adage, “the price is the news”,”  he said.

“But certainly, going forward, the methods used to ascertain U.S. polling will be very much in question,” he said.

Jeff O’Connor

And early on, the Trump Trade winners have erupted, O’Connor said. 

“While the conviction, outsized volume supporting a high standard deviation move, will have to temper, it is those types of trading days that can signal what the path of least resistance is going to be in the equities market,” he said.

According to O’Connor, it was remarkable to see many of the major indexes hitting all time highs supported by volumes some 60% beyond the averages of the year. 

But it is that type of conviction that triggers the quant/systematic crowd to get involved, he said, adding that it can be described as a technical feedback loop, but almost the guaranteed business of momentum funds grabbing onto the move and then pushing to fresh highs. 

“Couple that with some of the best traditional asset manager flows of the past four years, as reported by sell side trading desks, and the post-election day market action was extremely powerful,” he commented. 

The contrast between the two candidates ideologies has made this election more clear from a market perspective, O’Connor said.

Whether it be corporate tax plans, tariff expectations, or sector specific winners/losers, the candidate dichotomy on visions for the economy, consumers, and suppliers, made the Trump Trade fairly easy to track, he added.

On the first day of trading, the clear cut winners were small caps, banks, construction materials, energy equipment, machinery, etc, he said, while the underperformers included solar, copper, Chinese technology, hospitals, defensives, etc. 

But aside from sector/sub-sector performance, the more macro level trades maybe stand out the most – i.e. the dollar and rates, O’Connor said. 

“What the moves are telling us is that the expectation is that Trump’s second term will follow the first, and that is tax cuts, deregulation, tariffs that will simultaneously spark economic growth, corporate profits, but with it inflation,” he said. 

“And the possibility, seeming more likely, of total executive and legislative GOP control, is exacerbating the strength of moves,” he added.

According to O’Connor, clearly the potential for total GOP control has the institutions getting into trades quicker than they may have anticipated as they position for the future. 

“Continuous institutional volumes in ’24 have been some of the best of the past 7-8 years, however, with equity performance so strong, and the presidential overhang, there was signals of institutional trepidation going into the election,” he said.

Valuations are obviously extended, and this year already marks a major outlier in terms of market performance versus historical averages on election years (+24% vs ~+7%), according to O’Connor. 

One area that has gotten a significant boost is the small cap space where the prospects of better business backdrop (along with deregulation) are letting stocks move in the face of a total rate reprice, he said. 

This arena is the most sensitive to higher interest rates, and should rates go higher from here, in general, not just for small caps, equity performance will see a cap, he said.

“In the end, the noise of the election will die down and volumes will revert quickly,” O’Connor said. 

“There are signals that, globally, fund managers are over-exposed to U.S. markets and available cash has moved towards historical nadir levels.  Performance is being driven by the macro backdrop,” he said.

“The market obviously likes the prospects from a fiscal perspective, and the FOMC’s job gets tougher as campaign promises point to a possible res-snap on inflation, but equity performance is going to continue to be driven by macro data points – the ability to meet steeper earnings growth expectations into 2025 and the ability to navigate the economy into a soft/no landing,” he added.

Sell Side Focuses on Trading Limits

Trading limits have come into the focus of senior management teams across the sell-side, according to the Q4 2024 Sell-Side Execution Management Insight report by Acuiti.

A major fine from UK regulators has changed approaches across the sell-side, the report noted.

“This new focus on trading limits has shone a light on issues such as the lack of a central limits system and lack of clarity on how execution limits should be calculated,” the report added.

Banks operate their own models for trading limits and determining them for a client is often a nuanced exercise that involves the desk’s accumulated knowledge about their clients’ needs and strategies, according to the report.

For futures desks, trading limit calibration was identified as a high or urgent priority by 61% of the network.

Network members report that improving pre-trade risk analysis is an important part of these reviews.

Acuiti said that give-up arrangements are also emerging as an item of particular attention within the trading limits discussion.

According to the findings, most of the network reported calculating client futures trading limits on a product-by-product basis.

“This approach requires extensive analysis of each product, considering factors such as the order book for that product, the algos used to trade it its IM and other aspects of market structure,” the report said.

The report stressed that “explaining the nuance and minutiae of trading limit calculations to senior management and regulators can be a time-consuming exercise”.

According to Acuiti, if senior management teams have the technical knowledge or experience of working an execution desk, the process is much easier, however, over a third of the network cited it as a major inconvenience.

The report also covered the rising demand for commodity futures, India’s Gift City, the re-bundling of execution and research and the outlook for the remainder of 2024.

The report is based on a survey of the Acuiti Sell-Side Execution Network, a group of over 300 senior executives at banks and brokers across the global market. 

Each quarter members of the network input topics and questions into the survey with the responses aggregated into this report.

Interactive Brokers Reports 560 Mln Presidential Election Contracts Traded

Interactive Brokers (Nasdaq: IBKR), an automated global electronic broker, announced the success of its ForecastEx prediction market. Since its launch on October 4, 2024, ForecastEx has a total volume of over USD 560 million in presidential election contracts traded as of midday on November 6, 2024, with no technical issues reported.

Key Highlights:

  • ForecastEx Performance: ForecastEx Election Contracts proved to be a good predictor of election outcomes offering publicly visible prices which clarify real-time sentiment and bring accountability and transparency to a topic.
  • Future of Prediction Markets: Interactive Brokers sees prediction markets like ForecastEx becoming valuable tools in the coming years, offering unique data and insights. Beyond elections, IBKR’s ForecastTrader provides contracts on economic indicators, environmental factors, and government-related issues.

Steve Sanders, EVP of Marketing and Product Development at Interactive Brokers, noted, “Since investors must commit capital to express their conviction, they are engaged and educated about a subject. ForecastEx delivered highly predictive, real-time data to both investors and the broader market.”

On election night, Interactive Brokers also achieved record overnight trading volumes, including:

  • US Stocks:  188,168 trades
  • US Derivatives: 161,742 trades
  • Total Overnight Trades: 349,910

This occurred from 8:00 pm to 4:00 am Eastern on US markets and represents a huge increase over normal overnight trading.

Who Pays for Innovation? Why Market Collaboration is the Key to More Connectivity

By Bob Cioffi, Global Head of Equities Product Management, ION 

The equities trading landscape has taken a dynamic turn over the past few years. While the continued dominance of low-touch, algorithmic trading has accelerated the speed of activity, the rise of alternative trading venues worldwide has unlocked a wider range of options and opportunities.

Firms are feeling the pressure as a result. While buy-side businesses jostle for access to as many markets as possible to avoid missing out on liquidity, sell-side firms are competing to help deliver on those ambitions. However, both are struggling to keep up with the pace of change. 

The market needs more agility and connectivity to manage greater volumes and demands. But the question of who takes ownership for this innovation – and bears the cost – is more complex. With more market players than ever before, firms, venues, and technology providers need to work out how to share this burden to reap the collective benefit.

New competitive dynamics

Across the equities market, choice and competition among trading venues is ramping up.

New, alternative trading venues have been challenging traditional exchanges for some time. Both are experimenting with new functionalities and order books – auction, dark, lit, and conditional – to differentiate themselves as the go-to platform for clients. In Europe, the London Stock Exchange (LSE) acquired Turquoise to draw liquidity back in response to post-MiFID liquidity fragmentation, while Euronext has grown by acquiring exchanges in Dublin, Oslo, and Milan. 

Less typical market players have also entered the fray to challenge the primary exchanges. These range from banks creating their own trading venues, such as UBS’ MTF and Goldman Sachs’ MTF (SIGMA X), to brand new exchanges such as Artex, which offers tokenized art funds as a new investment opportunity and allows museums to trade digital asset securities like equities. The rapid growth of IntelligentCross, an alternative trading system (ATS) is another good example.

In a fragmented landscape where multiple venues offer free market data and connectivity with prominent liquidity providers, horizontal differentiation – exchanges offering different types of products or services to cater to different market segments – is increasingly common. We are at a point where no single venue can serve the interests of all investors. 

Pressure on the system

It’s common for firms to want to “try before they buy” with access to new venues in the market. But building the technology to create fast access in this way is costly – both in time and resources. 

For sell-side businesses to deliver best execution for their clients, the cost of connecting to every available venue currently outweighs the benefits. This leads most to opt for selective connections and rely on broker services. For buy-side firms and end-users deciding which markets they would like to access and how, these different approaches to connectivity will continue to shape their decisions, especially as different types of trading venues evolve. Naturally, technology providers are under pressure from all angles to build and monetize a new era of market infrastructure: solutions that can support connectivity to new venues, and therefore help all parties achieve their goals.

As a rule, greater competition is an economic good. It moves the market forward, breeds innovation, and results in lower costs. But key industry questions – such as who should take the lead in modernising market infrastructure to meet abundant modern connectivity needs – make reaching a verdict more difficult.

Addressing the challenge

As venues and order types grow in number, the degree of overhead in today’s market is significant – and the pace of change is fast. The question is how the market can innovate to keep up at a time of such rapid development.

Traditional processes for securing connectivity such as the manual configuration of connections and the lengthy onboarding of new clients are no longer quick or adequately responsive to meet needs. Technology firms need a way to work with new venues and exchanges to meet the needs of market participants.  

At the same time, the growing trend of consolidation across exchanges in terms of ownership – for instance, the widespread adoption of Nasdaq’s technology – is also helping exchanges to take a big leap in terms of capabilities and offerings.  Alongside the opportunity for new technology markets to provide much-needed common interfaces between different venues, a broader shift towards efficiency and scalability is already unfolding through consolidation. 

Looking to the future

As we move ahead, it is through a collaborative effort that the market can address the challenge of funding new demands for innovation. With liquidity and best execution at stake, market connectivity is more important than ever. This bid for more options and flexibility is a prime opportunity to create a more resilient, agile market structure that can support the demands and direction of modern trading.

FINRA Highlights Metaverse Impact on Securities Industry

While the metaverse is being used and experimented with in a number of ways by financial institutions, it is an evolving technology with both potential benefits and risks that need to be better understood, according to Haimera Workie, Vice President and Head of OFI at FINRA.

The recent FINRA’s report, The Metaverse and the Implications for the Securities Industry, is intended to raise awareness among FINRA member firms and the broader securities industry by providing an overview of how developments related to the metaverse may impact business models and processes.

Haimera Workie

While the true implications of the metaverse may not be known for years, the report analyzes potential applications, use cases and challenges for member firms and notes certain regulatory considerations.

The report notes that the metaverse includes virtual worlds that are immersive, interactive and may be experienced in new ways through technological developments in hardware and software.

While the gaming industry has long been active in the metaverse, the report highlights that financial institutions have increasingly been exploring the metaverse to engage with the next generation of customers and to enhance their operations.

“A segment of financial institutions, including broker-dealers, are actively experimenting with incorporating the metaverse and its immersive technologies,” according to the report.

These developments prompted FINRA’s Office of Financial Innovation (OFI), which is part of the Office of Regulatory, Economics and Market Analysis, to launch the research initiative.

The report expands on the following potential metaverse-related use cases that FINRA members and related financial markets are considering or exploring: Data visualization; Virtual trading;  Digital twins and industrial metaverse; Payments; Training and collaboration; Investor education; and Customer solicitation and service.

The report also delves into the challenges that firms may wish to consider as they explore applications on the metaverse or implement a metaverse strategy, including resource needs, data privacy and protection, and cybersecurity.

he report notes that member firms should also be mindful of the potential implications to their regulatory obligations as they consider whether to incorporate the metaverse into their internal systems and processes or use this technology within product offerings.

The specific rules applicable to member firms’ use of the metaverse will vary but will ultimately depend on how member firms deploy the technology, the report says. FINRA’s rules, which are intended to be technology neutral, continue to apply if member firms use the metaverse in the course of their businesses, just as they apply when member firms use any other technology or tool.

FINRA is seeking comments from firms, market participants and others currently exploring the metaverse. Comments are requested by March 14, 2025. 

“We look forward to continuing to have an open dialogue with industry stakeholders to better understand the impact the metaverse could have on FINRA members and investors,” Workie said.

A Data Strategy to Future-Proof Investment Operations

How are firms changing their data management strategies to improve investment operations and what is the increasingly relevant role of Artificial Intelligence (AI)?

In a recent Markets Media webinarDuncan Cooper, Chief Data Officer at Northern Trust Asset ServicingMiguel Castaneda, Partner at private markets advisory firm Alpha Alternatives (formerly Lionpoint Group), and Tom McHugh, CEO and Co-founder of FINBOURNE Technology, shared their perspectives. 

Over the last 10 years, new technologies have allowed firms to capture greater volumes of data with increasing granularity. The types of data firms are dealing with is also largely unstructured and from a wide variety of sources, yet it still requires the same level of governance and control. 

What are the key drivers instigating improvements in investment operations and the implementation of data strategies? 

The amount of data has grown exponentially in all organizations and firms are now dealing with more diverse and more complex data. This is driving a change in the way firms think about and interact with data. Data silos have become more prominent and there is an ever-greater need for data across teams. Clients need a better way to communicate across functional silos to do their day-to-day work. 

“One of the current challenges that we’ve seen is a lot of clients have legacy file exchange methods that are either SFDP or flat file uploads and they come in different formats and cadences, whether it be real time, daily, weekly, quarterly,” said Miguel Castaneda at Alpha Alternatives (formerly Lionpoint Group). “When an issue comes up there is a lot of emailing back and forth, resending and reloading. That causes delays across all the teams in the front middle and back office that need access to that data,” Castaneda said.

Where should a firm start with establishing a modern data strategy?

 Duncan Cooper, Northern Trust

The first step  is to conduct a thorough audit of where they are now and where they would like to go so that they can be strategic about what their data infrastructure should look like.  

“Understanding how much data they are dealing with, where the data is going and the rate of decay or entropy of that data is a really good place to start.” – Duncan Cooper, Northern Trust.

According to Tom McHugh at FINBOURNE, firms often lack a clear understanding of the data terminology. Firms should first get a handle on what terms such as data lakes and lake houses really mean, and then look at their processing on top of it.

 Tom McHugh, FINBOURNE Technology

“It boils down to three things: what are you going to use it for, who cares about it, and who is responsible? Who really owns it and who cares if it is not right? If they can solve that little panacea, everything else tends to be just technology that works around it.” – Tom McHugh, FINBOURNE.

The panelists were clear that firms should focus first on the process and the business need rather than just looking at the shiniest new tools. “What money will they save, what potential revenue could they open up, what risks could they mitigate? How will they get a better understanding of their data within the organization to be able to understand where potential risks may be or how they can optimize the business?” Cooper said.

“It is incumbent on good technology vendors to not necessarily sell what they have, but actually look at what solutions people need. That is easier said than done, but it breeds better outcomes.” – Tom McHugh, FINBOURNE.

What is the view on realistic uptake and the application of AI in data management within investment operations today?

Artificial Intelligence is seeing a lot of hype for its ability to process data at scale, but it is not yet widely used in financial services. “People want AI in their technologies, but do not always understand the costs involved,” said Castaneda. It is not just the AI models and compute power, but all the upfront energy that goes into creating a data strategy or a data environment to enable AI. 

 Miguel Castaneda, Alpha Alternatives

“Firms should approach AI incrementally, and not just in terms of technology, but also in terms of people, process and data.” – Miguel Castaneda, Alpha Alternatives (formerly Lionpoint Group).

Firms have been very cautious with using AI, according to McHugh. People are using AI to provide meeting summaries and as an email assistant. But in the rest of financial services, people are wondering if they have the right to train the model on data they are looking at. It is unclear who owns the product of that. There is no real standard on digital rights for market data, for reference data and for the customer’s data. And firms have not yet put in the necessary safety rails for people to be comfortable using AI, McHugh said.

If AI can help in the workflow and give a helpful suggestion or automate a task in an overall workflow, where a human is still in the loop, that is a good use case for now, said McHugh. The technology will evolve and become a more expected feature, but firms need to make sure they have the right governance and security in place to know what happens once they enable AI.

Individual Investors Are Driving Growth in Private Markets

Traditionally, high-net-worth individuals and family offices have struggled to invest in private markets, in spite of their high collective AUM. In this article, Myles Milston, Co-Founder and CEO of Globacap gives insight into how technology is opening up access to private markets for private investors and analyses how increasing allocations from these investors will affect the market.

Private markets are experiencing a boom. Allocations are significantly increasing across the board from all types of investors. High-net-worth individuals (HNWIs) and family office investors are no exception to this rule. Diversification into private markets is now a strategic must-have for investors, particularly as the market faces higher levels of volatility.  

This is a huge moment for individual investors, who aren’t letting this opportunity escape them – individual investors are set to invest an additional $1 trillion of retail assets into alternatives over the coming five years.

Private investors now oversee a sizable proportion of worldwide AUM, given the substantial growth in private wealth in recent years. The collective private markets assets under management (AUM) of family offices have more than doubled in the last 10 years, and the number of global private wealth owners is set to increase by 28.1% by 2028.

This positions HNWIs as key catalysts for future growth in private markets. But why are private market allocations growing at such an increased rate and how will this affect the real economy? economy?

Private markets pique investors’ attention

Private markets have made huge strides forward in recent years. Over the past decade, they have increased funding, boosted liquidity and embraced automation and technology, making them an attractive alternative to investing in public markets.

While EMEIA IPO activity continues to shrink, private markets are beginning to function more smoothly, quicker, more efficiently, and at a greater scale than before.

Private companies planning to list and those that have already gone public are increasingly finding private markets more attractive. This is because companies can now access the funding and liquidity they need while avoiding the complexity and expense of going public. 

For investors, private markets offer a variety of benefits. Not least among them are the higher returns and stability they often provide, doubling as a strong hedge against inflation. Private markets also give investors a chance to invest in the real economy, diversifying away from more traditional stocks and bond investing routes.

Now expected to grow at double the rate of public assets, private markets are predicted to reach an AUM of between $60 trillion and $65 trillion by 2032.

Barriers to investing private markets

Historically, HNWIs and family offices have faced challenges in accessing private assets, and it’s been cost-prohibitive for private markets-focused funds to offer access at scale. Slow transaction times, often taking weeks to process, combined with low liquidity and funding levels have kept investors reluctant to engage with the space.

Specifically, HNWIs and family offices’ small size often acts as a barrier to entry into the market.  With typically lower AUM and high minimum investment requirements that are common for private market opportunities such as private equity or venture capital, HNWIs and family offices are often unable to invest.

In addition, regulation also prevents individual investors from entering private markets, as they need to be officially certified as having a high net worth or as sophisticated investors. To be certified, investors must have an income of at least £170,000 and net assets of at least £430,000 over the last financial year, preventing many from participating in the market.

However, strides forward in private markets’ technology have reduced transaction times and opened up accessibility to make private markets an attractive alternative to traditional public markets. Advances in workflow automation software, for instance, are bringing private markets’ efficiency in line with that of public markets.

Additionally, new technology and products, such as digital nominee solutions that offer alternatives to traditional structures such as SPVs and feeder vehicles, have made it feasible for asset managers to take HNWI investment at scale efficiently by pooling smaller ticket investors under a single LP.

As a result, interest from private investors in allocating greater portions of wealth into private markets is on the rise. In fact, new research shows that nearly half (46%) of family offices see an increased focus on private markets as a key area of difference for the next generation’s investments.

Driving the economy with increased participation

Investors of all types are eager for a slice of the lucrative private markets pie, with this becoming one of the more exciting areas of the market in recent years. Private investors’ flexibility means that they are particularly well-positioned to adapt quickly and take advantage of any new opportunities.

Historically, HNWIs and family offices have found it difficult to access the lucrative returns on offer in private markets. However, access is being widened for these investors through new technology such as digital nominee structures, empowering them to become more involved in this area of the investment market.

Growing incoming allocations from private wealth, along with bolstered private markets AUM and more seamless access to investments could provide a significant boost to the economy by unlocking trillions of dollars’ worth of new capital for investment in companies globally.

TECH TUESDAY: How Many Investors Really Track the Major Indexes?

TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.

As we’ve noted before, index rebalance days tend to result in much larger closing auctions. That’s because most index funds try to exactly match what their index provider does – and index changes happen using the official closing price.  

For example, a typical close accounts for less than 10% of volume traded during the day; meanwhile, some index rebalance dates see over 30% of volume traded in the close. 

Based on this knowledge, we can use the size of the closing trades on index addition days to estimate total index fund tracking. The results show that many companies might have around a quarter of all float-shares bought by different index funds.

It’s important to note that companies benefit from being added to major indexes as they see significant new (and typically long-term) investors. 

Index rebalance days have large close volumes

As the data in the chart below shows, there are just a few dates each year index trades typically happen:

  • MSCI is (typically) at the end of May and November. S&P, Nasdaq and FTSE indexes rebalance on the third Friday of the last month in the quarter. That’s also “quad witch” day, which makes the close volumes even higher. 
  • Russell rebalances their indexes once a year, usually on the last Friday in June that is not quarter end. 

Chart 1: Index rebalance days see exceptionally large closing volumes

Index rebalance days see exceptionally large closing volumes

A typical close currently adds to around $40 billion in trading, which is less than 10% of the volume traded during the day (grey dots). 

In contrast, S&P and Russell index dates see an average $240 billion trading in the close, adding to over 30% of the day’s closing volume, and significantly elevating the total trading during the day (ADV), too. Even MSCI rebalances cause the close to increase to around 20% of ADV. 

Using closing trading to estimate index tracking

There are two ways we can estimate how much index funds tracking each index adds:

  1. Top down: Sometimes index providers disclose how much money tracks their indexes. Some academics have also added up all the index fund holdings from 13F filings. You could even try to reconcile that to ICI disclosures that nowadays say index funds are around 50% of all mutual funds.
  2. Bottoms up: Another way is behavioral – to look at how many shares actually trade on the index rebalance dates. Knowing that index funds only really need to trade on the rebalance date, and that in order to accurately track the index before market open the next day, many funds prefer to trade at the same time as the benchmark is changed (which is the close!), representing another way to see how big index funds might be.

Today, we use the bottoms up approach to see how many float-shares actually trade on rebalance dates across the major U.S. indexes. The results (Chart 2) show that:

  • Small caps actually have significant proportion of index tracking, 27% total in the S&P 600 and Russell 2000.
  • Although, a large cap can qualify for all three major indexes, including the Nasdaq-100®, it could have up to 28% of its float shares held by index funds.

Even though far more dollars are indexed to the S&P 500, as much as $7.5 trillion, it’s the proportion of each company’s float shares that we are measuring here – and that should be consistent across all companies in each index.

Chart 2: Index day close trading indicates index tracking funds could own around 25% of float shares in many companies

Index day close trading indicates index tracking funds could own around 25% of float shares in many companies

Importantly, neither the top-down nor bottom-up approach is perfect. Some futures and options hedges might trade like index funds, while actual index funds might pre-position to try to limit market impact from the predictable index trade. Some also claim that some active funds trade like “closet indexers.”

Closing volumes need to include some off exchange trades now too

Off-exchange trading is becoming larger and larger. That’s also true in the close.

Exchanges and brokers can both publish so-called “echo prints” that copy the official close price (MOC) but print to the “tape” after they find out what the official close price is.

In this study, we add the echo print trades that occur from 4 p.m. to 8 p.m. and are at the MOC price – to the “MOC volumes” we use above. Interestingly:

  • On a typical day, we see the echo prints average around 30% of the MOC volumes (grey dots in Chart 3).
  • On an index rebalance day, the official close seems more important, with echo prints adding to around 20% of all trades.

Chart 3: Echo prints contribute a consistent proportion of total MOC-priced trading 

cho prints contribute a consistent proportion of total MOC-priced trading 

Normal close trading is likely a fraction of trading on index rebalance dates 

Some might also wonder if we shouldn’t remove “normal”, or non-index, MOC volume from the totals above. Especially given we have previously said that the MOC is typically more active (and less index) than people think.

However, when we look at how much volume trades in a “normal” close – and compare it to how much trading that we see on index addition dates – we see that any adjustment would be a rounding error (as Chart 4 shows). 

The reason index trades appear so much larger in this view is because the data in chart 1 is for the whole market – while index trades typically affect just the added stocks – so the effect is magnified (or focused) on the index add stock. 

This also highlights how important index additions are for companies. They result in a material fraction of total float shares being bought by index funds – and index funds are typically long-term holders

Chart 4: The “normal” MOC activity is a fraction of the index trading on a rebalance day

The “normal” MOC activity is a fraction of the index trading on a rebalance day

The data in Chart 4 also shows the typical dispersion of results that we average in Chart 2. Although the average S&P 500 addition adds to 16% of a company’s float shares the actual trade typically ranges from 14% to 18%, and sometimes much more. 

It’s also worth noting that most S&P additions happen away from quad witch. That’s important, as quad witch trading might otherwise exaggerate the S&P results. 

Typically, the S&P quarterly rebalance includes “other” index changes, like float, style and shares outstanding updates. Because the S&P 500 is a “500 company” index at all times, additions are typically made whenever another company leaves the index (often through M&A). Although, to be fair, the past few quarterly rebalances have included some promotions and demotions to reallocate stocks to more appropriate market cap groups.

Index addition is good for companies

We know that index addition creates a significant amount of liquidity in an added stock. 

This research shows just what proportion of float shares change hands, and are likely bought by index funds, on those dates.  

Importantly, index addition is mostly good for companies. Index funds are a large, long-term, new investor base. Index inclusion also increases interest from active mutual funds, which may increase access to U.S. capital for future investments.


Nicole Torskiy, Economic Research Senior Specialist, contributed to this article.

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TS Imagine Acquires PrimeOne

TS Imagine has acquired PrimeOne, a provider of operational risk management solutions for the prime brokerage industry, from S&P Global, according to CEO Rob Flatley.

“I am fortunate to be able to reunite with the PrimeOne team at a perfect time for TS Imagine,” he told Traders Magazine. 

Rob Flatley

The combined team will operate under the TS Imagine brand, and global headquarters will remain in New York. EJ Liotta, leader of PrimeOne, will join TS Imagine’s executive team.

PrimeOne was founded by Flatley in 2011, as part of CoreOne Technologies. He then sold CoreOne and its four core products, RegOne, DeltaOne, VistaOne and PrimeOne, to IHS Markit in 2015. In 2022, S&P Global and IHS Markit completed their approximately $140bn merger, and PrimeOne’s products became part of S&P Global Market Intelligence.

Flatley formed TS Imagine following the merger of TradingScreen and Imagine Software in 2021.

TS Imagine innovates by drawing on nearly thirty years’ experience serving the world’s most sophisticated financial institutions through changing markets and shifting regulatory landscapes.

The Company delivers a SaaS platform for integrated electronic front-office trading, portfolio management, and financial risk management tools to the buy-side and sell-side. 

“We are well-positioned with large institutional clients, on both the buy-side and the sell-side, for cross-asset class electronic trading, and cross-asset class financial risk management,” Flatley said.

“The financing business is adjacent to the markets currently served by TS Imagine. For firms that use leverage, trading and financing are inextricably linked. Their trading flows will follow where they finance,” he said.

Flatley said that the hardest part about setting up financing technology is the actual integration with risk management and the margin systems: “that’s where a lot of people might get into trouble”.

PrimeOne’s platform offers key services such as stock borrowing, lending, and margin management, which will complement TS Imagine’s existing technology. 

The acquisition will allow TS Imagine clients to streamline workflows and improve operational efficiency.

When Flatley bought TradingScreen and Imagine Software, he realized that he’d “love to buy PrimeOne back.

“I felt like we had two amazing pieces of a puzzle, but there was a third piece where we could go in and really help firms deliver what they need faster, and also do that with zero operational and integration risk,” he commented.

The integration of PrimeOne’s tools with TS Imagine’s RiskSmart platform aims to enhance real-time risk monitoring by leveraging PrimeOne’s operational and financing data. Additionally, PrimeOne’s expertise in swaps will support the expansion of TS Imagine’s TradeSmart OEMS into swaps.

The acquisition creates several opportunities in product integration, product development and cross-selling. 

According to Flatley, the market has expressed a desire for a single solution with RiskSmart quality real-time analytics paired with the robust prime brokerage infrastructure of PrimeOne.

“There are not that many systems where the buy-side and the sell-side can actually use the same risk management system,” Flatley said.

In addition, PrimeOne’s expertise in swaps will be integrated with TS Imagine’s TradeSmart OEMS, paving the way for electronification and automation of the swaps market.   

The current state of electronification in the swaps market is “pretty weak”, according to Flatley. “When you want to go out and price a swap, it’s almost done exclusively on chat and email,” he said.

PrimeOne’s technology electronifies the equity terms for the swap and the financing terms, so the buy-side and the sell-side have the same rule book in terms of how they’re going to manage their exposure, Flatley said.

“We’ve electronified the fixed income market using electronic RFQs, we’ll take the same approach in the swaps market,” he said.

Commenting on the impact of the greater electronification in the swaps market, Flatley said: “The buy-side will save money, because today that work is analog and it’s not that efficient.”

In addition, Flatley thinks that firms will be able to get in and out of positions a lot easier with fewer error prone operations.

“It’s a good performance enhancer as well. You get the best inventory management relative to the exposure that you’re trying to achieve,” he added.

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