TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.
(This article provides information about Nasdaq’s Pre-Trade Risk Checks, available to U.S. equities trading clients.)
Risk is a 24/7 concern for market participants and market operators alike. But what are the trends shaping risk management in an economy undergoing a digital transformation?
“The capital markets industry is undergoing a digital revolution led by cloud adoption and a shift to modern SaaS platforms,” Amy Kohn, Principal Product Manager of North American Markets at Nasdaq, told Traders Magazine. “This enables firms to be more agile, more responsive to changes in market conditions and more flexible to meet the evolving needs of clients and regulators.” Firms are expanding their transformation strategies beyond customer-facing activities, trading and operations to other parts of the organization, such as risk management.
“This tech re-architecture creates opportunities for modern risk platforms to offer interoperability, shared information across firms, new automation and workflows, and more flexible controls that complement firms’ risk systems, governance policies and procedures,” added Kohn.
In capital markets, we expect to see firms continue to lean on digital transformation with a focus on strategically using data and infrastructures. Building on workflow automation, incorporating ‘smart’ visualizations, interactive interfaces and artificial intelligence (AI) empowers firms to “do more with less.” Benefits include workforce enablement and cost reduction, as well as improvements in operational agility, resilience and customer experience.
“As firms modernize their infrastructure and add workflow automation, risk monitoring information is more widely available, which enables people to be more responsive,” Kohn said. “The systems can better support risk policies and procedures that regulators require.”
Still, there is substantial room for capital market modernization. For instance, a 2022 industry report showed that 81% of brokers and banks in U.S. and Canadian markets still used either manual processes or home-grown systems to support their post-trade processes.
While the pace of digital transformation has been slow at times, firms’ efforts have gained steam over the past couple of years, especially as the COVID-19 pandemic changed how and where work got done. Cloud computing was among the top five 2023 spending priorities for more than 40% of U.S. banks, and cloud partnerships have proliferated across Wall Street as banks, hedge funds and private equity firms warm up to the technology.
Exchange operators play a key role in the industry’s digital transformation – and concurrent risk management – by providing the cloud infrastructure and data services that underpin deterministic, low-latency trading. Market participants need their own risk management platform, of course, but the best risk management is at the firm level, overlaid with risk solutions provided by an exchange.
“We hear from our customers that they want to modernize their tech stacks, and capital decisions prioritize high impact and time-bound projects,” Kohn said. “The most effective way to do this is by using trusted, transparent and modular platforms that provide a quick return to value and help safely build on a digital transformation journey. That’s what’s important.”
As an exchange, Nasdaq has the capacity to address these customer needs. Beginning in March, Nasdaq will offer members and sponsored access firms configurable risk checks via a RESTful API service. These checks are the “last stop” before orders are sent to the exchange, underscoring the critical role exchanges play in providing risk management solutions.
