TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.
Institutional trading firms in the U.S. are facing more regulation, and greater consequences for failing to comply.
It’s well-known that the Securities and Exchange Commission has been extraordinarily active in the past few years under Chair Gary Gensler, perhaps most controversially with its equity market structure proposals.
For its part, the Commodity Futures Trading Commission is hitting firms where it hurts – i.e., increasing monetary fines to deter misconduct. “At the end of the day, the penalties need to exceed the costs of compliance, to avoid the risk of institutions viewing penalties as an acceptable cost of doing business,” CFTC Enforcement Director Ian McGinley said in an Oct. 17 speech.
The increase in regulation and enforcement activity means that brokers today need to do more to ensure compliance. Whereas in the past that would have primarily entailed adding staff, firms today emphasize optimizing technological systems to enable doing more with less.
“The costs of compliance and, notably, the costs of noncompliance are rising. The impact on trading markets is pressure from all sides being felt by market operators and participants alike,” Arthur Bunyatov, Head of Sales for Nasdaq Execution Platform, wrote in a recent Insights article. “As firms assess their capacity to manage regulatory costs and change, it’s important they consider their technology systems and how equipped they are to meet ever-increasing demands.”
Among other asks, the SEC’s equity market structure proposals would require brokers to adjust minimum pricing increments, or tick sizes, for certain stocks, and also ensure that certain retail trade orders go through yet-to-be-established auction mechanisms before routing to established market centers. Brokers face a two-part lift: the need to comply with the rules, and the need to prove compliance.
There are also significant regulatory changes afoot across North American markets, where settlement for equity trades will narrow from two days after trade, or T+2, to T+1 in May 2024, and a potential expansion of Regulation Systems Compliance and Integrity (Reg SCI) would broaden the rule’s application to certain larger broker-dealers.
One problem many firms face when adjusting to changing regulatory mandates is the prevalence of older technology platforms and infrastructure, which comprises almost one-third of systems, according to a Nasdaq and ValueExchange survey. This so-called legacy technology can hamstring firms who need to spend just to keep the status quo, rather than take advantage of the flexibility, scalability and cost efficiencies provided by modern technology.
“In this state of continuous change, some leaders at broker-dealer firms are reevaluating the expense of their compliance and technology architecture in the shadow of growing regulations,” Nasdaq’s Bunyatov wrote. “The complexity of the upkeep and support of in-house systems adds an element of risk while demanding increases in resources and training. As such, we’ve observed a general trend toward larger financial institutions working with fewer technology partners to reduce complexity and drive greater operational efficiencies.”
Added Bunyatov: “Streamlining the tech stack can help unlock advantages, performance and cost-savings.”
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