Finding an execution platform Plan B in securities finance

Key Takeaways

• Reliance on one execution platform creates risk
• Firms seek alternatives, but implementation is a challenge
• Moving to new or additional platforms comes at a cost

Relying on a single execution platform provider for securities finance transactions has risks, and adding new ones can bring benefits, but it can be challenging. The very real need to consider cybersecurity or operational complexity must be balanced versus the benefits of increased liquidity and operational efficiency make it a complex undertaking.

Recent research from Finadium covering 16 user firms, from the largest by securities on loan/securities borrowed to important niche liquidity providers and takers, finds that while most expect their onboarding process with a new vendor to take just a few months, others are looking at a year or more.

The liquidity concern

Liquidity is a primary concern for every firm, and it is crucial to the success of an execution platform.

“Lenders and borrowers need to see their counterparties on a platform before prioritising that venue over another where the liquidity lies,” Finadium notes.

Following a recent cyberattack at a major securities lending platform, trading firms are considering their options, including managing their internal procurement needs and seeking answers regarding the liquidity of new platforms.

This is not an easy undertaking, with one survey respondent asking, “Where will all the liquidity come from for these platforms?”

The demand for innovation

Switching to a new execution platform or adding another means seeking additional functionality.

Respondents to the Finadium survey said they expected to be rewarded for their considerable market investigations with a provider that offers more than their current vendor offers.

Most executives told Finadium that multiple competitors would spur new thinking about product development while lowering costs.

“It seems that everyone has been waiting for this to happen organically; now the need is seen as strategically important to both individual business units and the broader firm in the medium term,” the research finds.

Users pointed to examples of using new data sources to create automation protocols and hoped that more volume on different platforms would encourage a more diverse set of technology offerings.

The importance of cybersecurity

Any firm seeking a new execution platform must place robust security procedures front and center when selecting technology partners. Indeed, internal cyber teams today “are taking a lead role in the procurement and review process”.

Any execution platform will need to demonstrate a commitment to cybersecurity.

However, the Finadium research suggests that firms know little about what good cybersecurity looks like: “Every executive we spoke with recognises the need for change, but fewer are certain about what that change looks like or the active steps needed to achieve it.”

The cost factor

Managing costs is a significant component when selecting securities execution platforms, and moving to new vendors has its price.

Finadium finds that while direct expenses for internal or consultant resources should be modest — the lowest estimate from firms surveyed was USD 150,000 and the highest at USD 3,000,000 — some respondents noted that connecting to new venues with complex trading and post-trade transactional lifecycle messaging could be more expensive, potentially reaching the USD 1,000,000 mark for internal costs.

The key here is deciding whether short-term pain is worth long-term gain.

One of the surveyed executives says: “Price is important but just one factor across multiple assessments and the cost/benefit analysis.”

The securities execution platform market needs a shakeup, and the addition of new vendors looks set to provide innovation, cost-savings, and greater efficiencies.

Moreover, following the 2008 financial crash and subsequent systemic events in global capital markets and cyberattacks, resilience is high on regulators’ list of priorities, and market participants must prepare.

As an established provider of multi-market aggregation solutions across Capital Markets generally, and specifically within Secured Funding through our Anvil Execution platform, ION is uniquely positioned to help clients benefit from the transformational changes that these market developments can bring.