Panellists at this year’s International Derivative Expo conference considered regulation, technology and competition as they discussed how the industry can improve efficiency and promote healthy markets.
Despite audience consensus that the efficiency of executing futures on exchange has improved over the last two decades, the industry is not where it expected to be 10 years ago, according to Michael du Plessis, senior managing director and global head of listed derivatives at Liquidnet. “We need to meet the expectations we have of ourselves,” he continued, hoping that the next 10 years would bring accelerated improvements to the space.
Mark Pinckers, trading manager at Flow Traders, agreed. “There have been steps forward and steps backward, but the direction of travel is clear”, he affirmed, while Nick Garrow, chief revenue officer at Trading Technologies International, claimed that the situation is complicated: “there are still large pockets of inefficiency”.
Regulation
Although regulation aims to provide a harmonised, efficient basis for the industry, results differ across jurisdictions as a result of structural difference between trading venues, varied regulatory frameworks and enforcement styles and the historical development of rulebooks across Europe. A one-size-fits-all approach won’t work, affirmed Nikoletta Chelakidi, vice president and head of regulatory strategy at Eurex Frankfurt, advising that regulators avoid being too prescriptive: “The ideal approach is a balance between regulatory and industry standards and a certain flexibility.”
A particular issue for the EU is regulatory overlap, Chelakidi continued. “We need to remove certain redundancies, and better prioritise and align timelines on a regulatory and industry level,” she said, adding that the current regulatory burden forces firms to put meeting deadlines above harmonising solutions or innovating in the space.
“The degree of regulatory change is enormous,” agreed Garrow, suggesting that complete harmonisation across the EU is “impossible”. Although change may be burdensome, it is often also necessary. “Without regulation, we’d be in a world that was even worse,” opined Christian Voigt, head of markets at Broadridge Financial Solutions, with Garrow highlighting the overall positives of implementing shared standards. DORA, for example, adds another layer of requirements for vendors but “will collectively make our lives a lot easier”.
Innovation and competition
Firms need to be able to justify why customers should choose them, and differentiated product offerings is a key part of this. The panel discussed the role of patents, with Pinckers stating that open access to technology, the ability to adapt and following trends are important parts of driving change. On the other hand, the ability to patent technology helps to incentivise innovation, according to du Plessis.
When asked whether competition could harm standardisation, du Plessis shared his confidence that the markets will be able to recognise when shared, standard solutions are needed. Chelakidi added that the implementation of a generic setup across the industry would be beneficial, with firms then working on building out their products from the same core.
The main push for change comes from technology, according to Garrow. “It has been, and will continue to be, one of the biggest drivers of innovation,” he said, stating that “AI will be a huge gamechanger”.
However, in an audience poll, computing power and AI sat firmly in the middle of the pack when it came to their ability to drive innovation. AI is already being used in smaller aspects; “the real question is, when does it start taking bigger chunks of the workflow and bigger responsibilities?” asked Voigt. Considering the outlook for the technology, du Plessis predicted that the shift from large language models to large action models – which can translate human intentions into action – is three to five years away.
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