Leveraging Scale to Boost the Post-Trade Life Cycle
Post-trade has historically run behind in processes and technology compared with the pre-trade and execution segments of the trade life cycle, but the gap is narrowing amid increased clearing volumes, expanded regulatory mandates and a higher bar for best practices. Clearing houses and providers of clearing, settlement, custody, and other post-trade services are refining their product offerings and moving into new asset classes to better meet the risk management needs of trading clients, whose back offices are aligning more closely with front and middle offices.
At Trading Technologies, we’ve become deeply involved in this evolution.
Our Strategic Acquisition of ATEO
Our history and recent evolution of our clearing offering begins with a key strategic move: the acquisition of ATEO in February 2024. As a result, we’ve been firmly in the post-trade business for about 18 months.
Through the ATEO acquisition, TT now has two products in the post-trade and clearing space. One is TEO, a post-execution allocation and confirmation product, and the second product is TT Clearing, a matching and clearing product connected to clearing houses. So for all listed derivatives markets, this helps handle all the activity that needs to happen on trade dates after a trade has been executed.
There were a couple of things at work in our decision to buy ATEO. First, the ATEO products are extremely good products. But ATEO was quite a small company, so their ability to contract with large global banks, for example, was limited just because of the size of their organization. So part of our intent was simply to take advantage of TT’s larger size and relationships. This has played out, as we are leveraging wider TT relationships and we are now able to offer our clearing services in the TT cloud through our managed service offering.
The second aspect to the ATEO acquisition is from a technical perspective. Historically, there has been quite a divide between the front office trading and execution, and the middle and back office with the clearing activity. For a long period of time, there have been two separate worlds that talk to each other, but haven’t fully integrated. We believe that as things change with technological innovations in the coming five to ten years, we’re going to see those barriers dissolve. This has already begun, as banks and brokers are starting to look at the front office and the middle office as being part of one holistic whole supporting the trade. So at TT we wanted to have our software and our technical tools do the same thing, and be much more interlinked between front office execution and middle office clearing.
The third aspect is to build a fully integrated front-to-back service that empowers us to anticipate our clients’ needs, deliver innovative solutions, and create lasting value through a seamless and consistent experience.
Key Industry Trends
These strategic goals are informed by broader clearing trends we see in the industry. In general, people need to get away from inefficiencies in clearing, because anything that fails an automated process requires manual intervention on trade date and adds risk. For example, for a trade that goes to the wrong account or even the wrong broker, if that’s not resolved on trade date, that brings in a lot of risk to an execution organization or a clearing organization. Historically those problems have been solved by teams of experienced middle office people who look for those discrepancies and solve those on trade date, and indeed there are some extremely good people who do that for banks and brokers globally. But, that is quite manually intensive, as even if you’re looking at automated straight through rates of 95% or 96%, that’s still a large number of trades that need manual intervention. So the entire industry is looking for ways to avoid those manual touches, and streamline the processes that are in place to make that a bit more robust.
This shift is also being driven by regulatory changes. The US shortened its settlement to T+1 last year, and the EU and UK are working toward that. Moreover, many of our clients are now asking us to extend our middle office capabilities to other asset classes, which is an area we are currently working on. As you look across different asset classes – from securities, to listed, to OTC products – you’re seeing moves to T+1 plus settlement, top day settlement, and even continuous 24-hour settlement.
We’re not necessarily pushing or driving in any direction, but what we are doing is ensuring that our platform is built in such a way that you can do real-time continuous settlement if that’s where the market goes. The need for very quick settlement is becoming increasingly important, so we need to have that capability.
Differentiating Our Offering
While the technical software for clearing is quite commoditized, we believe TT can differentiate itself through scale. Most firms are looking for a true global provider that can stay up to date with all the changes that are happening. If you think about the listed derivatives market, if we’re going to be supporting the clearing houses, we need to support all clearing houses globally. That means you need not just technical teams, but business teams that can liaise with clearing houses, whether it be in Chicago, New York, London, Paris, Seoul, Singapore, Tokyo, or Sydney.
I think the big benefit that we bring is that we have those teams. We understand the new contracts that are coming out, and the specs of the technical upgrades. So while we believe we have best-of-breed functionality, the benefit is not necessarily differentiating in terms of functionality. Rather it’s about helping firms keep up with the complexity and the cost of clearing on markets globally.
Looking ahead, our future plans for TT in the clearing space are all about creating better links between the middle office and the front office. This is where we can differentiate and be better. Say a trader today is sitting on an execution screen. They click on the order and see the order was filled at a certain price. Historically, that was the end of the story for the trader. But now it’s not really the end. If a trader has been filled on a particular order, they need to know which end accounts they need that order to go to, and in some cases they’re going to be passed off to different clearing brokers as well. You might have one order that ends up as four different trades, with two different brokers in four different accounts.
Seeing the progress of that throughout the day has historically been tracked in the middle office. But now we’re trying to have the trader see their fill as a starting point. They can then see that the allocation for that trade has been processed, it has been split into four child clearing trades, two have been accepted by the clearing broker and they are good in the final account.
Beyond facilitating internal workflows, we also want to leverage our existing execution platform to create a post-trade confirmation network for the broader financial institutions ecosystem. So being able to follow through on the post-execution workflows and trade dates is something we are looking to bring in over the next 12 to 18 months. That’s probably our biggest current initiative.
To learn more about how TT Clearing and TEO can help optimize your post-trade workflow, get in touch by completing our online inquiry form.