A Short History of 'Equification'

The 2008 financial crash heralded big changes to the regulatory landscape within the capital markets. It started with the regulators suddenly realising the true scale and complexity of the global financial sector - how could any of the problems be fixed or even identified in the first place when the issues often transcended geographical boundaries or political, legal and regulatory jurisdictions? 

It was clear that motions had to be made towards global transparency, to address the problems experienced between governments and banks worldwide. 

The G20 accord led to legislation such as Dodd-Frank in the US and the MidFid II directive in Europe being introduced. These legislative measures are leading the markets forward into the process of 'equification', that is, the process of financial instruments being created that look increasingly like equities. Equities are far more transparent and traded on an exchange in an electronic format (as well as going through the process of clearing), so from a regulatory perspective their structure is the ideal that other asset classes should seek to replicate. 

The inherent structural change to these instruments and the knock-on impact that has had in the marketplace has considerably challenged capital markets participants. Electronic trading is here to stay - it is cheaper and more cost effective, and there is far less chance of a trading firm being targeted by a regulator if the business is conducting trades electronically rather than by voice. Heads of trading organisations are discovering that in this day and age, when people are still heavily involved in the trading cycle, they tend to be the subject of intense and constant scrutiny from bodies such as the New York Attorney General, the Federal Reserve and the Financial Conduct Authority (FCA). With voice trading, a high level of transparency is more difficult to achieve and as a result there is a desire to pull away from trading activity of this nature. 

Such a fundamental shift in the practise of trading means that the cost of adapting will be high and the process will be complex. Larger banks especially will be running on legacy systems built up over years that are a patchwork of functionalities, rendering them slow, inflexible and expensive to change.  

Fixnetix began in the equities market as the asset class began its journey into electronic trading and its quest for a more transparent marketplace. Now the rest of the industry is moving in the same direction, putting Fixnetix in the unique position to be able to use our expertise to help guide trading firms through the difficult transitions that they are facing.