Navigating Volatility Through Innovation And Connectivity

4 mins read

Written by David Brown | 13 July 2022

David Brown, Chief Commercial Officer of IPC

Despite negative sentiment across broader financial markets, increased volatility presents a host of opportunities for sophisticated investors, eager to take advantage of market fluctuations in their leveraged trading strategy. Organizations across financial services have been encouraged to become more flexible, agile, and responsive; market participants can’t afford to have connectivity issues interfering with generating alpha, sourcing liquidity or mitigating risk. 

Ecosystems of financial market participants are increasingly reliant on cloud infrastructure to stay connected. This is a trend that continues to grow and will have significant implications for the sector, with the global financial cloud market expected to reach $90.11 billion in 2030, up from $23.67 billion in 2020. For many organizations, the turbulence across financial markets, and the black swan events occurring at alarmingly regular intervals, has expedited the necessity for natural buyers and sellers to be connected. Digital transformation has accelerated by months or even years, placing low-latency technology at the cornerstone of global leadership. 

As financial services adjust to these realities, the most successful ones will become experts at ‘change’. In many instances, “organizations have seen two years’ worth of digital transformation in two months”, according to Satya Nadella, Microsoft CEO, as cloud infrastructure, security and high speed connectivity become critical to navigating market volatility and reducing the impact across the broader financial ecosystem. 

The Role Of Technology In Navigating Market Volatility 

During times of financial instability, access to an established ecosystem of market participants trading multiple asset classes is central to tail risk management. Sell-side firms, buy-side firms, inter-dealer brokers, liquidity venues, and trade lifecycle providers, as well as, clearing and settlement firms, will increasingly rely on cloud infrastructure for trade execution, order routing, market data delivery, and for accessing trade lifecycle services. As US stocks slide back into a bear market, and the ramifications across financial ecosystems continue to be felt, global financial market participants will need to utilize multi-cloud platform ecosystems to trade faster and become more agile to enhance competitive advantages. 

As financial institutions evolve to mitigate and leverage market movements, financial market participants expect innovative and ubiquitous fintech solutions, including: 

1. Access to a range of independent market data sources to calculate net asset values and assess risk more accurately; 

2. Exposure to a global community of liquidity venues to reduce the market impact costs of liquidating large, concentrated positions; 

3. Secure and reliable infrastructure for communications

4. Connection to a range of trade lifecycle services, including risk management, portfolio management, execution management and order management systems, to enforce position and risk limits; and 

5. Ultra-low latency connectivity to gain a valuable speed advantage when executing complex trading strategies. With increasing trading possibilities emerging in the global capital markets, firms that can access and utilize enhanced connectivity solutions have been able to capitalize on the best routes to market. Reducing latency has become an ever-increasing goal of firms, particularly the rise of stat arb desks and algorithmic traders, who are investing in ultra-low-latency trading infrastructure solutions to ensure they continue to maintain a competitive edge. 

Traditional Financial Institutions Exploring Crypto 

Alongside the extreme conditions we are currently witnessing across the traditional financial ecosystem, is the increased uncertainty across crypto markets. In May, falling crypto prices caused stablecoin, TerraUSD, to fall apart and capital began fleeing DeFi. Likewise, June’s inflation scares further intensified the crypto sell-off with various crypto exchanges halting withdrawals of Bitcoin. However, despite the recent collapse of stablecoin Terra, and heightened worries over the prospect of a “crypto winter,” institutional interest in the crypto space remains robust, albeit cautious, for some players. DBS Bank, Southeast Asia’s biggest lender by assets, plans to launch cryptocurrency trading services for retail clients within the year, an initiative that’s just one component of its foray into the tokenization of assets and blockchain technology more broadly. With other financial institutions like JP Morgan following suit, it has been widely reported that institutional interest in digital assets is not going away any time soon. 

The global demand for institutional-grade cryptocurrency surveillance and trading options servicing has  fuelled the demand for ultra-low latency connectivity and rapid execution times. Cryptocurrency traders  need the same capabilities, and access to markets and liquidity, to which they are accustomed to when  

trading traditional asset classes, particularly during times of market volatility. Furthermore, multiple  jurisdictions across the globe are emerging to cement their status as crucial regions for digital asset  innovation. This has propelled the requirement for arbitrage accelerating solutions to allow investors to simultaneously buy and sell a cryptocurrency in different markets and take advantage of any price differences.  

Building Resilience In Response To Disruption 

The effects of the bear market are being felt across the entire financial ecosystem, and although it has  been shocking in velocity, it has been familiar in structure. As history tells us, this market re-adjusts  quickly and dynamically. As financial markets across all asset classes continue to create disruption and rally to recover, technology across the back office will continue to revolutionize, allowing financial market participants to trade successfully and take advantage of market volatility through low-latency connectivity technology.