David Heathcote, Global Head of Debt Advisory, KPMG
The technological advances in the past decade have created an increasingly digitised landscape for financial markets. This has created new opportunities by enabling direct, immediate, and accessible pathways to capital.
One notable trend that has been in use for raising capital is digital platforms. Traditionally, capital would be raised through brokers and their proprietary list of capital providers via phone or email. One shortcoming of this approach is that all capital providers would not be reachable and market/pricing efficiencies would not be fully achievable. Globally, we have seen the emergence of online platforms offering more transparency and standardisation in capital raising. A centralised database accessible to both financiers and issuers allows for deals to be found, digested quickly, and bid upon by multiple parties. With increased competition comes pricing efficiencies. Many banks, market operators, capital advisors such as KPMG and buy-side firms are investing in these solutions as a means of streamlining origination and funding, and we expect this trend to continue.
Artificial Intelligence in Markets
The expansion of the data-centric realm has changed the way data is used, stored, and analysed across the entire spectrum of the capital market. Applications of Artificial Intelligence (AI), data analytics, and machine learning has enabled financial institutions to harness the capability of computing power to develop quantitative models, create cost efficient processes for the development of targeted products and analytics.
For entities with access to big data, decisions can be automated and integrated into the pricing infrastructure, thereby mitigating risks and assessing probable outcome of capital market transactions. This has introduced the market to high frequency trading algorithms that have the advantage of harnessing a wide variety of data sources, analysing it, and implementing trading decisions based on this analysis. This expansion of machine driven trading has resulted in almost half of all US-based equity trading to be managed by quantitative decisions.
This is expected to increase in the future as computing advances allow an increasingly expansive category of data to be incorporated into trading decisions.
Existing players will need to either compete or collaborate with the new, innovative firms to ensure that they are at the forefront of the customer experience chain
Distributed Ledger Technology (DLT)
In the last couple of years, DLT has been recognised for its ability to reliably keep records and maintain traceable history of ownership through either permissioned or permission less networks. This key advantage has begun to be applied to one of the most high frequency marketplaces in Australia. The Australian Stock Exchange (ASX) is one of the first institutions in the world to explore and implement distributed ledger for capital issuances. They are currently in the process of testing and establishing a distributed ledger system to replace their existing trade clearing and settlement system. This will potentially optimise workflow productivity for settlement processes and reduce the timeframe of transactions from the existing T+2 timeframe to near instantaneous settlement.
We expect the use of DLT to expand significantly over the next couple of years and it will become an integral part of capital market infrastructure as markets seek to re-engineer processes and optimise regulatory requirements which are increasingly becoming part of capital market transactions.
The advent of the digital age has also brought forth a more digitally connected era, whereby entities and individuals have multiple forms of access to capital market platforms. Online interfaces through computers as well as mobile/tablet platforms have democratised access to services and products that typically maintained high barriers of entry.
Capital market infrastructure which has historically hindered new players in this space are becoming less of a barrier as technology provides more efficient avenues to create, share, and transfer value. Access to banking is an example of this shift. Traditionally, a relationship-based product with store-fronts, innovations such as simplified user-experience (UX) online access and digital payment systems introduced by fintechs has made access to capital a more agile and truncated process.
This digital disruption has already put pressure on the margins of incumbents and based on market results new players have started gaining a substantive market share in the capital markets space through innovative measures. Existing players will need to either compete or collaborate with these firms to ensure that they are at the forefront of the customer experience chain. Many incumbents have started to protect their businesses by acquiring and developing fintechs through innovation incubators and adopting new technologies developed by these new entrants.
The last 10 years has evidenced significant change to the way we have traditionally thought about capital solutions, thanks to technological advancements. Leveraging data combined with new market approaches are driving more efficient solutions and increasing our speed to market. These developments still feel as though they are at the early stage in their lifecycle with further advancements expected in the coming 10 years, creating considerable opportunities for technology officers focused on capital solutions.
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