Why Brokers are Rethinking Their Technology in Response to Tighter Regulation

Hey there! It’s Tech Tuesday, and we’ve got some interesting news for you. Institutional trading firms in the U.S. are facing stricter regulation and harsher consequences for non-compliance. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are really cracking down on these firms.

You’ve probably heard about the SEC’s equity market structure proposals, which have caused quite a stir. But the CFTC is also getting in on the action by increasing monetary fines to discourage misconduct. They want to make sure that the penalties outweigh the costs of compliance, so firms can’t just treat them as a normal cost of doing business.

With all this regulation and enforcement activity, brokers are realizing that they need to step up their game when it comes to compliance. In the past, they might have just hired more staff, but now they’re focusing on optimizing their technology systems to do more with less.

Compliance costs are rising, and the impact is being felt by everyone in the trading markets. Arthur Bunyatov, Head of Sales for Nasdaq Execution Platform, said it best: “Firms need to consider their technology systems and how equipped they are to meet the ever-increasing demands of regulation.” It’s not just about following the rules; brokers also need to prove that they’re in compliance.

The SEC’s equity market structure proposals have some specific requirements for brokers. They’ll have to adjust minimum pricing increments for certain stocks and ensure that certain retail trade orders go through auction mechanisms before routing to established market centers. It’s a lot to handle, but brokers have no choice but to adapt.

And it’s not just the SEC. There are other regulatory changes happening in North American markets too. Settlement for equity trades will be shortened from two days after trade to just one day in May 2024. Plus, there’s talk of expanding Regulation Systems Compliance and Integrity (Reg SCI) to include larger broker-dealers.

But here’s the problem: many firms are still stuck with outdated technology platforms and infrastructure. Can you believe that almost one-third of systems are considered legacy technology? That’s according to a survey by Nasdaq and ValueExchange. These old systems hold firms back, forcing them to spend money just to maintain the status quo instead of taking advantage of modern technology’s flexibility, scalability, and cost efficiencies.

In the face of all these changes, some broker-dealer firms are reevaluating their compliance and technology architecture. They’re realizing that relying on in-house systems is risky and resource-intensive. That’s why we’re seeing a trend of larger financial institutions working with fewer technology partners. It’s all about streamlining the tech stack to unlock advantages, improve performance, and save costs.

So, there you have it. Brokers are feeling the pressure of tighter regulation, and they’re turning to technology to help them navigate these challenges. It’s a tough road ahead, but with the right systems in place, they can stay compliant and thrive in the ever-changing world of finance. Stay tuned for more Tech Tuesday updates!