How Capital Markets Infrastructure Providers are transforming the industry

Over the last 10 years, I have seen significant changes in global capital markets. Faced with technological disruption and regulatory forces, buy-side and sell-side participants, custodians, and market infrastructure and financial technology providers have all been forced to readdress their business strategies. With this in mind, I wanted to share some thoughts gained from reviewing analyst houses’ insights and reports, listening to customers, and taking into account many industry influencers views. It seems that we’re finding ourselves at a critical stage where a new structure for the capital markets industry is emerging.

No longer is the industry largely dominated by investment banks in the sell-side and fund managers in the buy-side; instead opportunities are arising for a new group – Capital Markets Infrastructure Providers (CMIPs), consisting of trading platforms, stock exchanges, interdealer brokers, clearing houses, technology providers and securities depositories. CMIPs are regarded as the platforms, pipes and plumbing of global finance.

Only recently, I attended the Fixed Income Leaders’ Summit in Amsterdam where there were many discussions about how the sell-side and buy-side need to re-think their business models in order to succeed in this new landscape. The impact of infrastructure providers is already apparent. It’s therefore not surprising that, according to one of the latest reports from McKinsey & Company*, CMIPs will see an average annual growth of five percent through 2020, whilst the buy-side and sell-side will grow at a rate of three and one percent respectively.

So, what’s fueling this growth? There are a number of reasons, including a shift in demand from traditional sell-side. Indeed, due to the sell-side being hit with heavier capital and cost burdens, we have seen market infrastructure providers’ share of the pie grow substantially as they’ve stepped in to offer new services.

As the industry continues to evolve, McKinsey & Company see five key trends impacting CMIPs over the next year. These include:

1. Diversification into adjacent businesses
   Whilst many have already made this step, firms will continue to migrate into alternative capital markets infrastructure businesses, with larger firms expanding into post-trade and technology services.
2. The rise of the buy side
   Whilst the sell-side is still important, CMIPs are expanding services to the buy-side, where revenues are growing strongly. They are offering direct access in execution and clearing, alongside a range of pre- and post-trade services.
3. Increasing demand for data and analytics
   Data has become a growing source of revenue for CMIPs over the last few years. As new technologies leveraging data and analytics continue to be brought to market, the industry is becoming much more innovative and efficient.
4. The rise of Fintechs
   We will increasingly see CMIPs build partnerships with fintech companies to improve customer care and deliver services that a capital-hit sell-side can no longer provide.
5. Utilities as core service offerings
   Utilities deliver many cost and efficiency benefits, which compensate for the growing capital burdens firms face under new regulations. To capitalize on this, CMIPs will need to become technology leaders that can guarantee cost and service quality advantages.

Capital markets business models are changing substantially, with new opportunities arising for the buy-side, sell-side and infrastructure providers. However, what’s clear is CMIPs are in a much stronger position than the other tribes. Over the next several years, I anticipate we will see CMIPs increasingly tap into new revenue streams, build new relationships and take advantage of the market dynamics in their favour.

*Source: McKinsey &Company report – “Capital Markets Infrastructure: an Industry Reinventing Itself” (17/03).