Feast in the Front Office, Famine in the Back Office – Competitive Advantage in the Middle?

In the capital markets industry, the front office has seen much growth and innovation in recent years supported by substantial technology changes. At the same time, the back office has seen very little investment. While it’s been a feast in the front office and a famine in the back office, can investment in the middle office now bridge the gap to help firms achieve an edge over their competition?

The front office has traditionally been viewed as the almighty revenue generator, and has benefited from several strategic changes. Access to emerging markets, algorithmic trading, high frequency trading and more have all resulted in new, high volume “stuff” being thrown over the post-trade wall.

Meanwhile, back-office systems supporting the post-trade world are often legacy, supporting an intricate historic hardwired network of information flow to-and-from CCPs, depositories, custodians, regulators, general ledgers, etc.

These back-office systems and the organizations around them often have little capacity or appetite for implementing rapid or major change. This has meant they’ve used many manual “plugs” with all the inherent errors, costs and operational risk this approach brings.

Is there a middle office middle ground?

A smart and flexible middle office system used as a global transaction management layer can help the post-trade world transform a legacy client service into a market differentiator as well as improve efficiency and risk control.

In terms of service, a competitive middle office’s orders executed in new venues or across venues and currencies should result in confirms and allocations to and from clients in real time with “no touch.”

Likewise, an explosion in volumes can be managed by a flexible netting module matching with clients, markets or introducing brokers and vastly reducing the volumes that go to a legacy back office. Accurate settlement instructions can be attached to trades for new markets, depositories or custodians for pre-settlement matching before they are passed to the back office, reducing settlement failures and increasing efficiency.

With a flexible, competitive middle office, counterparty and position risk information can be made available in real time to the risk department or even to the front office to help trading decisions, enhancing risk control.

Of course, we are discussing a middle office evolution, rather than revolution. Core books and records will remain where they’ve always been – in back-office systems – but a flexible middle-office system controlled by business and operational teams, can deliver a valuable competitive advantage.