Facing intensifying rivalry and fee pressures, major players in listed derivatives markets are ramping up investment in front-office technology to bolster operational resilience and gain a competitive edge, according to a new report by Acuiti.

Competition Heats Up in Derivatives Markets, Driving Tech Investment

Acuiti's study titled "State of the Market: FCMs Front Office", produced in partnership with Broadridge, surveyed senior executives from 38 leading futures commission merchants (FCMs). It revealed that while competition in clearing has remained relatively stable over the past five years, trading and execution have seen a significant uptick in rivalry and fee compression.

Currently, the heightened competition stems primarily from other sell-side firms. However, the landscape is expected to shift as non-bank liquidity providers expand their reach into listed derivatives markets.

In response, FCMs prioritize customer service and channeling more resources into front-office technology upgrades, with around half of the firms increasing their tech budgets this year. The investment is focused on two core areas: consolidation and efficiency, and operational resilience.

"Competition has been intense among sell-side execution in derivatives markets, resulting in significant fee compression," said Ross Lancaster, the Head of Research at Acuiti. "With little room left to cut fees, FCMs are seeking to differentiate themselves through customer service and technology. Investment is, therefore, being focused on both creating efficiencies and enhancing the offering to clients."

Consolidation and Data Integration Fuel Efficiency and Customer Service Goals

More than half of the FCMs plan to consolidate front-office order management system (OMS) technology across asset classes. Budgets are being allocated to build backup processes to address operational resilience concerns and meet the upcoming Digital Operations Resilience Act requirements in the European Union.

The study has highlighted that data integration between systems and technology remains a key challenge for firms as they strive to improve straight-through processing and reduce manual intervention in the trade lifecycle.

"Front-office investment for FCMs is providing them with a competitive edge in an increasingly competitive marketplace," said Ray Tierney, the President of Broadridge Trading and Connectivity Solutions. "This study found that FCMs were seeking to achieve operational efficiencies through the consolidation of technology stacks and to compete on their levels of customer service."

Tierney emphasized that overcoming data fragmentation between systems is central to both goals, enabling FCMs to provide more insight to clients while enabling more efficient operations.

Other Acuiti Studies

Acuiti regularly researches financial and derivatives markets. At the end of November 2023, the company showed that proprietary trading firms worldwide are gearing up to expand their foreign exchange (FX) trading activities and increase their investment budgets for 2024.

The report revealed that 45% of FX trading firms are planning significant enhancements in their operations within this asset class, with a strong interest observed in equity options, indicating a bullish outlook for 2024. In contrast, cash equities are witnessing a decline, particularly in Europe, where many firms are looking to reduce their stakes.

Furthermore, Acuiti published a report last week highlighting a significant shift in the European retail FX/CFDs industry. According to the study, 92% of companies surveyed express concern over their future amidst growing regulatory pressures.

The report noted that European retail brokers must now reveal the percentage of clients who incurred losses trading CFDs in the past year, generally between 70% and 80%. Research indicates that the average retail investor lost €2,680 trading CFDs between June 2017 and June 2018, a finding corroborated by more recent studies from Finance Magnates Intelligence.