The US capital markets have been solidifying their position as a leading global hub, attracting companies from various sectors and regions. This trend was evident in 2021 when Swiss sneaker brand On Holding announced its Initial Public Offering (IPO) launch directly on the New York Stock Exchange (NYSE).
Fast forward to 2023, and we saw a 155% surge in total IPO proceeds, with 132 deals taking place on US exchanges.
Interestingly, a 2024 FIA and Acuiti report on the State of the European Derivatives Market highlights how principal trading firms are drawn by the rapid growth of US retail options trading, while asset managers and hedge funds are motivated by the strong performance of US single stocks and the depth and liquidity of US futures markets.
Driving this trend are the following reasons:
- US equities account for a whopping 70% share of the global market, according to the Morgan Stanley Capital International (MSCI) World Index.
- The S&P 500 remains central to global markets, offering companies higher valuations.
- Add in the balanced approach to regulatory requirements from the NYSE and NASDAQ, and it’s clear why companies are flocking to the US.
With this backdrop, Wall Street firms, particularly clearing brokers and other sell-side firms, need to prepare for the influx of new IPOs, more investors, and growing trading volumes across diverse asset classes (carbon and crypto).
At the outset, they should consider technology investments to address the challenges of scalability (think increasing trading volumes and transactions) and regulatory compliance (thanks to the ever-evolving nature of the US regulatory landscape).
Let’s explore how.
Cloud Computing for Scalability
Firms need to upgrade their capital markets’ technological infrastructure to handle the anticipated increase in trading volumes. This involves investing in high-performance computing systems, robust data storage solutions, and advanced cybersecurity measures to protect sensitive financial data.
If firms are still relying on on-premises servers built on legacy technology, it’s time to reconsider. Cloud-based platforms provide the scalability and flexibility needed to handle increased data volumes. Key cloud solutions to invest in:
- Platform as a Service (PaaS) to support the development and deployment of applications without the hassle of managing the underlying infrastructure.
- Software as a Service (SaaS) or Cloud-based software solutions for everything from CRM to advanced trading analytics since they are accessible from anywhere. Goldman Sachs leverages AWS to enhance its data processing capabilities, allowing it to manage enormous trading volumes seamlessly.
RegTech for Compliance in Capital Markets
The SEC’s Rule 613 under Regulation SCI mandates stringent surveillance, making RegTech an invaluable asset for the US capital markets. Seel-side firms can gain a solid competitive edge if they invest building key RegTech tools such as:
- Automated Compliance Monitoring systems that flag irregularities in real-time, ensuring adherence to trading regulations.
- Regulatory Reporting Platforms to streamline the reporting process, ensuring timely and accurate submissions to regulators.
- Integrated Risk Management Systems to continually assess and mitigate compliance risks in real time.
- Anti-money laundering (AML) Tools that leverage AI and ML to detect suspicious activities and prevent financial crimes. These tools continuously analyze transaction data to identify patterns indicative of money laundering, enhancing a firm’s ability to comply with AML regulations.
- Know Your Customer (KYC) Solutions to streamline the process of verifying client identities, reducing the risk of fraud and ensuring compliance with international regulations. Automated KYC platforms enable firms to efficiently handle large volumes of data, making the onboarding process smoother and more reliable.
- Transaction Reporting tools ensure that all trade activities are accurately documented and reported to regulatory bodies. This is crucial for maintaining transparency and avoiding penalties for non-compliance.
Localization & Customer Support for Global Reach
Catering to a global audience means not just offering multi-currency trading options but also having customer support that understands the target market context. Hiring staff who are fluent in key global languages can be a big plus. Interactive Brokers provides multi-language support and localized trading platforms, making it easier for global clients to navigate the US markets.
The Mindset Shift: From Efficiency to Innovation
To conclude, it’s important to remember that it’s not just about the tools; it’s about the mindset.
US clearing brokers and sell-side firms need to shift from viewing technology merely as a way to improve efficiency to seeing it as a strategic enabler of innovation. This means staying curious, being willing to experiment, and always looking for ways to leverage technology to gain a competitive edge.
They can perhaps take a leaf out of the T+1 settlement handbook, that serves as a powerful example of how embracing innovation can drive industry-wide change.
In March 2023, SEC Chair Gary Gensler highlighted the importance of modernization, stating,
“The move to T+1 is not just a technological upgrade; it’s a critical enhancement that will make our markets safer and more resilient.”
SEC Chair Gary Gensler
FINRA CEO Robert Cook echoed this sentiment, emphasizing the need for continuous innovation in the face of evolving market dynamics.
Looking ahead, the trend of increasing global IPOs listing on US exchanges is likely to continue. This presents a great opportunity for US exchanges to position themselves as the go-to for these new entrants. To truly capitalize on the IPO trend from other regions, US firms need to appeal to global market firms by building on and showcasing their advanced technological capabilities. Highlighting successful use cases, like how AI and blockchain have streamlined operations and reduced costs, can make a compelling case. Those who adapt and innovate will be best positioned to reap the rewards of a growing, dynamic market.
