As financial markets become increasingly unstructured, a growing misalignment is emerging between the economics and technical challenges of connecting to markets and policy makers’ objectives for market growth and stability.
In paper 1 of its three-part series “Markets Unstructured: The Importance of Connectivity in the Reinvention of Markets”, MSP explained how liquidity is dispersing and increasingly moving to multiple Request for Quote (RFQ) channels, pitching trading venues, sell-side intermediaries and automated market makers against each other as their value propositions merge.
Paper II, released today, examines the challenges of the technical and commercial transformation required to underpin these changes and the implications for market access, competition, and execution outcomes.
Key Findings:
- The buy-side does not own the technology upon which it relies to access markets. 88% of buy-side firms still rely on broker-sponsored Order and Execution Management Systems (OEMS) for broad access to markets and 47% are dependent on individual Fixed Income, Currency and Commodity (FICC) trading venues to provide direct, bespoke interfaces to each of their markets.
- As liquidity disperses, 71% of sell-side firms expect to have to connect to, and/or compete with more liquidity pools, increasing the spaghetti of pipes and connectivity costs that is already in existence. Meanwhile, the buyside trading desks face a “swivel” curse of inefficiencies as they navigate between the OEMS solutions provided by brokers and the interfaces provided by individual trading venues that want to connect to them directly.
- 78% of sell-side say they are already offering a myriad of hybrid technical solutions to their clients across asset classes, which may be unsustainable and lead to commercial decisions about whether to continue paying for buy-side connectivity.
- 44% of both buy and sell-side firms are planning a connectivity overhaul and a further 33% are evaluating their options, but many struggle to prepare for strategic change or know how to unpick the current commercial and technical models, which, they say, are steeped in contractual vendor lock-ins, opaque pricing models and inertia to transform.
- Some sell-side are modernising, accelerating API investment: 67% plan to deploy cloud APIs. However, as the motivation to sponsor connectivity reduces, access to such capabilities and efficiencies will become more uneven and the buy-side increasingly need to prepare to own their own technology and take up the reins of investment.
Connectivity can no longer be treated as background plumbing. It now determines whether firms can actually reach liquidity, interact with prices, and participate competitively in the market. Uneven access will contribute to further distortions in market structure.
Connectivity-as-a-service and clean, standardised data for all participants are now the base requirements for the growth and stability of markets. If the buy-side is going to invest to modernise, it needs help to eradicate fragmented workflows across asset classes, remove opaque pricing and contractual vendor lock-ins, fix poor data quality, and break down legacy asset class silos. Future growth and market stability depends on four pillars:
- Transparency – clear contractual arrangements and consistent pricing, particularly in fixed income where EMS costs remain opaque
- Standardisation – mandated, enforceable standards such as FIX, with consistent, flexible APIs (aligned where possible to FDC3-style cross-asset models)
- Interoperability – portable data, integrated pre- and post-trade tooling, seamless onboarding, and unified, real-time information across the trade lifecycle
- Cultural change – reduced vendor lock-in, dismantling silos, and shifting from entrenched partnerships to more flexible, open structures.
Niki Beattie, CEO of MSP and one of the authors of the report comments “Too often people forget the importance of plumbing. Without greater efficiencies in secondary markets, growth and innovation will stall. As markets become more unstructured, connectivity is no longer just the ability to send orders from a participant to one or two trading venues- it has become the nervous system of modern markets. Getting the foundations right to ensure participants can send and receive accurate and validated data and interpret risk signals between all liquidity pools, across asset classes and up and down the processing chain is critical. Policymakers and participants who underestimate its importance will find their markets and smaller businesses left behind, further reinforcing structural disparities./p>
A copy of the Paper II report is attached.
