MARKET NOTE

TABB Group Research

September 2017

TabbFORUM Speaks:
Top 10 Trends Shaping the Capital Markets

Top Ten List

Top 10 list determined based on TabbFORUM community interactions on
www.tabbforum.com
Analysis includes user clicks on articles, news, videos, and industry provided
content
Relevant TABB Group voice of the market insights are incorporated within
theme focused areas
Recent publication titles are cited throughout the findings for further reference V15:036
September 2017
www.tabbgroup.com
 Top Ten Trends and Analysis | September 2017

Introduction
To date, 2017 has proven to be an exciting and changing time for the capital markets. The U.S. market has rallied to new highs,
and yet volatility remains at historic lows. There was no shortage of interest from our roughly 32,000 TabbFORUM readers in
whats happening now and what lies ahead. Covering the regulatory and political as well as the technology and financial, our Top
10 trends list is comprised from the most read and most commented topics in the capital markets this year.

During 2017, market participants... Exhibit 1: Expected Impact of MiFID II on US Buy-Side Firms

% of Funds Expected to Be Impacted by MiFID II

1. Remain laser-focused on January 2018. MiFID II
Implementation and What-If Compliance draws the 76%
most attention and the #1 overall spot.
Over three-quarters of US buy-side firms interviewed in US Institutional Equity Trad-
ing Study 2017: In the Eye of the Storm, April 2017 expect to be affected by MiFID II, 24%
up from 66% last year (see Exhibit 1). Many of these firms are looking to make sig-
nificant changes to their research procurement process. Not surprisingly, large firms
make up the bulk of the group that expects to be directly affected since they are more
likely to have a European presence. However, even a considerable number of smaller
buy-side firms expect to be impacted in the future or impacted indirectly, primarily
by competitive forces driving clients to ask for the same level of transparency or by Yes No
brokers changing their operations.
r
ly going to be ou
Source: TABB Group
MiFID II is probab ll no be
t
. Although we wi
biggest initiative , we're
iFID II compliant
required to be M direc-
be moving in that
probably going to ions.
ndling of commiss
tion with the unbu
anager
Small Asset M

Exhibit 2: What financial technology will most impact your operational

efficiency over the next year/five years (survey of sell-side participants)?
2. Seek use cases around Blockchain IRL (in
real life). Practicality and confirmation that
Blockchain/DLT 33% 33% Distributed Ledger Technology is sustainable
Regtech 27% 33%
fields marquee interest.
In Blockchain: Saved by the Enterprise, July 2017, TABB Group inter-
Big Data analytics 33% viewed senior executives in capital markets responsible for DLT initiatives
to explore DLTs current and future place in finance. This provided a view
Robotic process automation 20% into an industry that recognizes the opportunities that DLT will bring to
transformation of economic activities, and identified some of the more
ISO20022 adoption 13% complex use cases where DLT will provide the most value: reporting and
reconciliation; financial instruments as smart contracts; reference data
Other 7% management and corporate actions; automated account maintenance;
and supply management in physical markets.
over the next year over the next five years
Source: TABB Group

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 Top Ten Trends and Analysis | September 2017

Exhibit 3: Market changing announcements in 2017

3. Saw a few market-changing announcements

in H12017. M&A (KCG/Virtu, BATS/CBOE), FICC
slowdown (i.e. Goldman earnings), and HFT firm
shut downs, and what all this means to future market
structure has a new vibe to it.
Except for a handful of days, the stock market has been relatively calm and steady
during 2017. Dampened volatility and firms dependency on quick changes in
trading sentiment have felt repercussions via lower trading volumes and fewer
commissions. A first half deal by Virtu to acquire KCG in addition to shut downs
by some marquee high-frequency trading firms symbolizes an inflexion point in
the industry. TABB Group recently calculated that overall HFT revenues are down
from a peak level of over $7.2 billion in 2009 to only $900 million estimated by the
end of the year. Further, the FICC and derivatives markets have not been immune
to weaker trading volumes and market pressures as well. Goldman Sachs recent
Q2 earnings were in the spotlight for missing estimates while the combination of
BATS and CBOE is further representation of the ongoing competitive nature of
the execution venue landscape.

Exhibit 4: Legacy vs. Cloud

Legacy Model Cloud Model

CAPEX model: license fees & OPEX model: pay as you go;
hardware costs billing increment in minutes
4. Will provide a bigger purse for Cloud
or even seconds
investment. A 2018 upcoming budget cycle
Slow time to market, lengthy Elastic, on demand; servers
focuses on technology workflow, especially
procurement times spun up in minutes/seconds
innovation and security for the enterprise.
Upfront costs/commitments Little-to-no upfront costs The move to the cloud within financial services is gaining steam as
prohibit experimenting or long-term commitment cloud offerings have improved security and operations capabilities see
encourages experimentation Data, RegTech and a Compliance Ecosystem in the Cloud (July 2017)
Skilled technical staff admin- Infrastructure abstracted, Todays public cloud meets the security requirements of financial ser-
ister, configure and support minimizing support require- vices organizations; it is now up to those organizations to work through
infrastructure mean high ments, skilled staff freed to the logistics of integrating it into their infrastructure. Overcoming these
fixed overheads focus on adding value to challenges may be nontrivial, but the business benefits justify the effort;
business especially as firms progress from using cloud for utility computing to the
game changing innovation offered by machine learning and artificial
Innovation restrained, Applications moving to a
intelligence (AI). Cloud proponents point to an innovative culture
applications tend toward cloud native model to obtain
where businesses can rapidly extend or create new business models
monoliths greatest cost and agile ben-
with minimal risk and no up-front costs.
efits of the cloud; resources
focus on core business to
support innovation
Source: TABB Group

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 Top Ten Trends and Analysis | September 2017

Exhibit 5: Are you Looking at Artificial Intelligence to

Analyze Operations Data Today vs. in Two Years?
5. Have begun replacing functions and roles
using Robotic Process Automation and AI. The
capital markets are turning hype into reality and
some key stories piqued interest (i.e. IBM Watson Today 36% 64%
stock-picking).
In a review of a select group of top-tier asset managers in the first quarter of
2017, TABB Group determined that RPA is still at the initial stages of adoption
and is analogous to the adoption of cloud approximately 18 months ago. But
there is a general trend within capital markets to understand and adopt tech- 2 Years 86% 14%
nologies that enhance and improve all workflows using technology. Asset man-
agers cited organizational barriers to automation, and the need for operational
readiness as a prerequisite, while the main goal for all investigating RPA usage
are cost and reduction of margins.
Yes No
ges of
are at varying sta Source: TABB Group
Asset managers e or AU M.
rdless of siz
investigation rega es se d a fo cus
gaged expr
Those that are en ive ta sk s ra th-
inful repetit
on identifying pa n by fu nc tio n
tire functio
er than on an en pp in g sto ne
RPA as a ste
basis. Many see .
to more co m plex technologies
se arch , 2017
TABB Group Re

Exhibit 6: Have ETFs/Passive Strategies 6. Are watching the active to passive shift more
Impacted Your Business (95 Buy-side Head Traders)? closely than ever. The buy side value proposition and
argument (or philosophical) debate between active,
63.2% passive (ETF/Index), and everything in-between is
96.1%
65.0% raging fear and survival of the fittest.
In our Institutional Equity Trading survey, ninety-six percent of the 95 funds
19.7%
13.2% we interviewed indicated that they are being affected by the shift from
3.9% active to passive. There are many sides to the impact story. Some firms can
2016 2017 Negatively Positively Both Neither be impacted positively, others negatively. And many can be affected both
ways, especially those that have both an active and passive business see
Source: TABB Group
ETFs Role in an Evolving Buy -Side Tool Chest (June 2017) Still other
firms are facing increased headwinds in attracting new capital because
ETFs facilitate the equitization process by enabling trading desks to move
me- into or out of different investment strategies more easily than with index
ward passive is so
The allocation to ily fig ht .
t necessar futures, which until now has been the most common equitization product.
thing that we can am en ta l
Large Fund When we asked firms about how they were affected by ETF/passive strat-

Asset Manager egies, 63% of respondents cited their challenges while almost 20% listed

positive attributes coming from the shift.

2017 The TABB Group, LLC. All Rights Reserved. May not be reproduced by any means without express permission | 4
 Top Ten Trends and Analysis | September 2017

7. Seek to minimize trading slippage and improve

why
trading outcomes. Key stories around best execution trying to fight for
Were constantly d ha ve to say,
hing, I wo ul
disclosure and dark pool announcements continue to were here. If anyt ef up
s was to really be
gather the most attention. one of the initiative es s, so as to
ion pr oc
for the best execut lu e.
d va
Despite not getting as much attention as unbundling, there are also several justify why we ha
ed iu m -s ize d Asset Manager
best execution requirements laid out in MiFID II. This is one of the driving forces M
behind firms taking an even deeper look at their execution quality - going beyond
traditional TCA and venue analysis to try to account for every kind of implicit
cost of trading. In fact, in TABB Groups 2017 Institutional Equity Trading study,
we found that 37% of buy side firms had execution quality as their top initiative
Exhibit 7: What are Your Top Trading Initiatives in 2017?
(see Exhibit 6, next page). For ongoing developments in trading allocations, see
TABB Equity Digest (quarterly) and TABB LiquidityMatrix (monthly).
Venue / Routing
Technology Analysis 43%

Fine Tuning TCA 24%

26%
Execution 37%
Quality Broker Algo 14%
Review/Customization

22%
Study Mkt Structure
15% 10%
Regs
Workflow
Relationships
Source: TABB Group Sourcing Liquidity 7%
(New Venues)

8. Are evaluating actionable ways to utilize data. What

are the right standards? What are the right protocols?
How can tell if the data is accurate? What is alternative
Exhibit 8: Various Categories of Alternative Data Sets
data? The level of readership demonstrates how critical
a topic this is for the workings of our industry.
The fact that alternative data is in the initial stages of adoption is both a challenge and
an opportunity see Capturing Alternative Alpha: The Rise of Alternative Data Sets
(November 2016). Like any new fast-growing space, there will likely be some redundancies
in the proliferation of new analytic companies looking to leverage this data and as the space
matures, the number of companies will be cut down to the successful few. The amount of al-
ternative data has exploded, and many different firms have tried their hand at harnessing it.
As the use cases for alternative data continue to grow, the maturation of the field will draw
in further adoption. Already, there is broad appeal and interest across the financial spec-
trum. Many financial firms are enthusiastic but cautious about implementing new strategies
related to alternative data. A trading firm is not going to want to deploy millions of dollars Source: TABB Group
against a data set that has not yet been proven. As these firms become more comfortable
experimenting with the data and more knowledgeable about the methodologies of collect-
ing and analyzing it, this will drive will increase the momentum around adoption.

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 Top Ten Trends and Analysis | September 2017

9. Show greater than usual interest into political

headlines with regulatory flavor. Stories including
the impact of Trump in addition to SEC/CFTC over-
sight brought a lot of frustration and head scratching
during the 1st half of the year.
Following the inauguration of President Trump, the 2017 market rally can be
directly associated with expectations of market deregulation and a general
easing off by U.S. regulators. In Larry Tabbs report Trump, Volcker, Reg NMS
and HFT he provided commentary that significant changes or even a potential
repeal to Reg NMS, the Volcker Rule, and/or Basel Accords would have material
impact on equity market structure and trading. Interpreting actions out of
Washington, however, has been a fortune tellers nightmare. Lack of govern-
ment cooperation filters from top to bottom and was symbolized by unfilled
Commissioner seats at the SEC and CFTC in the first half of the year. Going for-
ward, the industry will hope for better leadership, results, and faster regulatory
interpretation of complex topics (e.g. Bitcoin/Blockchain). Outside the US, the
EU Commission Public Consultation on FinTech is an initiative to keep an eye on.

ty markets
crosshairs of equi
The laws in the nal Market Syste
m
Regulation Natio
participants are cker), an d th e Th ird
Volcker Rule (Vol
(Reg NMS), the ly- an tic ip at ed
el III) and the wide
Basel Accord (Bas
own as Basel IV.
follow-on rule kn
rump, Volcker,
Source: TABB Group T FT
Reg NMS, and H

Exhibit 9: Do you expect to see a migration out of OTC instruments?

No, 67%
10.Recognize FICC markets are evolving. Greater
transparency, standardization, venue analysis, cost of
clearing All buzz words that can expect to be in the
headlines into the distant future.
The fixed income markets are struggling to find a proper balance between a demand
for efficiency and the dependency on principal-based risk transfer. Ten years removed Yes, 22%
from the credit crisis, markets are larger, less liquid and increasingly fragmented.
Market structure reform threatens, but thus far the debate has trumped substantive Too Early, 11%
change see U.S. Fixed Income Market: Industry Trends & Drivers (December
2016). As issues like best execution, distribution, liquidity, reporting, transaction cost
analysis, and transparency all move to the forefront, market participants will increas-
ingly start to evaluate the entirety of the execution continuum. Source: TABB Group

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 Top Ten Trends and Analysis | September 2017

Conclusion
The impact of the regulatory demands instigated by MiFID II have dominated the headlines on TABB Forum thus far in 2017. The
themes of readiness, client reporting, best execution, and research unbundling practices and repercussions captured the attention
of our subscribers far more than any other. MiFID II will transform the industry - from the buy side to the sell side, from research to
the trading desk, in Europe as well as beyond - the industry will look closely for which winners and losers shake out. Even today, with
just a few short months to go before MiFID II takes effect, there is anxiety and uncertainty around compliance and preparedness,
across all industry segments, markets and jurisdictions. Larger firms and disrupters that can invest in technology and have the
economies of scale to spend on compliance will have a significant advantage. Close on the heels of MiFID II was financial technol-
ogy and data analytics across the enterprise, and the pressure on firms to keep up with disruptors by embracing new workflows and
business models to gain actionable insights from data across the enterprise. The disciplines of distributed ledger technology, cloud,
artificial intelligence, robotic process automation, machine learning all attracted attention from readers looking to distinguish hype
from reality, and to identify the use cases most applicable to their businesses.

About
TABB Group
TABB Group is the international research and consulting firm focused exclusively on capital markets, founded on the inter-
view-based research methodology developed by Larry Tabb. Since 2003, TABB Group has been helping business leaders gain a
truer understanding of financial markets issues to develop actionable roadmaps and approaches to future growth. By accurately
assessing their customer base, competition, and key market opportunities, TABB Group works with senior industry leaders to make
critical decisions about their business. For more information, visit www.tabbgroup.com.

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 Top Ten Trends and Analysis | September 2017

www.tabbgroup.com

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+ 44 208 133 5022

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