For individuals, organizations and industries, ringing in the new year brings assessments of the past year and lookaheads to the one coming.
In U.S. equity trading, a combination of drivers, including regulatory initiatives, market volatility and a gradual industry shift from legacy market structure systems to modern tech stacks, are among industry-specific issues under the microscope. These and other timely topics fall under the umbrella of risk, an overarching and perennial focus area for market infrastructure providers, as transaction volumes climbed to record highs in 2022.
“Markets are robust and fast-moving, and issues that happen can be large-scale,” Amy Kohn, Principal Product Manager, North American Markets at Nasdaq, told Traders Magazine. “Resiliency needs to be top of mind.”
Market operators like Nasdaq are increasingly partnering with customers to strengthen operational risk controls. For a market participant, this is about minimizing the chance that people, systems or tools create errors on an exchange; for an operator, it entails ensuring exchange architecture decisions do not adversely impact market stability.
In today’s environment, trading volumes and volatility can spike at any time. This risk has been exacerbated over the past few years with the COVID-19 pandemic and, more recently, U.S. Federal Reserve interest rate hikes and the war in Ukraine. Nasdaq has proactively invested in implementing additional technology and resiliencies to help prepare for and effectively manage these volatile times.
On the regulatory front, trading firms are responsible for protecting against their own erroneous trades. The move to T+1 settlement requires that firms implement more automation and controls to mitigate trade breaks and lower regulatory capital requirements.
In its 2023 Capital Markets Outlook, SIFMA highlighted the need for market resiliency to keep up with rapid technological evolution.
“Technology continues to help the industry advance its business practices and improve client services,” the report stated. “However, as firms deploy new technologies, they remain focused on ensuring markets remain resilient and client information is protected. Today, business continuity planning, cybersecurity and operational resilience remain among the top agenda items in board rooms across the industry.”
Adena Friedman, President and Chief Executive Officer of Nasdaq, addressed the issue of market resiliency this past July at the exchange group’s annual Technology of the Future conference.
“Despite continued volatility, market performance has remained incredibly resilient – the direct result of planning and preparation that happened long before this period of uncertainty took hold,” Friedman said. “By continually investing in the technologies underpinning our global capital markets, we have been able to flex, expand capacity and effectively manage elevated trading volume when needed.”
For market participants, there’s no reason to think risk factors will turn into disruptions or other consequences in 2023 more than they have any other year. But stable times are the best times to proactively plan for worst-case risk scenarios rather than needing to react to them after they happen.
“Tech disruptions are a reality, and resiliency plans are needed,” Kohn said. “As we turn the corner of a new year, now is a good time to revisit your ‘break the glass’ strategy – If things go wrong, what’s your plan?”
If you are looking for market expertise and want to boost your firm’s risk controls, get in touch with Nasdaq to learn how our Risk platform technologies can help safeguard the integrity of your marketplace by protecting it against errant orders and ensuring that market participants trade within their limits.
Originally published on Traders Magazine.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.