As attitudes towards technology continue to shift across the capital markets industry, Michael Chin, chief executive of Duco, delves into what how middle and back-office innovations are increasingly able to move the needle when it comes to more efficient processes.

A year ago, I’d never have imagined myself stepping away from the world of the front-office.

I’d been working in the front-office as a trader or a vendor for my entire career and after selling Broadway Technologies to Bloomberg back in 2023 a number of other opportunities in the front office world presented themselves.

Among these opportunities was the chance to lead Duco and as I considered my choices, I realised just how crowded the front-office landscape has become.

Traders have so much choice in technology that it’s becoming difficult to do anything that really moves the needle. The more I learned about Duco and the problems the company was solving for middle- and back-office teams across the globe, the more it dawned on me just how ripe and exciting the opportunity for innovation outside of the front office is.

This realisation comes alongside a shift in attitudes across the industry wherein business and market trends are reshaping capital markets, putting greater focus on the middle- and back-offices. It’s no secret that these functions have been overlooked and underfunded when it comes to innovation which has left them with outdated technology stacks and inefficient operating models – but that’s all changing.

Firms are waking up to the idea that value is created across the business, not just by the front-office. As the spotlight spreads across the whole organisation, the pivotal role of the middle- and back-office shines bright. 

Operations are now seen as value creators and, with the right technology, they can surely rise to the challenge.

Thinking about value from start to finish

People used to think about capital markets firms as having a front-office that made all the money, with middle- and back-offices doing the admin and tidying up loose ends. Attitudes are changing now because macroeconomic conditions, market forces and regulatory pressures are creating an environment where firms must look at their business more holistically – front to back.

According to analysis by Oliver Wyman and Morgan Stanley, capital markets firms are increasingly focusing on operational efficiency, regulatory compliance, and cost reduction. The latter in particular has become such an issue because it has risen in line with revenue growth during the good times, but when the revenue outlook softened those costs were still there.

Banks’ top priority now is plugging the gaping cost holes at the center of their operations, alongside improving operational efficiency, reducing risk and ensuring compliance with an ever-stricter set of regulatory requirements.

And even if the front-office remains in the driving seat, the fact of the matter is that most capital markets firms have a lot of operational baggage. At some point that baggage becomes too much and the engine cuts out. Middle- and back-offices are full of inefficient systems, manual processes and thousands of overburdened workers trying to get things done. There’s a point at which that stops being scalable – and there’s a strong argument in favour of the fact that the industry is already long past that point.

Capital markets firms are increasingly waking up to the idea that lean, agile and efficient back- and middle-offices are essential to remaining competitive and meeting the main challenges of the day.

According to GreySpark Partners, “post-trade functionality is clearly the single most important area of differentiation among competing banks”. They list securities operations, derivatives operations, portfolio & risk management and bank-client interactions & communications as the top four areas of differentiation among competing banks. What makes you competitive isn’t about who can trade or invest better, it’s about who runs the most streamlined machine.

It’s time for a change

The middle- and back-office needs better technology to achieve their firm’s strategic goals around cost, efficiency and compliance. While the pace of innovation in the front-office may have slowed, the opposite is true in the post-trade arena. 

That’s not to say no one is innovating, more that there are still so many fundamental challenges that are being addressed, or in need of a new solution. Capital markets firms have long struggled with five core challenges around data: the issues of endless variety, constant change, overwhelming scale, hidden lifecycles and a lack of control.

Capital markets firms rely on a number of core automation systems that specialise in a particular asset class which act like the motorways for your data. However, outside of this exists a complex network of point solutions and end-user computing (EUC), all held together by manual work, in order to handle the portion of data that couldn’t travel down the motorway. 

But, the amount of data traveling these roads is growing. You don’t even have to look that far back to see just how fast this is happening. Futures and options trading volumes, for example, have hit a new record for six consecutive years, with volumes rising 64% year-on-year to 137.3 billion contracts in 2023.

This means an increasing amount of resources are needed to manually transform, enrich, reconcile and validate the trade data that isn’t fully automated. This data is still mission-critical – it fuels internal reporting, informs P&L calculations and risk management. It’s under increasing scrutiny from regulators and must follow ever-more prescriptive rules around format and quality. 

The ‘last mile’ has therefore grown over the years into a spaghetti junction, filled with opaque and risky processes, outdated technology and legions of ‘Human APIs’ manually holding it all together.

But it’s a problem that can be solved by innovations in cloud computing, Software-as-a-Service, no-code applications, machine learning and AI. Data automation is a transformational approach to managing data that leverages these amazing technologies and enables firms to overcome historic challenges around data.

Duco clients, for example, isdemising on-premise legacy systems automating end-user computing like spreadsheets in their hundreds eradicating manual processes from their operations. 

The need for an innovation mindset

So, the technology is there to help middle- and back-offices to innovate towards smarter, more efficient, transparent and low-risk operating models. But the existence of technology isn’t enough on its own.

Operations have long been change-averse. It’s entirely understandable; they’re dealing with mission-critical processes and everyone knows that transformation projects are difficult. They’ve also spent decades working with technology in a certain way: on-premise, hard-coded, maintained and operated by IT. It’s difficult to think differently when you’re used to doing things a certain way. 

Therefore, to truly benefit from the latest advances and thinking around technology, processes and people, firms need to adopt an innovation mindset. In my first six months at Duco I spoke to dozens of customers, and the top question was: “How can we do more with the platform?”

That’s the innovation mindset right there, thinking not about how to do the same things a bit more efficiently, but to ask whether it’s possible to do things in an entirely different way. To move, for example, from a reactive operating model built around the need to clean up after bad data to a data-centric operating model, where controls are put in place proactively to ensure STP. One where exceptions really are exceptional.

Santander’s José Muñoz described this mindset onstage at Sibos, asserting that “transformation should be a third of your time. We try to focus people on change all the time, as part of their business-as-usual.”

Santander aren’t the only firm who are starting to view change as a necessary part of run-the-bank. The leading capital markets firms recognise that they can’t afford to stand still. Operations leaders like José are looking to push the boundaries of what’s possible, and that’s what’s so exciting about being a technology vendor in this space. We have the capability, and the market is demanding something different to what they’re used to. It’s the perfect environment for innovation to flourish.

Operations is in the spotlight

It’s never been a more exciting time to be in the middle- and back-offices. The spotlight is shifting to look across the business as firms realise that value creation happens everywhere. The technology is there for you to make big changes and solve your long-standing challenges. Plus, the market trends, regulatory changes and demands of the business need you to innovate.

The challenges are big, but the solutions are there. With the right mindset, you can be a driver of serious change in your organisation. Are you ready?