Voice Communication Key to Trading-Floor Advances

By Gerald E. Starr, CEO, Cloud9 Technologies

For too many years, trading floor managers have been either complacent or muddled in their approach to optimizing what is probably their most valuable asset – data. In the early days of electronic markets, the focus was on areas like pricing, transaction, KYC, capital allocation and balance sheet data. But as artificial intelligence and machine learning have become more sophisticated, one critical area of opportunity is still frequently overlooked – voice communications.

Recording calls and other spoken interactions with customers has long been regarded as a necessary evil to meet compliance needs, particularly given declining voice trading volumes and a broader industry shift to substitute capital deployment for labor. After all, in volume terms, some 80% of cash equities (and 90% of futures), nearly 80% of spot currency trades (and 60% of FX forwards and futures) and over 70% of US Treasury transactions are now conducted electronically.

While these figures are accurate, what is often missed is that the most profitable trades are still mainly carried out on the phone or by one-to-one personal communication. This is where the most valuable data lies.

This realization has not on its own been enough of a wake-up call for some, many of whom have become complacent with the persistent, benign low interest rate environment.

But there are a few cracks appearing in that sea of calm that the markets have become.

New best execution standards require traders to provide evidence that customers are getting best prices for their trades, with regulators by implication demanding even more of the market to go electronic. As one analyst said, “Somewhere along the line, trades are going to need to be digitally recorded. The answer to this is not so simple. Banks will need to ensure if they are still transacting on a voice basis that it needs to be captured effectively.”

At the same time, pockets of volatility have flared up. Yield curves are starting to invert. The availability of liquidity in certain asset classes is becoming more sporadic. All signs that our decade of predictability might be coming to an end. And in times of stress it has been proven that customers prefer to talk to a person rather than a machine.

In addition, some institutional investors are becoming wary of flagging their transactions through electronic bids or offers, for fear of their intentions being revealed and prices moving against them. Many others are also starting to realize the importance of pre-trade information and analysis that can be as equally valuable in demonstrating (and delivering) eventual best execution as that offered purely by the speed and anonymity of the electronic exchange.

So, are we at a watershed? And, if so, what are the implications?

Certainly the capture, subsequent retrieval and ease of reference for voice data must not only be treated with the same priority as traditional structured data, but must be tackled in a way that is consistent and integrated with other data. Working practices and business models must also be aligned to recognize the importance of using new technologies that harness those capabilities, both from front-to-back in business processes and transaction lifecycles, as well as horizontally across asset classes and other siloes.

Research shows that fund managers value the “high-touch”, voice-led transactions where information is a key driver of value in an investment, such as complex derivatives. This has also led to the evolution of “hybrid voice transactions” which embrace multi-legged, cross-asset and multi-venue executions, where added value is required across the transaction lifecycle.

In order to not only protect the integrity of the complex evolution and execution of those strategies, but to provide recourse against errors, sophisticated recording of recommendations and instructions must be able to sit alongside the actual data that registers those trades.

Only a holistic and strategic approach to the warehousing and accessibility of all structured and unstructured data (including voice) will make this a reality. It is now clear that the capability exists to normalize the interoperability of data that includes voice, chat and data and deploy it to the best advantage of the business and its customers.

This transformation of the trading floor will be a challenge for traditional suppliers of Trader Voice hardware, leaving the market open for rapid innovation and the introduction of dynamic, cloud-based applications and technologies.

The capital markets have yet again come a long way in a short space of time. But the evolution of “all-to-all” markets and integrated, multi-asset transactions, means that market principals need to now apply the same cohesion to their own data management strategies — across electronic and voice — as they would to their customers’ investment management expectations.

And if they do it right, voice communication might even prove to be the key to new business and revenue growth, rather than the compliance albatross it was once perceived to be.