The most exciting place for innovation in the capital markets? The operational area.

As attitudes toward technology continue to change across the capital markets industry, Michael Chin, CEO of Duco, examines how innovations in the middle and back office can increasingly contribute to more efficient processes.

A year ago, I could never have imagined leaving the world of front office.

I have worked as a front office trader or salesperson my entire career and following the sale of Broadway Technologies to Bloomberg in 2023, a number of other opportunities in the front office world presented themselves.

One of those opportunities was the chance to take over as head of Duco. As I considered my options, I realized how crowded the front office has become.

Retailers have such a wide range of technologies to choose from that it’s becoming increasingly difficult to do something that really makes a difference. The more I learned about Duco and the problems the company was solving for middle and back office teams around the world, the more I realized how vast and exciting the opportunities are for innovation outside of the front office.

This realization comes alongside a mindset shift across the industry, with business and market trends reshaping capital markets and driving greater focus on the middle and back offices. It’s no secret that these functions have been overlooked and underfunded in innovation, resulting in outdated technology stacks and inefficient operating models – but that’s changing.

Companies are increasingly realizing that value creation happens throughout the company, not just in the front office. As the spotlight is on the entire organization, the central role of the middle and back office is becoming increasingly clear.

Today, operations are viewed as value creators and with the right technology, they can rise to the challenge.

Think about value from start to finish

It used to be thought that capital markets firms had a front office that made all the money, while middle and back offices were responsible for administration and handling outstanding issues. Today, this attitude is changing as macroeconomic conditions, market forces and regulatory pressures create an environment in which firms need to look at their business more holistically – from front to back.

Accordingly Analysis by Oliver Wyman and Morgan StanleyCapital markets firms are increasingly focusing on operational efficiency, regulatory compliance and cost reduction. The latter in particular has become such an important issue because it rose in line with revenue growth during good times, but when the revenue outlook deteriorated, these costs remained.

Banks’ top priority right now is to plug the gaping cost holes at the heart of their business, while also improving operational efficiency, reducing risks and ensuring compliance with increasingly stringent regulatory requirements.

And even if the front office is still in control, the fact is that most capital markets firms carry a lot of operational baggage. At some point, this baggage becomes too much and the engine stops. The middle and back office are full of inefficient systems, manual processes and thousands of overworked employees trying to get their jobs done. At some point, this is no longer scalable – and there is a good argument that the industry has long since passed that point.

Capital market companies are increasingly realizing that lean, flexible and efficient back and middle offices are essential to remaining competitive and meeting the major challenges of our time.

According to GreySpark Partners, “post-trade functionality is clearly the most important area where competing banks differentiate themselves from their peers.” The four most important areas where competing banks differentiate themselves from their peers are listed as securities trading, derivatives trading, portfolio and risk management, and bank-client interaction and communication. Their competitiveness does not depend on who can trade or invest better, but on who operates the most efficient machine.

It’s time for a change

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

This does not mean that no one is innovative, but that there are still so many fundamental challenges that need to be addressed or need a new solution. Capital market companies have long struggled with Five key challenges surrounding data: the problems of endless diversity, constant change, overwhelming scale, hidden life cycles and lack of control.

Capital markets firms rely on a set of centralized automation systems, specialized in a particular asset class, to act as highways for their data. But beyond that, there is a complex network of point solutions and end-user computing (EUC), all held together by manual labor to process the portion of the data that cannot be transported via the highway.

But the amount of data being transported via these channels is growing. You don’t even have to look back very far to see how quickly this is happening. The trading volumes for futures and options, for example, have reached a new record for six years in a rowwith volume increasing by 64% year-on-year to 137.3 billion contracts in 2023.

This means that more and more resources are needed to manually transform, enrich, reconcile and validate trading data that is not fully automated. This data remains business critical – it provides information for internal reporting, profit and loss calculations and risk management. It is under increasing scrutiny from regulators and must adhere to increasingly strict rules regarding format and quality.

Over the years, the “last mile” has become a spaghetti hub, full of opaque and risky processes, outdated technology and hordes of “Human APIs” hold everything together manually.

But it is a problem that can be solved through innovations in cloud computing, software-as-a-service, no-code applications, machine learning and artificial intelligence. Data automation is a transformative approach to managing data that leverages these amazing technologies and enables organizations to overcome historical data challenges.

Duco customers includeEliminate legacy on-premises systems, automate end-user data processing such as hundreds of spreadsheets, and eliminate manual processes from operations.

The need for an innovation mentality

So technology is there to help middle and back offices develop smarter, more efficient, more transparent and less risky operating models. But the mere existence of technology is not enough.

Operations departments have long been resistant to change. This is completely understandable, because they deal with mission-critical processes and everyone knows that transformation projects are difficult. In addition, they have been working with technology in a certain way for decades: on-site, hard-codedmaintained 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 ways of thinking about technology, processes and people, companies need to develop an innovation mindset. In my first six months at Duco, I spoke to dozens of customers and the most important question was: “How can we do more with the platform?”

This is exactly what innovation thinking is: you don’t think about how to do the same things a bit more efficiently, but ask yourself whether it is possible to do things in a completely different way. For example, from a reactive operating model based on the need to clean up bad data to a data-centric operating modelwhere controls are proactively put in place to ensure STP. One where exceptions are truly exceptional.

José Muñoz of Santander described this way of thinking on stage at Sibos and claimed that “transformation should take a third of your time. We try to keep people constantly focused on change, as part of their normal business operations.”

Santander is not the only company that is beginning to see change as a necessary part of running a bank. Capital market leaders are realising they cannot afford to stand still. Operations leaders like José want to push the boundaries of what is possible and that is what is exciting about being a technology provider in this space. We have the capacity and the market is demanding something different from what it is used to. It is the perfect environment for innovation to thrive.

The focus is on the operation

Times have never been more exciting for the middle and back office. The focus is shifting to the entire enterprise as companies realize that value creation happens everywhere. Technology is here to make big changes and solve your long-standing challenges. In addition, market trends, regulatoryBusiness changes and requirements require you to innovate.

The challenges are great, but the sSolutions exist. With the right attitude, you can become a driver of serious change in your organization. Are you ready?