As blockchain and AI transform trading, innovation is the name of the game

Big regulatory changes and rapid advances in innovation since the financial crisis have transformed the trading landscape and provided new opportunities for the market.

Financial regulators, attempting to avoid another crisis, have reduced the levels of risk in their markets over the last five years. They have demanded that firms are more transparent, better financed and have greater accountability. But for firms prepared to meet these requirements, and to prevent the new regulations slowing growth, they have adopted more business-friendly practices.

“They have stricter requirements, but have introduced systems and processes that allow compliant firms to come to market quickly and efficiently. They also know that new technology can create greater visibility,” says Philippe Ghanem, chief executive and vice chairman of investment firm ADS Securities.

The company was founded in Abu Dhabi in 2011 to bridge the liquidity gap that existed between the Asian markets closing and the European markets opening, helping to maintain liquidity for a range of traders.

“From our formation, we understood that to be successful we needed a high level of capitalisation,” says Mr Ghanem. “At all stages in our development, we have used our financial strength to invest in regulation, give security to our clients, hire the best people and maintain tier-one relationships with, for example, prime brokers.”

When the Swiss National Bank unexpectedly announced in 2015 that it was removing its cap of 1.20 francs per euro, thereby wiping billions of dollars off the markets, ADS Securities was able to maintain trading lines for its clients at a time when other brokerages could not cover their trading and eventually collapsed.

Large banks and investment firms are setting aside reserves to cover any potential fines as a result of past regulatory infringements. As a relatively new investment firm, this is not an issue ADS faces. “We can concentrate on investing for the future,” says Mr Ghanem, “looking at ways of accessing often fragmented liquidity and maximising the value of investors’ trading.”

On top of causing their own disruption, new regulations have prompted more transformation by triggering significant investment in technology, which has changed the direction of the industry by allowing greater transparency and reducing risk.

These developments have led to the rise of blockchains, decentralised, public ledgers that record transactions digitally. Blockchain technology underpins cryptocurrencies, such as bitcoin, which ADS was the first company to offer trading for in the Gulf Co-operation Council.

While many associate blockchain with cryptocurrencies, its potential stretches much further, including changing the face of foreign exchange trading, from liquidity distribution through to settlement, clearing and post-trade confirmation. Regulators are clear that they want FX trading to be exchange based and this could be achieved through using blockchain.

“Blockchain has the ability to completely change the financial services model,” says Mr Ghanem. “A secured cryptographic ledger system could enable exchanged-based FX trading without the need for a central clearing entity. This is very exciting and would be a major change for the whole industry.”

ADS Securities is building a third-generation trading platform, which uses blockchain technology for its backend systems, allowing all trades to be logged through a secure cryptographic smart contract. The platform’s frontend will utilise the existing graphical user interface along with new functionality, such as increased automation, push notifications, a social trading environment and a smart investment portfolio.

Automation, AI and the use of algorithms can make trading systems smarter, with machines that analyse a wide array of data to decide the best strategies for entering the market

The development of blockchain technology will allow investment firms to align marketing with customer relationship management (CRM) systems, providing the trading choices that investors want. Linking these kinds of insights to artificial intelligence (AI) systems will enable companies to offer highly sophisticated trading options.

Automation, AI and the use of algorithms can make trading systems smarter, with machines that analyse a wide array of data to decide the best strategies for entering the market. There will always be the need for human intervention, but when this is required, it can be based on a much greater understanding of the potential trade.

“It is the future technology which will be most transformative and this includes the way that marketing, big data and CRM systems are directly linked to trading data,” says Mr Ghanem. “ADS Securities is not yet a fully automated company, but in certain areas, including risk management and hedging systems, this may only be a matter of time. We have invested heavily in AI systems and intend to keep up this level of capex.”

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