2023: That's a Wrap
A look back on three key capital market trends of 2023 and what 2024 could hold
As the curtain draws on 2023, and we get ready to enjoy a mince pie or two, we thought we’d take a chance to take a quick look back on three of the main capital markets trends this year, while looking ahead to what we can expect in 2024.
We’d also like to say a big thank you for your readership this year. We will endeavour to bring you even more specialist capital markets content next year, as we continue to embark on our Substack journey.
Happy holidays!
1. Artificial Intelligence 📱
2023 has been a watershed year for AI, and has seen the technology integrate further into the global economy against a backdrop of uncertainty and fear. Much of the furor and interest around AI has stemmed from the creation of the generative AI model ChatGPT, which has opened up new possibilities in terms of how humans can interact with and generate value from machines. Although ChatGPT was released at the end of 2022, its integration into workflows has proliferated this year, with several major financial institutions now utilising or planning to utilise generative AI in some way. For instance, this month, asset manager BlackRock became the latest major financial institution to rollout generative AI to its clients. Sure, the use of AI had already been prevalent in the capital markets industry before the arrival of ChatGPT. However, its usage by financial institutions has largely been more centred around intelligent automation, data analytics and customer interaction. The use of generative AI represents a paradigm shift in the way that banks leverage AI technology, because of its ability to quickly generate output from large volumes of data, providing significant cost and efficiency benefits. For example, generative models can be used to generate synthetic data that can be used to train machine learning algorithms. This can help traders identify patterns and make better predictions about market trends.
Other AI techniques have also come to fruition this year. For example, natural language processing (NLP) is being used to analyse news articles and social media posts to identify market trends and sentiment. Another is predictive AI, which uses algorithms to monitor data and make predictions or forecasts about specific scenarios, such as asset prices or detecting fraudulent activities. Additionally, we’ve seen the growing applicability of AI in simulating scenario testing models, which you can be reminded of here.
However, although 2023 has undoubtedly been a groundbreaking year for AI, concerns and apprehension toward the nascent technology remain — especially with the lack of a unified, comprehensive regulatory framework among the capital markets space. AI technology is only as good as the data it is supplied with, meaning it can be susceptible to risk bias and produce inaccurate results. Additionally, its strong processing power and efficiency can make it more attractive to use than human capital, potentially jeopardising the job security of many people.
However, the European Union became the first mover in terms of deploying a comprehensive AI regulatory framework after proposing the Artificial Intelligence Act in December 2023, which is set to come into force between 2025 and 2026. The regulation seeks to ensure that fundamental rights, democracy, the rule of law and environmental sustainability are protected from high risk in the EU. Other jurisdictions such as the UK and US have hinted at the prospect of regulating AI this year, although no definitive regulatory framework has been put in place.
Looking ahead to next year, we expect to see further maturity of the AI sector and refinement in terms of how financial firms utilise AI. For example, generative AI is still largely based on theoretics, rather than providing factual answers or evidence. Crafting prompts to base the output on actual data will be key for better results and generative AI optimisation for financial firms. We also expect to see the development of even more powerful AI systems amid an increasingly competitive environment, as well as the continued, widespread application-specific adoption of AI across more workflows, ranging from the front-to-back-office, trading, analytics, liquidity sourcing and surveillance, against a backdrop of more stringent regulatory demands.
GreySpark’s AI pieces of the year 📰
2. Cryptoassets Trading and Blockchain 🤑
2023 has seen the continued integration of cryptoassets and their underlying technology into the global financial system, coupled with a strong appreciation in the price of Bitcoin, the bellwether of the crypto market, which has increased more than 150% this year. Crucially, though, crypto adoption is stretching beyond only retail investors, who were responsible for the inception of crypto, and garnering institutional and even sovereign interest in the asset class, which is driving demand for specialised crypto trading infrastructure tailored to their needs.
As the table below shows, a host of major financial institutions, on both the buyside and sellside, including Goldman Sachs and Morgan Stanley, are now offering crypto services in some way, including crypto trading, custody, ETFs and crypto prime brokerage.
What’s also apparent is the growing use of blockchain technology in the capital markets ecosystem. Blockchain is immutable alphanumeric code that underpins the exchange of cryptoassets. Although blockchain originated from the crypto world, its use case is easily transferrable into the traditional finance system, with fiat currency channels now utilising blockchain technology and capitalising on the benefits that it provides, such as efficiency, security, and 24-7 payment settlement. For example, in May 2023, Goldman Sachs, BNP Paribas and 30 other financial firms announced the inception of Canton Network, a new global blockchain network of networks for financial market participants and institutional assets.
However, the continued integration of crypto into the global financial system has, if anything, revealed that this mysterious asset class isn’t so different from fiat currency after all — especially, when comparing traditional technology infrastructures (i.e., cash FX) and crypto trading infrastructure. It is this familiarity that could further instill confidence towards crypto as an asset class among financial institutions as we head in to 2024. GreySpark identifies three main areas in which cash FX and crypto trading share similarities. These are:
The use of Smart Order Routing (SOR) for liquidity aggregation: SOR is an automated execution system that monitors all trading venues on which an asset is available to trade. The SOR system will scan each venue for the best possible execution. This technology has been prevalent in cash FX markets for years, and is therefore more advanced and mature than SOR systems found in the crypto space. Trading system vendor smartTrade Technologies is one example of a company that provides financial institutions with access to crypto liquidity through a SOR, as well as providing the same functionality for cash FX markets.
The use of prime brokerage: In our August 23, 2023 article, we referenced the possibility of prime brokerage in helping to provide a bridge into the crypto world for financial institutions, purely because PB is built upon a tried and tested framework. PB is a bundled group of services that IBs can offer to hedge funds and other asset management or institutional investment clients. PB services can include add-ons such as trade execution, settlement and custody. The provision of specialist crypto prime brokerage services has proliferated over the past year, providing more advanced features such as liquidity sourcing from both centralised and decentralised exchanges.
The use of quote-driven dealer-to-client electronic communication networks (ECNs) — which are commonplace in cash FX trading — are also becoming part of the crypto trading landscape. An ECN is a platform that facilitates the trading of securities outside traditional exchanges. ECNs enable access to more diverse liquidity pools, directly matching buy and sell orders without the intervention of a broker. Generally speaking, clients need a credit sponsor to trade on these new crypto, FX-styled ECNs. Current providers of these crypto-centric ECNs include Cypator and Crossover Markets. In particular, Cypator uses PB for clearing, and it also has an interface that resembles the layout of a cash FX trading platform, again simplifying the adjustment to crypto. The company has 20 institutional clients signed onto its platform, and it has cleared over 100,000 trades to date.
Of course, a dark regulatory cloud still looms over much of the crypto industry, with much uncertainty still remaining with regard to just how cryptoassets, globally, are going to be brought into line without stifling industry growth. Although the Markets-in-Cryptoasset regulation in the European Union established the the first comprehensive crypto regulatory regime in the developed world, there is seemingly a long way to go for other major jurisdictions in terms of achieving a unified crypto regulatory framework. For example, different regulatory bodies in the US are still at loggerheads with regard to defining what exactly constitutes a cryptoasset, leading to a lack of regulatory clarity, and ultimately, a reluctance toward industry participation from consumers and businesses alike.
Nevertheless, given the surging institutional interest toward cryptoassets once again and the growing likelihood of the first spot Bitcoin ETF being approved next year, GreySpark envisions 2024 as being another progressive year for crypto, whereby the asset class further ingrains into the fabric of the global financial system, with features such as trading and custody leveraging both new and existing infrastructures, bringing the realisation that a mass overhaul of infrastructure isn’t necessarily needed for financial firms to participate in this asset class.
GreySpark’s crypto pieces of the year 📰
3. Environmental, Social & Governance (ESG) 🌳
ESG has undoubtedly become a top priority for finance leaders, who are now increasingly facing regulatory pressures as the world urgently seeks to reach net zero carbon emissions targets. In fact, according to a survey conducted by global consulting firm Protiviti, which questioned 900 global finance leaders, ESG is the main priority for financial firms heading into next year, with ESG reporting, investing and operations arguably the three main ESG focus areas.
The hard numbers reflect the growing ESG trend. In the past five years, ESG-labelled assets under management (AUM) has more than doubled. Most impressively, as shown below, ESG AUM resisted the effects of 2022’s interest rate rises to register a small increase in AUM, against the backdrop of a more-than 10% and $10 trillion fall seen in the global AUM figure. This a trend expected to continue, with just 7% of asset managers and less-than 2% of asset owners not planning to integrate ESG into their investment processes.
Source: GreySpark analysis and Morgan Stanley
Globally, 2023 marked the arrival of more stringent and standardised ESG disclosure and reporting rules across several jurisdictions. For example, this year marked the start of SFDR reporting in the EU, whereby mandatory reporting templates were introduced, along with more nuanced ESG regulations - for instance, investment firms now have to disclose what proportion of its assets are invested in areas subject to ‘principal adverse impact’, which provides transparency on investment decisions. Additionally, this year, UK asset managers have been subject to the Task Force on Climate-related Financial Disclosures (TCFD) requirements, which seeks to increase transparency around how firms consider climate-related risks and opportunities, enabling their clients to make more informed decisions about their investments.
Next year, investment firms in scope of the EU regulations are expected to become compliant with all six EU Taxonomy objectives. The EU Taxonomy objectives fall under the EU’s main package of ESG policy initiatives known as the European green deal. These objectives can be seen below:
Corporate Sustainability Reporting Directive (CSRD) is also set to be phased in at the start of 2024, with up to 50,000 in-scope companies being required to meet prescribed formats of ESG disclosure and reporting standards.
2024 should also see the arrival of the United States’ first major climate disclosure rules. The proposed rules largely pertain to the reporting of greenhouse gas emissions produced by publicly traded companies.
Collectively, 2024 is shaping up to be a busy year for the ESG capital markets space. A myriad of complex regulations are set to foster a deeper integration of finances and sustainability, and ultimately, create a more sustainable and transparent capital markets industry. Confusion and uncertainty toward the new regulations will likely be unavoidable, with this huge regulatory adjustment set to be felt for years to come. However, tighter ESG regulations could prove to be a good thing, due to the potential reduction in greenwashing among capital markets firms, and increased innovation that a greater ESG influence can bring.
GreySpark’s ESG pieces of the year 📰
That’s all for this year, everyone.
Merry Christmas and a happy new year. We’ll be back very soon!
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