The future of e-commerce

On 17 May 1792 outside 68 Wall Street the Buttonwood Agreement was signed forming the basis of the New York Stock Exchange. Some 150 years later the nascent Eurobond market saw the creation of Clearstream (formally Cedel) and Euroclear. From these humble but pivotal events emerged electronic trading, driven by innovation in the areas of technology and regulation.

Confidence and innovation

Possibly the most important aspect to trading is that legal title exists over the asset being sold or funds being raised and it can be argued that electronic trading speeds up the transfer of ownership or title to any given asset. Confidence, however, comes from the establishment of legal and regulatory foundations upon which new products and services can be built.

In this respect, policy makers and regulators have the hardest job of all. On one hand their role is to provide the framework upon which economies and companies can transact commerce with confidence; on the other it is to recognise future needs and opportunities, encourage innovation and allow commerce to flourish.

Providers of innovative products, services and technology will continue to enjoy potential benefits until the benefits become commoditised. The process of commoditisation, however, will occur in ever-decreasing periods of time, barriers to entry will continue to drop and new products and services will not enjoy long periods of exclusivity. In response, company boards must decide where they wish to be on the innovation and investment curve.

In today's securities markets we can see clear signs of this process with the trend of stock exchanges merging to establish greater economies of scale, depth of liquidity and balance sheet strength. Also, telecom providers are providing new plug-and-play, low latency trading infrastructures in developed and emerging markets to enhance technology firepower.

In this respect there is a close relationship between policy makers and product innovators. The former provide stability and confidence through enhancing regulatory frameworks and the innovators provide ways of working within these rules. As the pace of change increases, banks, brokers and other market intermediaries must adapt with greater agility.

Choice

As the speed with which product and services commoditisation increases, so does the need to provide customers with choice and to respond to their needs. In the securities industry this was perhaps most evident in the creation of new and better ways of providing investors with access to liquidity and improving the protection and confidentiality of the investor's intent. The role of the stock exchange as a monopoly was removed, with competition between trading venues and approaches being made available through regulation.

For the markets as a whole the need to base such competition on clear, commonly adopted and non-competitive standards is key. In the context of the securities market this refers to the need to use and develop the industry standards for electronic messaging, such as FIX and SWIFT, and of tested legal contracting standards as supported by, for example, ISDA, ISLA and AFME.

Reach

The breadth, size and diversity of the market will increase and the need for investment and innovation to create the next generation of industries will require the raising of capital. The changing demographic nature of trade will require new products and services, coupled with efficient means of distributing products to different geographies. For policy makers and regulators there will be additional challenges in navigating different regulatory standards and practices. Innovators will need to understand a greater diversity of customers and products.

Because of the increasing distance, diversity and quantum of consumers of financial products and services it is clear that the use of technology and electronic trading as a paradigm to bring products to markets consistently in volume, at distance and with cost efficiency, is fundamental.