Digital Transformation Journey
The U.S. financial services industry has been on a digital transformation journey which to date has included multiple waves and evolutions of technology, including the evolution of digital assets.
Powerful Technologies Create Opportunities
The history of U.S. financial markets is one of continual evolution. Over the years, the industry has advanced on multiple fronts, eliminating labor-intensive and inefficient data processing tools and methods to make room for more transparent and efficient systems; dematerializing paper securities to create electronic records and certificates; and shortening multi-day settlement cycles two mitigate risk. Today, powerful technologies, such as blockchain and distributed ledger, are creating opportunities to further transform the markets of tomorrow.
Wading Through the Paper Crisis
In the late 1960s, Wall Street had a paper problem. From 1967–1968, average daily trading volumes doubled from 10 million to 20 million shares. This boom buried workers under a mountain of paper orders and stock certificates.
The solution was to immobilize and dematerialize paper securities — to pool them in a single location, then replace them with book-entry securities. These moves — which DTCC spearheaded — eliminated the majority of physical certificates in the U.S. and began the process of ending the issuance of new ones, helping to lower costs, mitigate risk and increase efficiencies, for the market and individual shareholders.
Trading Pits Go Electronic
As markets continued to grow and trading volumes continued to rise, floor brokers and open outcry trading struggled to handle the order flow. Electronic trading systems that allowed firms to bypass the trading floor, after emerging in the early 1970s, grew strongly in the 1980s. Electronic trading lowered costs, reduced risk and facilitated regulatory oversight.
Asset dematerialization and electronic trading paved the road for the next phase of market transformation: the automation of processes and workflows. Automation has been employed in varying applications for years and delivered significant efficiencies for the industry.
The Arrival of Digitalization
The wave of change now set to further transform the industry is coming from digitalization. The conversion massive data stores into computer-readable format, along with the emergence of new innovations, such as blockchain/distributed ledger technology (DLT), has the potential to further reduce operational overhead and risk through increased automation and improved data security.
Project Ion
Over the past few years, DTCC has been analyzing its core clearing and settlement processes, the backbone of the U.S. capital markets infrastructure, with an eye to further modernizing them. Project Ion, one offshoot of this undertaking, explores whether the digitalization of assets and use of DLT can further shorten settlement times and reduce cost and risk for the industry.
Project Whitney
Could increased levels of digitalization be extended to private market securities? DTCC has been exploring this question, prompted by the current trend for companies to stay private for longer periods while attracting strong investor interest. Project Whitney is studying the potential for asset tokenization and digital infrastructure to support the life cycle of private market securities, from issuance through to offerings on secondary markets.
What Lies Ahead
A tour through the last six decades shows how the financial industry continues to harness new technological capabilities to streamline processing of transactions in ways that benefit market participants. While we cannot know the shape of tomorrow’s innovations, it will remain essential that they preserve the safety, soundness and resilience of processing systems. As they have in the past, infrastructure providers like DTCC will uphold these standards as they drive forward the ideas for improving how the industry operates.
