Source: Coalition Greenwich; Compiled by Tao Zhu, Jinse Finance
The coming year can be said to be the most difficult to predict. Geopolitical complexities and uncertain US regulatory policies. Although the US stock market seems unstoppable and interest rates can only go down, we know that neither of these is a foregone conclusion.
Fortunately, some trends remain ubiquitous: electronic trading, focus on workflow automation, increasing market transparency, and of course artificial intelligence and machine learning (AI/ML). Although we have not explicitly included it in our list, the impact of AI/ML will be reflected in almost all the trends we will focus on in 2025. It is now and will continue to be a huge catalyst for financial market innovation in the coming years. With that in mind, here are the trends our team will focus on in 2025:
1. The growing influence of the ETF market
ETFs have become the smartphone of the market - they can do almost anything. More and more stock and corporate bond investments are shifting from mutual funds to ETFs, and this is inevitable. It is also natural for institutions to use these ETFs as cash management/liquidity/hedging tools.
But asset managers and owners have now discovered that ETFs are an excellent distribution tool for almost everything: private credit, Bitcoin, Ethereum, CLOs, money markets, municipal bonds, US Treasuries - the list goes on. Of course, there is certainly some chaos in this, and some solutions are seeking problems. But if managers have assets that investors want (e.g. private credit), carefully constructed ETFs in model portfolios can more easily access entirely new pools of capital than traditional methods.
Most retail investors don't need to add more "alternative investments" to their investment accounts, as institutional investors already have access to them. But improving the access channels (and liquidity) for a full range of investable assets is a good thing for both institutional investors and (qualified) retail investors.
2. "Smarter, Faster"
To be a top market maker, you still need to be faster than everyone else. You need microwave, shortwave or satellite connections to transmit market data and orders around the world at (near) the speed of light. If you are the fastest, first-to-market, your trading logic doesn't need to be unique to make money. But over the past five years, as data and trading links have defied the laws of physics, the number of such companies has plummeted.
For others, the focus is now on becoming smarter, with speed fast enough. Of course, "smarter" is subjective. In practice, combining the most creative minds with as much computing power as possible is what the major trading firms and hedge funds are doing. Speed is still important, and the bar keeps getting higher. But now, running a successful quantitative strategy is about using predictive AI at massive scale to uncover unique correlations and market anomalies, and capturing profits before others have a chance to figure out what you're doing.
3. Matching buyers and sellers is becoming more efficient (and complex)
Major stock markets, US Treasuries, FX, and an increasing number of investment-grade corporate bonds (and so on) are all electronic trading. While our research shows electronic trading will continue to grow, the pace of change will slow to varying degrees as each market matures. But maturity does not mean a lack of progress. The past and present tell us that the future will be full of ongoing electronic trading innovation. While innovation doesn't always increase electronic trading volume, it will make trading more automated, efficient and productive for investors and traders.
New stock alternative trading systems (ATS) show that even one of the most electronified markets in the world has new tricks up its sleeve. The US Treasury market has declared victory in electronic trading and is now embracing more complex challenges. The growth in electronic corporate bond trading is not coming from more RFQ volume, but from all-to-all protocols, portfolio trading, and modern auctions. The result is stronger market liquidity.
Technology doesn't create liquidity, but it does uncover liquidity that was previously inaccessible. The core of these solutions is often highly complex, but thanks to EMSs, UI designers, and algorithms, traders can just see the magic without being aware of the complexity that makes it happen.
4. Relentless pressure from upstarts on incumbents
Startups disrupting established businesses is as old as the businesses themselves, and this attempt has always existed in capital markets. In our top market structure trends to watch in 2022, we noted that pandemic-era startups have emerged from stealth mode, ready to provide solutions for the post-transformation world. For those companies that weathered a tough market cycle in 2022, the fruits of these efforts are becoming increasingly evident.
ATSs are eroding on-venue market share, non-bank market makers are taking market share (and clients) from the big banks, and capital markets fintech firms are doing both and more. These agile newcomers are leveraging cutting-edge technology, innovative business models, and customer-centric approaches, unencumbered by legacy technology and operational complexity.
But remember - there's a reason existing businesses are existing businesses. Their scale and experience often keep them ahead, even if they can't be as nimble. Of course, they can and often do acquire these innovative upstarts. Who wins? Whichever side, the customer sees better prices and products.
5. US regulation becomes more unpredictable
The only certainties are death and taxes - well, maybe just death. While many think they know what will happen in the capital markets under new Trump administration leadership, the truth is that few really know. We agree with the following assumptions: many SEC proposed but unapproved rules will be scrapped or rewritten; Treasury and repo clearing will fall into the latter category, with at least a delayed implementation timeline; the crypto market will see more relaxed regulation and gain regulatory clarity; many pending cases against the SEC will be withdrawn or won by the plaintiffs.
A Republican victory is not the only factor affecting regulatory changes in the securities industry. The Supreme Court's Chevron ruling has reduced the level of deference courts give to administrative agencies, which may trigger a new round of challenges to rule-making by the SEC, CFTC, and other financial regulators, covering everything from ESG to digital assets to event contracts. Increased judicial scrutiny of SEC actions may lead to further challenges, especially to some of the SEC's latest rules.
6. Derivatives markets trading and innovation remain red-hot
The demand for derivatives seems insatiable. Traditional futures contracts tracking interest rates and equity markets set trading volume records in 2024. Event contracts officially launched in the US and saw a surge in trading volume ahead of the elections. Bitcoin and ETH futures volumes grew, stock options have become mainstream, and 0DTE contracts have driven further volume increases. There will only be more to come.
Institutional traders and investors will continue to drive the majority of market trading volume, but the full-scale entry of retail into the futures market is noteworthy. More crypto-related ETFs will bring increased crypto ETF options trading volume. Credit futures have been tried for over a decade, but there are signs the market is finally ready for these carefully crafted tools. Regardless of the outcome, new competition in the US rates futures complex will only benefit the end-user. All of this will unfold against a backdrop of reduced regulatory red tape, which may accelerate new product approvals.
This supply-demand dynamic is driving investment in market infrastructure. Post-trade processing technology (often overlooked in favor of more revenue-generating front-office tools) is gaining the attention it deserves, ensuring market growth is not hampered by inefficiency and unnecessary operational risk. Investors are expected to join in at a faster pace, position transfers will be more efficient, and profit optimization will regain focus.
7. Market data supply and demand still cannot be met
Our research shows that market participants once again expect to spend more on market data in the coming year. Just like your grocery bill, inflation plays a role - but that's not the real story. Whether it's entering new countries, new asset classes, or new investment strategies, the first step is always to acquire new data. While the supply doesn't need to grow to keep up with demand (you can sell the same data sources endlessly), the available data continues to expand (e.g., alternative data, crypto data) as traders and investors work harder to find edges in existing and new markets.
The data itself is just the first step on this journey. New delivery mechanisms (e.g., cloud for real-time market data), better analytics (AI anyone?), and the tools that make this data actionable on the trading floor are all key investment areas supporting the demand for more market data. These are not one-size-fits-all. While speed is important for some traders, historical data may be more important for others testing strategies. That's why market breadth and delivery mechanisms are critical for any market data business today.
The market data business is not recession-proof. Market downturns may mean fewer clients in the short term as the capital pool shrinks and underperforming strategies are shut down. But ultimately, without market data, institutional trading and investing cannot happen, meaning the long-term spending chart can only move up and to the right.
8. Mandatory repo clearing drives innovation and competition
While the leadership in Washington has changed, the U.S. Securities and Exchange Commission's authorization to clear U.S. Treasury repo transactions is a provision that should be upheld. We and our research participants believe this will be a net positive for the market, although the development costs and short-term complexity for market participants must be addressed. The repo market is one of the most important markets in all of finance, so injecting some standards and additional risk management processes into the market is reasonable.
The authorization will also drive innovation. Clearing and more standardized product terms make electronic trading easier, which will lead to increased trading volumes from existing firms and potentially new entrants who sniff an opportunity. In turn, the trading mechanics may become smarter, drawing inspiration from innovations used for the electronic fixed income markets elsewhere.
These same market standards and trading mechanics can also open the market to new repo buyers and sellers. It becomes easier for those with cash on hand to generate returns, and easier for those with cash deployment strategies to borrow, injecting more liquidity into the entire market.
9. The love story between TradFi and DeFi continues to unfold
Trading cryptocurrencies through blockchain and bonds through ETFs is an established fact, but now the situation has changed: we can trade cryptocurrencies through ETFs (as well as futures and options), and trade bonds through Ethereum. DeFi companies see opportunities in TradFi assets, but perhaps more interestingly, TradFi companies are introducing access to TradFi assets through DeFi mechanisms.
Admittedly, this all looks a bit repetitive on the surface. If the whole point of Bitcoin is that you can trade it directly outside the financial system, why trade Bitcoin through an ETF? Similarly, anyone with a brokerage account can easily access money market funds. So why the crossover?
Many traditional investors want to get into the crypto currency markets, but would rather not go through the hassle of setting up new accounts - it's easier to park it in their existing taxable or tax-advantaged accounts. The same goes for DeFi investors in this space (yes, they exist). Putting your on-chain stablecoins (i.e. cash) into instruments backed by large asset managers holding U.S. government debt not only generates yield, but also safely stores that capital in the digital ecosystem.
Whether all finance will shift to DeFi over the next decade, or these two worlds will ultimately coexist with more seamless connections, is hard to predict. But the love story between TradFi and DeFi is certainly just beginning.
10. Investment in operational and compliance technology continues to grow
For a long time, operations and compliance professionals have been told to do more with less money. Post-trade spending has been more like a game of whack-a-mole than a long-term strategic investment. If you can spend money developing a new execution algorithm and see clear returns in the first year, why spend money on a new settlement system?
We get it - making money is important. But you can't make money if the foundations are weak. Those who closely watch the operational and compliance infrastructure understand that the goal is not just to reduce costs, but to scale, reduce risk, and achieve strategic objectives. That's why mainframes are giving way to the cloud, exception alerts are giving way to AI monitoring, and margin management spreadsheets are giving way to portfolio management systems that help optimize collateral.
Industry initiatives like T+1 and the upcoming Treasury clearing authorization are forcing existing technology and processes to evolve and improve. These investments not only accelerate processing speeds, but also increase the value the back office provides to the front. Better post-trade data means portfolio managers can understand risk more accurately and in real-time, while smart compliance checks can better ensure capital flows and avoid regulatory surprises.
