Source: Coalition Greenwich; Compiled by: Tao Zhu, Golden Finance
The coming year is arguably the most unpredictable year. Geopolitics is complex and U.S. regulatory policy is uncertain. Although the U.S. stock market can't seem to stop rising and interest rates can only fall, we know that neither of these things is set in stone.
Thankfully, some trends remain ubiquitous: the electronization of trading, the focus on workflow automation, the increasing transparency of the market, and of course artificial intelligence and machine learning (AI/ML). Although we didn't explicitly include it on our list, the impact of AI/ML will be reflected in almost all of the trends we will be watching in 2025. It is and will continue to be a huge catalyst for innovation in the financial markets in the coming years. With this in mind, here are the trends our team will be watching in 2025:
1. The influence of the ETF market is further expanded
ETFs have become the smartphones of the market - they can do almost anything. It is inevitable that more stock and corporate bond investments are transferred from mutual funds to ETFs every year. It is also natural that institutions use these ETFs as cash management/liquidity/hedging tools.
But asset managers and owners have now discovered that ETFs are a great distribution vehicle for just about everything: private credit, Bitcoin, Ethereum, CLOs, money markets, municipal bonds, US Treasuries – the list goes on and on. Sure, there are certainly some messed up cases, and some solutions are finding their way around the problem. But if managers have assets that need investors (like private credit), then ETFs carefully constructed in model portfolios can make it easier to access entirely new pools of capital than traditional methods.
Most retail investors don’t need to add more “alternative investments” to their investment accounts; institutional investors already have access to them. But improved access (and liquidity) to the full range of investable assets is a good thing for both institutional and (qualified) retail investors.
2. “Smarter and Faster”
To be a top market maker, you still need to be faster than everyone else. It takes a microwave, shortwave, or satellite connection to transmit market data and orders around the world at (near) the speed of light. If you’re the fastest and first to market, your trading logic doesn’t need to be unique to make money. But over the past five years, the number of such firms has shrunk dramatically as data and trade links defy the laws of physics.
For the rest, the focus is now on getting smarter, and fast enough. Smarter is subjective, of course. Practically speaking, combining the most creative people with as much computing power as possible is what major trading firms and hedge funds do. Speed still matters, and the bar is getting higher. But now, running a successful quantitative strategy is all about unearthing unique correlations and market anomalies through predictive artificial intelligence operating at hyperscale, and extracting profits before anyone else has a chance to figure out what you did.
3. Matching buyers and sellers has become more efficient (and complex)
The major stock markets, U.S. Treasuries, foreign exchange, and increasingly investment-grade corporate bonds (among others) are all traded electronically. While our research suggests that electronic trading will continue to grow, the pace of change will slow to varying degrees as each market matures. Maturity, however, does not mean a lack of progress. The past and present tell us that the future will be filled with continued innovation in electronic trading. While innovation will not always increase electronic trading volume, it will make trading more automated, efficient, and productive for investors and traders.
New equity alternative trading systems (ATS) show that even one of the world’s most electronic markets has new tricks up its sleeve. The Treasury market has already declared victory in electronic trading and is moving up to the challenge of greater sophistication. The growth in electronic trading of corporate bonds has come not from more RFQ volume, but from all-for-all protocols, portfolio trading, and modern auctions. The result is a more liquid market.
Technology doesn’t create liquidity, but it does tap into liquidity that would otherwise be unavailable. These solutions are often very complex at their core, but thanks to EMSs, UI designers, and algorithms, traders can see the magic and be oblivious to the complexity that makes it so.
4. The pressure on incumbents by upstarts is relentless
The disruption of incumbents by startups is as old as businesses themselves, and the attempt has always existed in the 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 deliver solutions for a transformed world. For those that have weathered the tough market cycles of 2022, the fruits of these efforts are increasingly evident.
While ATSs are eating into on-exchange market share, non-bank market makers are taking market share (and customers) from big banks, and capital markets fintechs are doing both and more. These agile newcomers are leveraging cutting-edge technology, innovative business models, and customer-centric approaches without the burden of legacy technology and operational complexity.
But remember—incumbents are incumbents for a reason. 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 are the big winners? Customers see better pricing and products for whoever wins.
5. U.S. regulation becomes more unpredictable
The only certainties are death and taxes—well, maybe just death. While many think they know what’s going to happen to the capital markets under the new Trump administration, few really do. We agree with several assumptions: many of the SEC's proposed but unsuccessful rules will expire or be rewritten; Treasury and repo clearing will fall into the latter category, with at least delayed implementation timelines; crypto markets will be more lightly regulated and gain regulatory clarity; and many pending cases against the SEC will be dismissed or won by plaintiffs.
The Republican victory isn't the only regulatory change affecting the securities industry. The U.S. Supreme Court's decision in Chevron has reduced the court's deference to administrative agencies and could spark a new round of challenges to the SEC, CFTC and other financial regulators' rulemaking, covering everything from ESG to digital assets to the future of event contracts. Increased court scrutiny of SEC actions could lead to further challenges, especially to some of the SEC's latest rules.
6. Derivatives market trading and innovation continue to boom
The demand for derivatives seems endless. Traditional futures contracts tracking interest rates and stock markets set trading volume records in 2024. Event contracts officially took effect in the U.S. and saw a surge in trading ahead of the election. Bitcoin and ETH futures volumes have grown, equity options have gone mainstream, and 0DTE contracts are driving volumes further up. There is only more to come.
Institutional traders and investors will always drive the majority of market volume, but the full entry of retail into futures is noteworthy. More crypto-related ETFs will bring increased volume in crypto ETF options. Credit futures have been tried for more than a decade, but there are signs that the market is finally ready for these well-crafted tools. Regardless of the outcome, new competition in the US interest rate futures complex can only be good for end users. All of this will unfold against the backdrop of reduced regulatory red tape, which may speed up the approval of new products.
This supply and demand dynamic is driving investment in market infrastructure. Post-trade processing technology, often overlooked by more front-office tools that generate ROI, is getting the attention it deserves, ensuring that the market's growth is not hindered by inefficiencies and unnecessary operational risks. Expect investors to onboard faster, position transfers to be more efficient, and a renewed focus on profit optimization.
7. Market Data Supply and Demand Remain Insatiable
Our research shows that market participants once again expect to spend more on market data in the year ahead. Just like your grocery bill, inflation plays a role—but that’s not the real story. Whether entering a new country, a new asset class, or a new investment strategy, the first step is always to acquire new data. While supply doesn’t need to grow to keep up with demand (you can sell the same data source at will), the data available for purchase continues to expand (e.g., alternative data, crypto data) as traders and investors increasingly strive to find an edge in existing and new markets.
The data itself is only the first step in this journey. New delivery mechanisms (e.g., the cloud for real-time market data), better analytics (AI anyone?), and tools to make this data actionable on the trading desk are all key investment areas to support the demand for more market data. None of these are one-size-fits-all. While speed is important to some traders, historical data may be more important to others for testing strategies. That’s why market breadth and delivery mechanisms are critical to any market data business today.
The market data business is not recession-proof. A market downturn may mean fewer clients in the short term as capital pools shrink and underperforming strategies are shut down. But ultimately, institutional trading and investing cannot take place without market data, which means the long-term spending graph only moves up and to the right.
8. Mandatory repo clearing drives innovation and competition
The SEC’s mandate for clearing Treasury repo transactions is a rule that should stick despite changes in leadership in Washington. We and our research participants believe it will be a net positive for the market, although development costs and short-term complexity for market participants must be addressed. The repo market is one of the most important of all financial markets, so it makes sense to inject some standards and additional risk management processes into the market.
The mandate will also bring innovation. Clearing and more standardized product terms make it easier to trade electronically, which will lead to increased trading volumes for incumbents and new entrants that may smell an opportunity. In turn, trading mechanisms may become smarter, drawing inspiration from innovations used to electronicize other parts of the fixed income market.
These same market standards and trading mechanisms can also open the market to new repo buyers and sellers. It’s easier to generate returns for those who have cash on hand, and easier to borrow cash for those who have strategies to deploy it, which will inject more liquidity into the market as a whole.
9. TradFi’s love story with DeFi intensifies
It’s a given that cryptocurrencies are traded through blockchains and bonds are traded through ETFs, but now things have changed: we can trade cryptocurrencies through ETFs (as well as futures and options) and bonds through Ethereum. DeFi companies see an opportunity for TradFi assets, but perhaps more interesting is that TradFi companies are introducing access to TradFi assets through DeFi mechanisms.
Admittedly, this all looks a bit repetitive on the surface. Since the 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 is there a crossover?
Many traditional investors want to enter the cryptocurrency market, but would rather open a new account without any effort - it’s easier to keep it in their existing taxable or tax-free accounts. The same is true for DeFi investors in this industry (yes, they exist). Putting your on-chain stablecoins (i.e. cash) into a vehicle backed by a large asset manager that holds U.S. government debt not only generates a yield, but also stores those funds securely in a digital ecosystem.
Whether all finance will shift to DeFi over the next decade, or whether the two worlds will eventually coexist in a more seamless connection, is difficult to predict. But the love story of TradFi and DeFi is certainly just beginning.
10. Growing Investment in Operational and Compliance Technology
Operations and compliance professionals have long been told to do more with less. Post-trade spending has become more like a game of whack-a-mole than a long-term strategic investment. Why spend money on a new settlement system when you can spend money on developing a new execution algorithm and generate a clear return in the first year?
We get it — it’s important to spend money to make money. But it’s impossible to make money if the foundation is weak. Those who pay close attention to operational and compliance infrastructure understand that the goal is not just to reduce costs, but to increase scale, reduce risk, and achieve strategic goals. That’s why mainframes gave way to the cloud, anomaly alerts gave way to AI monitoring, and margin management spreadsheets gave way to portfolio management systems that help optimize collateral.
Industry initiatives like T+1 and the upcoming Treasury clearing mandate are forcing changes and improvements to existing technologies and processes. These investments not only speed up processing, they also increase the value the back office provides to the front office. Better post-trade data means portfolio managers have a more accurate, real-time view of risk, while smart compliance checks provide greater assurance that capital flows and avoid regulatory surprises.
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