#4. Introduction to Financial Instruments: Technology in Investment Banking

Welcome back to the Technology in Investment Banking series. So far, we’ve looked at what investment banks actually do—and how their world works, from trade execution to the post-trade engine room.

This week, we zoom in on the financial instruments(the deals) themselves. What kinds of financial products do these banks trade? And what does that mean for the tech behind each one?

Let’s break it down.

Walk into any investment bank's trading floor, and you'll see rows of traders staring at multiple screens, seemingly doing the same thing: buying and selling financial instruments. But beneath this uniform scene lies a complex technological ecosystem where each asset class demands its own specialized infrastructure, data models, and processing capabilities.

A system built for high-speed equity trading would crumble under the complexity of exotic derivatives, while a commodities platform needs capabilities that would be overkill for simple bond trading.

Understanding Trading Venues: The Foundation

Before diving into specific asset classes, it's crucial to understand the two fundamental ways financial instruments are traded, as this distinction drives many of the technology decisions banks must make:

Exchange-Traded Markets

Exchange-traded instruments are bought and sold on centralized platforms like the New York Stock Exchange (NYSE) or the Chicago Mercantile Exchange (CME). Think of these as giant digital marketplaces with standardized rules.

Over-The-Counter (OTC) Markets

OTC trading occurs directly between two parties without the involvement of a centralized exchange. Imagine this as private negotiations between banks, corporations, or institutional investors.

This fundamental distinction shapes everything from system architecture to risk management approaches. As we explore each asset class, you'll see how some naturally fit the exchange-traded model while others require the flexibility of OTC markets, and how this drives their unique technology requirements.

Let's examine how various asset classes influence the technology that underpins modern investment banking.

Equities: The Game of Speed

What are Equities? Equities represent ownership stakes in companies. When you buy Apple stock, you own a tiny piece of Apple Inc. These instruments are relatively straightforward – each share represents the same ownership percentage and voting rights.

Trading Venue: Primarily exchange-traded on platforms like NYSE, NASDAQ, and various electronic exchanges. This exchange-traded nature is what enables the massive volumes and lightning-fast execution that characterize equity markets.

Real-life example of an Equity Trade:

A fund manager wants to buy 100,000 shares of Microsoft for a client. The trader gets this request at 9:30 AM New York time and needs to place the order in a way that doesn’t push the price up too much. Because Microsoft stock trades on a major exchange (NASDAQ), the process is smooth, prices are public, and rules are standard.

Technology Requirements: Equity trading demands extreme speed and volume handling, optimized for the exchange-traded environment. The technology stack is optimized for standardized, high-frequency operations where exchange-traded characteristics enable massive scale and microsecond precision.

Fixed Income: The Debt Instruments

What is Fixed Income? Fixed income securities are debt instruments where investors lend money to entities (governments, corporations) in exchange for periodic interest payments and return of principal. Unlike stocks, bonds come in countless variations with different maturities, coupon rates, and terms.

Trading Venue: Predominantly OTC markets with some exchange-traded products (like Treasury futures). The vast majority of corporate and government bonds trade in customized OTC transactions between dealers and institutions. This OTC nature creates the complexity that defines fixed income technology.

Real-life example of a Bond Trade:

A senior banker needs to buy $50 million worth of U.S. government bonds that mature in 10 years. These bonds aren’t bought through a stock exchange. Instead, the banker talks to several banks to find the best deal. Prices are discussed directly, and both sides agree on how and when the payment and bonds will be exchanged.

Technology Requirements: Fixed income trading requires sophisticated data management and pricing capabilities optimized for OTC complexity. The emphasis shifts from pure speed to accuracy and comprehensive data management, reflecting the OTC market's customization requirements.

Foreign Exchange: The Global 24x7 Market

What is FX Trading? Foreign exchange involves trading currencies in pairs (EUR/USD, GBP/JPY). It's the world's largest financial market, operating 24 hours a day across global time zones with over $7 trillion in daily volume.

Trading Venue: Almost entirely OTC markets with direct bank-to-bank trading, electronic communication networks (ECNs), and multi-bank platforms. The decentralized, OTC nature enables 24/7 global operations but requires sophisticated risk management across multiple counterparties.

Real-life example of an FX Trade:

A global company needs to turn $100 million into Euros to buy a European business. The company’s trader splits the job into parts and deals with several banks to get a good exchange rate. These deals don’t happen on a public exchange but through direct discussions with each bank.

Technology Requirements: FX trading demands global connectivity and real-time risk management across OTC counterparty networks.

The technology focuses on global reach, real-time processing, and sophisticated risk controls tailored for decentralized OTC markets.

Commodities: The Physical World Meets Digital Trading

What are Commodities? Commodities are physical goods like oil, gold, wheat, or natural gas. Trading often involves futures contracts for delivery at specific locations and times, bringing physical world complexities into financial markets.

Trading Venue: Mixed model - standardized futures contracts trade on exchanges (CME, ICE), while physical commodities and customized contracts trade OTC. This dual nature creates unique technology challenges, bridging exchange efficiency with OTC flexibility.

Real-life example of a Commodity Trade:

An airline wants to lock in fuel prices to avoid future price spikes. It buys contracts tied to crude oil prices. Some of these trades happen on official exchanges where only price matters. Others involve direct deals where the airline also agrees on where the fuel will be delivered, how good it needs to be, and how it’ll be stored.

Technology Requirements: Commodity trading bridges financial and physical worlds across both exchange and OTC venues. Technology must handle both financial complexity and physical world logistics across mixed trading venues.

Derivatives: The Mathematical Universe

What are Derivatives? Derivatives are financial contracts whose value depends on underlying assets. They range from simple exchange-traded options to complex bespoke swaps involving multiple asset classes, currencies, and risk factors.

Trading Venue: Highly mixed - simple derivatives (plain vanilla options, futures) trade on exchanges for standardization benefits, while complex derivatives (interest rate swaps, credit default swaps, exotic options) trade OTC for maximum customization. This creates a spectrum of technology requirements.

Real-life example of a Derivative Trade:

A retirement fund wants to protect itself from changes in interest rates. It agrees to a deal where it swaps interest payments with a bank for the next five years. This deal isn’t public and needs special contracts, checks on credit risk, and regular updates on how much money needs to be set aside in case the other party can’t pay.

The technology stack resembles a financial laboratory with cutting-edge computational capabilities, optimized differently for exchange vs. OTC complexity.

Conclusion: The Hidden Complexity

From the outside, investment banking technology might appear uniform – traders at screens executing trades through similar-looking interfaces. But this surface similarity masks profound underlying differences. Each asset class has evolved its own technological ecosystem, optimized for its unique characteristics and requirements.

Equity systems prioritize raw speed and volume handling for exchange-traded efficiency. Fixed income platforms excel at complex data management and pricing accuracy for OTC customization. FX infrastructure emphasizes global connectivity and real-time risk management across decentralized OTC networks. Commodity systems bridge financial and physical worlds across mixed exchange/OTC venues. Derivative platforms require mathematical sophistication that rivals academic research institutions, optimized differently for exchange standardization vs. OTC complexity.

What’s Coming Next

We’ve now unpacked how asset class differences shape the technology inside investment banks. From ultra-fast equity trading systems to data-heavy fixed income platforms, each product brings its own design rules. We also explored how exchange-traded and OTC markets influence everything from infrastructure to risk control.

Starting next week, we shift gears. We'll move beyond trading and dive into the core business functions of investment banks. First up: Investment Banking Division (IBD), Mergers & Acquisitions (M&A), and Advisory. What do these teams actually do, and how does technology support their high-stakes, high-touch work?

This is the fourth blog in my Technology in Investment Banking series.

If this helped you understand the tech beneath the trades, follow for more. If you work in fintech or banking tech, I’d love to hear your take on asset-class-driven system design.

Drop a comment and let’s trade notes.

See you next week!