Evolution of trading technology for exchanges in the Asia-Pacific

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Mar 18th, 2015

Several Asian economies and capital markets have witnessed rapid growth in the last few years. This has led to an expansion in the market infrastructure and a string of notable investments by the leading regional exchanges in trading platform technology. The exchanges in Asia-Pacific have adopted varying strategies to meet their technology requirements. Some exchanges have used their in-house capabilities to develop trading platforms. Others have used a mix of in-house platforms and technology from third party providers. Finally, some have relied mainly on outside technology, using best-of-breed solutions. The objective has been to modernize exchange infrastructure and ensure that the exchange remains competitive in the face of pressure from leading global players as well as other regional exchanges.

An interesting feature of the Asia-Pacific markets has been the linkages and tie-ups between the regional exchanges, as well as those with leading global exchanges. The market is exhibiting a unique mix of cooperation and competition. The most notable recent inter-linkages have been the Shanghai-Hong Kong Stock Connect and the ASEAN Trading Link. Both are still in early stages of being set up and there are some inevitable glitches before we see significant volumes. But what is important to note is that this kind of connectivity is spurring other exchanges to also try and increase access to their products from outside markets and exchanges.

While there are certain advantages for exchanges in the Asia-Pacific, there is nevertheless room for improvement. There is potential to turn the market data function into a significant profit center. Some exchanges are already successful in this, but others need to follow suit. Also, there needs to be greater emphasis on market surveillance and tighter regulation in what is a fast-evolving market landscape. I have been working on an upcoming research report that looks at the issues discussed here in further detail.

The latest report from WM: Effectively Serving the Mass Affluent

Mar 17th, 2015

Wealth managers today face the question of how to effectively capture and retain the next generation clients, who are, for the most part, in the mass market (MM) or mass affluent (MA) investor segments and part of Generation X and Y.

In this report Effective Serving the Mass Affluent, we address the questions:

  1. What does the mass affluent customer segment look like today?
  2. How will the role of the advisor evolve?
  3. How can wealth managers capture the mass affluent market?

Technology and customer segmentation will be key drivers in successfully capturing the mass affluent market. Robust digital strategies, the digitization of processes and data, flexible investment architectures, and tailoring products and services based on specific client classifications will enable firms to acquire this customer segment.

Click here for more about this report



Surprised Wealthfront’s Adam Nash took off the gloves? You shouldn’t be

Will Trout

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Mar 12th, 2015

In my last post I discussed the contretemps between Wealthfront and Charles Schwab. Here I look at what Adam Nash’s salvo across the Charles Schwab bow suggests about where he’s taking his fast-growing firm, and about his leadership style. The readiness of Nash (after barely a year as CEO) to go after Schwab reflects a changing of the guard on three fronts.

  • The first change is generational. As I told RIA Biz, Nash has little truck for tradition, and even less patience for what he sees as inefficient or customer-unfriendly practices.
  • Second, Nash is a disruptor by nature. His predecessor (Stanford Business School professor and storied venture capitalist) Andy Rachleff, while brilliant and innovative, is very much invested in the Silicon Valley ecosystem.
  • Three, Nash is a software engineer, while Rachleff (Wharton ’80) is a businessman and investor.

This latter distinction is perhaps the most important of all, as it suggests a sea change in a longstanding industry narrative. In today’s digital ecosystem, software engineering firm vs. incumbent increasingly is not a fair fight. As I note in a recent report, it is questionable whether an established firm outside the Bay Area could even hope to attract enough talented engineers to build anything on the scale that Schwab has done.

Looking forward, established firms will increasingly struggle to keep up with nimble start-ups. The readiness of Millennials like Nash to speak to truth to power underscores this power shift. Indeed, Nash’s damn-the-torpedoes approach reflects not just his personal style, it speaks to the way he does business.

War of words between Wealthfront and Schwab heats up

Will Trout

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Mar 11th, 2015

Chalk up a win to Wealthfront CEO Adam Nash in his war of words with Charles Schwab. By cleverly baiting his rival, Nash has managed to put his firm on the same footing as the industry colossus.

Careers are on the line at the larger firm, which has watched Wealthfront go from startup to upstart in two short years. Things are getting personal. Expect the peevishness expressed in Schwab’s response to surge as we approach the end of Automated Investing 1.0, and Nash goes directly after Schwab CEO Bettinger’s bacon.

I’ve been watching this battle brew for a while, and in my view, what is interesting here is not Schwab’s testy rejoinder, but where Nash is taking the fight. He’s not just pulling the rug out from Schwab, but barely a year after taking over from Andy Rachleff, he’s putting his own stamp on Wealthfront. I’ll talk about what this means for the future of this innovative firm, and for its automated and real life competitors, in my next post.

Another boost for the utility model

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Mar 11th, 2015

SunGard announced yesterday that it will launch a new industry utility for post-trade futures and cleared OTC derivatives operations and technology, with Barclays helping pilot the project by handing over some of its post-trade processing and regulatory reporting obligations to SunGard. This would not come as a surprise to readers of Celent’s coverage of technology and process evolution by capital market firms. In a number of recent reports (and blogs) we have highlighted how the evolution of the regulatory environment is forcing firms to look for new models for running operation and technology. The constantly evolving regulations have created additional obligations for financial institutions (FI), particularly in the areas of risk management, reporting and regulatory compliance.

While all FIs need to adhere to these changes, the changes add very little in terms of competitive advantage to the FIs. At the same time keeping track of and responding to these changes need significant investment of resources on an on-going basis leaving them with little time or resource to focus on core activities. Therefore they are not only looking to outsource these non-differentiating activities to third part providers, but also looking to gain further cost advantages through shared service or utility model of engagement. Under such arrangement one service provider caters to the need of multiple players, at times even the full industry, which allows all involved parties to benefit from significant economies of scale as well as through reduction in duplication of efforts. In some areas (such as KYC utilities) we have seen banks coming together to form groups or consortium to develop industry wide utilities. In other areas we have seen individual bank-vendor partnership developing a solution with plans of making it available to the wider industry in the future. The Sungard post-trade utility therefore re-emphasizes our point of the industry’s desire for radical cost reduction by exploring new engagement models.

It needs to be pointed out though that industry wide adoption of the utility model will take time. Many firms are still waiting to see the success/failures/pain points of those that are exploring with these new models. Some FIs at the moment are trying the utility model at an intra-firm level, i.e., across different divisions of a bank. Success of these efforts in the early days will expedite adjacent cost reduction opportunities as firms continue to explore emerging operating models beyond conventional captive operations.

Retail investor trading in the US: perspectives on trading preferences and behaviors

Mar 10th, 2015

Celent conducted a survey of retail investors across the United States to better understand this segment of the wealth management industry.

In this report, we answer:

  • What is the average profile of the retail investor in the US?
  • How have retail investors’ product preferences evolved over time?
  • How can firms capture and retain new and existing retail clients?

The aim of the report is to present a detailed picture of the online trading industry in the US from the perspective of the retail investor. Celent will conclude by stating its findings and making recommendations as to where wealth managers should potentially focus in the near term to capture retail investors.

“The global financial markets, traditionally reserved for professional traders, are accessible to retail investors across all demographics and trading experience levels,” says Ashley Globerman, an analyst with Celent’s Wealth Management practice and coauthor of the report. “The profile and demands of retail investors, particularly those of self-directed investors, have evolved greatly over time.”

The survey gauges their demographics, investing and trading behavior, product and service preferences, and technology adoption. The pool of survey participants ranges across all trading levels and demographics, such as age, gender, marital status, number of dependent children, and education and affluence levels. Some of the main findings of this survey are as follows:

  • The growth rate of self-directed investors continues to outpace that of non-self-directed investors.
  • Asset class preferences have changed slightly since Celent’s 2012 retail investor survey.
  • Dynamic client expectations continue to shape the wealth management industry.
  • There is investor demand for peripheral services outside of trading.

“As the wealth management industry and demands of retail investors continue to evolve, the importance of segmenting customers and adapting products and services based on their needs is increasingly critical in order for firms to remain competitive and gain broader market share,” says Isabella Fonseca, a research director with Celent’s Wealth Management practice and coauthor of the report.



Analyst day: Capgemini

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Mar 7th, 2015

I recently had the opportunity to attend the analyst day at Capgemini in Chicago. It was certainly time well spent, as it provided me interesting insight into the functioning of a leading capital market technology firm. It was also useful as I was able to step back from my day to day work in technology related to capital markets, and understand some of the latest trends in technology for both the overall financial services and also for non-financial firms such as energy companies, retail firms and even firms in the entertainment industry. Having such a perspective allowed me to contextualize the recent innovations and technological developments in the capital markets that I write and consult about, and which we discuss on a day to day basis with our clients and other industry participants. We often forget the potential for cross-fertilization of ideas across all industries, and also the deep impact that some of the technological changes have on our day-to-day lives.

The analyst day also provided me an understanding of the evolution of Capgemini as a technology firm and how it has matured as one in the last decade or so. From a firm that used to meet the bespoke IT needs of its clients, it has moved onto becoming a system integrator and then even a business partner for many of its clients in the new initiatives that they have planned related to technology. It is an interesting example of how the entire industry has evolved and how IT firms are becoming much greater risk-takers and partners in new technological initiatives, as opposed to being mere service providers they were earlier.

With regard to their capital market capabilities, there was an interesting discussion of a recent derivatives trading system implementation, where Capgemini helped to integrate and streamline the trading systems of their client, while upgrading the same in the process. It highlighted Capgemini’s capability to manage and enhance vital IT platforms as a strategic partner for its clients.


Smaller buy side firms and regulation

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Mar 7th, 2015

Increased regulation has become a way of life in the financial markets. Buy side firms are also devoting a lot of time and energy to meeting regulatory requirements. The share of expenditure for regulation and compliance has also risen accordingly. Firms are often building their IT strategies around the various requirements arising from Dodd-Frank, MiFID II, FATCA, Basel III, EMIR and so on. In this environment, smaller buy side firms are possibly in a tougher position than some of their larger asset management and hedge fund counterparts. The reason is that they do not have the same financial and technological capability and hence have to often adopt a more piecemeal approach to regulation and compliance. Their IT systems and platforms are also not geared fully to meet these needs, and streamlining the same is often beyond the capacity of many such small firms.

An interesting development that has resulted from the spate of regulations post-financial crisis is the reduced participation or even effective withdrawal of the banks from different types of risk-taking activities. This has been accompanied by the effort by buy side firms to fill some of these needs. While this is an important area of opportunity for buy side firms, it is also something they should be cautious about. The reason is that the increase in buy side activity has to some extent moved the sell side risk to the buy side. This is accompanied by some liquidity problems due to the declining sell side activity. While smaller buy side firms are probably affected less by this issue than some of the largest asset managers, nevertheless they need to ensure their risk management systems are capable of bearing any new and additional stresses that the larger systemic role of the buy side might bring.

Celent is currently conducting a lot of research looking at the various requirements of buy side firms, and I am about to publish a report that discusses the specific needs of smaller buy side firms when it comes to regulation. This research would also look at some of the ways in which these firms can cope with their pressing demands, and discusses how it is important for them to stand back and take a more holistic approach to regulation.

Temenos acquiring Multifonds – the rapidly changing world of asset management

Mar 5th, 2015

Temenos has announced that it is acquiring Multifonds. Multifonds, out of Luxembourg, is known for its IBOR portfolio and fund accounting system and its transfer agency application. Temenos, its original name back in the 1990’s was CTW (Conquer the World), is maybe doing exactly that, now adding significant Asset Management/ Fund Accounting functionality along with T24, its core banking platform and its current Portfolio Management offering, Triple A Plus. Now Temenos not only covers most of the banking world but also now can cover core asset management servicing.

The sleepy asset management business is no more. With over $100 trillion of investable assets around the globe, investing is under siege, from “baby boomers” retiring and transferring wealth, defined contribution plans moving across the globe and millennium middle class wealth seeking investment. All this money needs asset managers and all the AMs need technology to manage assets (see The Continuing Quest for $100 Trillion AuM).

The old adage, that the folks who supplied the picks and the shovels during the Gold Rush, did just fine and with a lot less risk and steady cash flows. Multiple vendors are expanding their offerings cross product, cross functions and combining services to serve ever larger audiences – universal banking, wealth management and asset management. Some supplying full BPO – fund administrators (SS&C acquiring DST, Advent), SEI spinning off its technology with Arcesium to serve asset managers.

Sure many AMs are thinking, well if I outsource my technology why not my full operations? There are more and more administrators, custodians and vendors who can offer any investment service you might need. Just have clients and a good investment strategy and you are off to the gold fields.

Data and transformations in the European fixed income markets

Ran Pieris

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Mar 2nd, 2015

The 2015 AFME European Market Liquidity Conference saw two important Keynote speakers with Martin Wheatley and Andrew Hauser but for me the most interesting discussions were around the common leveraging of data to provide greater liquidity to the Fixed Income (FI) Markets and to analyse and optimise Transaction Cost Analysis (TCA). The ongoing discussion for the requirement for E-Trading platforms had moved on to the type and number of platforms that will be needed. In the latter point we are at a colonisation phase where many new platforms are created but not all are likely to succeed.

Data is playing a more transformative role in the thinking of the optimisers in Capital Markets with the sell side and financial service providers expressing the use of it to optimise FI trading and allowing greater liquidity and automation. Interestingly the discussion on TCA also revolved around the greater use of data to automate trades but the general consensus was that although 95% of trades may be automated via TCA algorithms it is the 5% that fail that can be the most costly. It is interesting to note that the ex-ante use of data for TCA was discussed by Celent in a 2010 report and the adoption of it by the sell side appears only to have started in the European FI markets. However given the lack of liquidity mentioned the use of full automation is some time away and maybe applicable only to the most liquid FI securities.

Celent has already discussed the emergence of electronic platforms in previous reports such as 2014 European Fixed Income Market Sizing: Electronic Strikes Back being the latest and the general consensus for electronic trading of FI via central Limit Order Books (CLOB). For a view on CLOB see this report. The question raised now was how many FI platforms would be needed with the sell side agreeing a greater number of platforms while the buy side seeing the requirement for less platforms with greater liquidity. Maybe the multiple FI liquidity points can only be overcome by greater cooperation from both the buy and the sell side which is already on the table with Project Neptune.