Human and Machine-Rise of the Cyborg: The Cycle of Voice Trading

Human and Machine-Rise of the Cyborg: The Cycle of Voice Trading

Celent has explored voice trading in Human & Machine-Rise of the Cyborg: The Cycle of Voice Trading, published yesterday. In this piece, we look at the power of voice trading as well as the business drivers, challenges and forces that are driving change in voice communication, collaboration and voice market engagement.

Celent believes that voice is a key channel that will remain relevant and will work more seamlessly with electronic and data channels in the coming years. A move toward unified communication approach and advances in technologies, combined with a challenging business environment, are reshaping the modern trading desk. Cost cutting, front office effectiveness, gleaning better insight into customer behaviour combined with digital automation are pushing this frontier forward. Voice trading remains the major channel for transferring risk, across asset classes, yet remains a challenge due to the difficulties in leveraging this unstructured data set.

Advances in both preparing and leveraging data for advanced analytics are creating a demand for business insights-the demand for better data is ever growing. Firms are beginning to leverage advanced data tools for not only risk mitigation and regulatory requirements, but are creating front office opportunities for better counterparty engagement and communication.

Fintech continues to advance in the capital markets and the implications are profound for incumbent players. Firms that effectively leverage the full spectrum of innovation available are becoming more streamlined and more effective. The overarching need for business model evolution and the importance of technology in the markets continues to ramp up. As one example,last week alternative dealer Citadel Securities hired Microsoft COO to be the new CEO of it electronic market making business.

We are surrounded by advances in voice technology for interacting with machines in our life in general. We are getting comfortable with Apple’s Siri on mobile, and Amazon's Echo in our homes. Similar technologies have advanced in areas outside the capital markets, but leading firms are trying to leverage voice data for better insight, engagement, and automation. While we are nowhere near Robotic Stingray Powered by Heart Cells from Rats published in last week’s WSJ, in merging machine and biological elements we are heading more into an era of the cyborg-where capital market participants will increase their direct engagement with machines via voice interaction.

A big bank follows the wirehouses upmarket

A big bank follows the wirehouses upmarket
Money bag icon (flat design with long shadows) JP Morgan Chase’s decision to double the minimum asset level (from $5 to $10 million) required for service by its private banking group underscores the effect that digitization is having on all levels of wealth management. It echoes the approach taken by the wirehouses, who (with the exception of Merrill Lynch, which has served less affluent clients through its Merrill Edge program) have moved steadily upmarket in an attempt to rationalize their high cost service models. As such, the decision does not come out of nowhere but rather reflects the evolving economics of the advice business and the desire to incorporate new service models. It also speaks to the challenges and opportunities facing commercial banks. The Next Shoe to Drop Little noticed in the run up to the announcement of the rejiggered segmentation were a series of layoffs across the private bank. In retrospect, it is clear these were executed to lay the groundwork for the reprised segmentation and the pending launch of what the bank calls Private Client Direct. From the name itself, it is pretty clear that the bank is set to embrace a robo advisory model, perhaps in concert with one of the vendors (such as Trizic, the founder of which, Brad Matthews, is a JP Morgan alum) that have cropped up to serve the bank space. If it moves fast enough, JP Morgan could be the first bank south of the Canadian border (BMO launched its SmartFolio robo advisor platform earlier this year) to roll out such a platform. In truth, the JP Morgan decision is as much a right sizing as a rationalization, since only a small share of current private bank clients are affected by the move. From the bank’s perspective, this tighter segmentation is worth the effort, as small deposits exact a relatively high cost in terms of compliance and offer scant opportunities for profitable lending in the current rate environment. The point has been made, meanwhile, that personal service of the high touch sort is now reserved for the bank’s wealthiest clients. Doubtless management will pull out all the stops to keep these clients happy.

Markit merger – Fintech disruption and data

Markit merger – Fintech disruption and data
Spring has sprung and Markit, a firm that touches every corner of the capital market, starts this snowy spring morning in NY, with news of a mega-merger. Markit has grown by offering solutions, data and analytics to much of the capital market value chain as well as through multiple acquisitions, so it is interesting to see it now joining with IHS, to become part of a multi-industry vertical firm. According to the press release, IHS (NYSE: IHS) and Markit (NASDAQ: MRKT) will combine in an all-share merger of equals.  The combined company’s reported results for fiscal year 2015 include approximately: $3.3 billion in revenue. It will be interesting to see how Markit’s three divisions will fit into the multi-verticals that IHS serves. Markit’s three divisions: Information, which has been a source of pricing and reference data, with analytics across asset classes; Processing, has been a critical source of efficiencies and automation to the capital markets, particularly in OTC derivatives, FX, and the loan space; and, Solutions, has been a source of managed solutions. Like many people in the financial industry, I was surprised by the announcement of this deal. On a strategic basis, I have thought of Markit combining with a larger market data provider, adding additional data and valuation tools to that firm, or feeling in key data or automation gaps. Or, other market participants across the capital market transactional space which  have been recent, and eager buyers, of data companies. They have been eager to own not only the data, for the creation of IP, for the bigdata analytics, for the potential data tools in the  electronification of trading, but for the recurring and stable revenue model. One recent example, is the ICE acquisition of IDC. Whether any of these other types of deals were considered, I don’t know.  Perhaps, the deal speaks to the challenges that are seen in the capital market as the industry continues to find its way in the post-crisis world. The lack of future clarity, as financial services firms digest the implications of FinTech disruptors,  along with the realities of today’s regulations and capital restrictions, drove the key decision makers to expanding to other industry verticals. However, after two days of mulling the deal over: Markit has sat in a unique place within the financial services, since its inception in credit market data thirteen years ago. The firm has morphed into not only providing critical data, analytics and valuation tools,  across asset classes, for a broad swath of the capital markets, but has been instrumental in bringing much needed automation and  efficiencies to some of the thorniest challenges that the industry has faced within processing OTC rates, credit, FX, and the syndicated loan space, with its processing division, as well as a variety of services and software within the solutions  division. Markit’s growth has always been based on a strategy of hiring key talent, directly from the industry, purposeful partnerships, all combined with aggressive acquisition. This combination has allowed them to create holistic middle and back office solutions, with engaged buy-in from key partners. Both Markit and IHS sit on vast resources, of the true currency of our time, data. Markit in the capital markets and IHS in energy as well as other industries. We can envision creating indices in energy  products, such as Markit has done in credit. We can also imagine creation of products like ETFs and smart equity across the industries where these two companies sit. They can also create research and analytics across the spectrum of industries where the combined company competes. I can see what each firm sees in the other.  

Intra-IDB part II: The ICAP to eCAP deal

Intra-IDB part II: The ICAP to eCAP  deal
Where there is smoke there is fire and the proposed outline for a deal which I discussed in my blog this weekend was announced today.  Long time rivals  in the inter dealer broker (IDB) space Tullett Prebon and ICAP are coming together with Tullett buying ICAP in an all-stock deal. Tullett will now be the 800 lb. gorilla of voice brokering, with about 1500 ICAP brokers  going to Tullett as part of the deal as well as another 1000 employees. The deal will also include certain electronic assets like  ICAP’s 40.2% ownership in iSwap (IRS) , certain JVs and as well as the not clearly defined information services revenue. The details of the deal terms, economics and structuring are discussed in the press release and the analyst presentation. I will focus on certain key points of the deal looking at the ICAP side. ICAP has followed a strategy of acquiring growth and putting together an impressive portfolio of front to back  technology assets. Historically, its main challenge in maintaining the voice business was not only the lower margins, and slowing environment for many of the products traded  but the internal competition between its voice and electronic channels. The electronic businesses have not grown as they should, had this internal friction not been present. This is the case across asset classes. But, as they say, better late than never, and ICAP is on the road to becoming a different company. The new ICAP (let’s call it eCAP) will include: • FX venue EBS and the related EBS businesses • Treasury exchange BrokerTec • Post-trade and processing companies TriOptima and Traiana which serve across asset classes with a focus on FX, rates and credit • FinTech incubator Euclid which has been active in making strategic bets for the firm • Tullett will have the right to the ICAP name What is not entirely clear at this point is what “information services” will remain with eCAP. Given the importance of market data, a detailed understanding of the  value of  eCAP will be a function of whether certain market data assets like data from EBS and BrokerTec will remain with eCAP. Furthermore, it will be interesting to see if the eCAP has the right to compete in interest rate swaps, or what its plans will be to develop an electronic platform for IRS given the loss of iSwap. I would imagine, given the importance of interest rate swaps in the rate world that the new firm will want to have a robust offering in this area. In sum,  eCAP will be a lean technology, execution, venue, tools, pricing, and analytics company. Of course, eCAP will still have a vested interested in the voice business as it will hold about 20% of the newly issued Tullett stock.      

Intra-inter dealer broker deal: facing the future

Intra-inter dealer broker deal: facing the future
Speculation reached the point Friday afternoon such that a press release came out regarding the discussions of two major brokers. ICAP and Tullett Prebon, two of the largest inter dealer brokers (IDBs) announced that they were in advanced discussions; it appears ICAP is poised to sell its voice brokering businesses and certain electronic platforms to Tullett. On first blush, it looks as though ICAP will be shedding its voice brokering businesses and certain e-platforms; while maintaining such platforms as EBS and Broker Tec (FX and Treasuries) as well as other platform assets, ancillary businesses around these platforms (such as data and analytics), as well as ICAP’s extensive post-trade infrastructure. Friday’s press release detailed the assets that would be part of the transaction. In summary: • ICAP’s three regionally managed voice broking businesses in EMEA, the Americas and Asia Pacific (1,458 voice brokers); • (“APAC”), including all e-trading products and services developed by ICAP’s e-Commerce team (including Fusion and Scrapbook) (together “Global Broking”); • ICAP’s 40.23% economic interest in iSwap, a global electronic trading platform for EUR, USD, GBP and AUD IRS; • Revenues and operating profits from sales of information services products directly attributable to Global Brokering and iSwap; and, • Certain JVs and investments. IDBs have struggled in the post-crisis world to deal with the changing dynamics of regulation, the nature of their place in the market and lower volumes. Furthermore, MiFID II is on the horizon in Europe and will further change the competitive nature of the IDB space. More importantly, in many cases, IDBs have struggled for years with the right formula to develop electronic distribution and sales channels without cannibalizing their core voice businesses. The pressure on the IDB community has been immense. ICAP now has an opportunity to focus on an electronic future, across assets, from font to back office.  ICAP, with holdings across markets will now be a considerably leaner technology company. It will be able to serve its traditional dealer clients as well as other businesses in the changing capital market world. It is very likely in the next day, with the confirmation of a deal, ICAP will be beginning a path toward being a very different, technology and processing based company. As a final note, it will be interesting to see if there are any other competitors, on the side-lines, who will be positioned to step-in and change the final parameters, or even players in the deal (as was the case with BGC/Cantor in the GFI Group deal).

MiFID II on the minds of fixed income leaders

MiFID II on the minds of fixed income leaders
I am getting excited about participating and speaking at the Fixed Income Leaders Summit in Barcelona, Spain this week.  The timing could not be better; the fixed income world is grappling  with the challenges of an evolving market structure, innovation and technology, all within the context of a recently delivered regulatory MiFID II/MiFIR proposal. I am looking forward to hashing out the most pressing challenges facing the market, with the best and brightest leaders from all corners of the fixed income world. In advance of the conference, the European Fixed Income Industry Benchmarking Survey 2015, surveyed 50 senior buy side leaders to get a sense of their focus. The primary challenges  identified, include: the evolving center of gravity in the relationship between the buy side and sell side; digesting and understanding the regulatory framework and MiFID II guidelines: and, engaging with the changing landscape of sourcing data and electronic trading. Celent is very focused on the evolution of the fixed income business within the context of evolving market models, data aggregation/analysis and regulation.  We continue to discuss these topics in our ongoing research. I am especially eager to participate in discussions  around requirements for quoting and new reporting requirements that will impact the buy side. I will also be discussing the evolution of trading tools and electronic trading-looking at the landscape of trading platforms, new analytical tools for accessing liquidity access, and creating a holistic approach with engaging with the market across products. I look forward to catching up on all these topics. Please come by and see my session on market structure and electronic trading tools at 11:45 on Thursday in lovely Barcelona.

MiFID II and you – here before you know it

MiFID II and you – here before you know it
A brief review indicates that ESMA has given more clarity on its view of fixed income trading in the post-MiFID II world. We are now one step closer to a new world of secondary trading in European bonds. In the context of the heated debate around liquidity in fixed income recently ESMA has moved to an approach that looks at each bond to determine the liquidity thresholds and hence the exact nature of the required pre- and post-trading transparency. ESMA will be looking at 100,000 Euro thresholds with at least two trades occurring daily in at least 80% of trading sessions. Hence, a certain proportion of European bonds will become subject to a wholly new regime of trading-scheduled for January 2017 if there are not additional delays to the start of MiFID II. Bringing a new level of transparency to the pre- and post-trading of fixed income products, in conjunction with the myriad other touch points of MiFID II, will stretch the resources of most financial market participants. While firms have been preparing for some time, there are different degrees of readiness.  For most firms,  the next year will be huge effort, to get ready for this new trading regime.

The future is here

The future is here
The pressures are well known in banking and the capital markets. Each month there are front page articles of scaling back, overhauling, reorganizing, or closing major bank lines. A continued reworking, a forging of a new business is occurring. Old models are shrinking and being replaced by new business models or being cast aside. Since the 2008 crisis, wave after wave of pressure has made this perfectly clear. Capital constraints, on-going regulatory pressures, and an ultra-low interest rate environment have all struck hard at the existing banking & broker/dealer system. Nearly all players-big and small- are rethinking the very core of their businesses. And this is a multi-threaded problem across all businesses: equities, FX, fixed income, and derivatives. Banks and broker/dealers are trying to balance their existing franchises against the pressures they are facing to create a lean profitable business that supports their clients. There are no easy answers, given the strong interdependence between the wealth, asset management, and capital markets businesses across all products. Many of the solutions are moving from efficiency, or cost-cutting to effectiveness. Costs are being cut-there are improvements in risk, compliance, processing. The cost side is getting better but the challenge remains on the revenue side. This drive for effectiveness is driving business models that support internal and external clients from a compliance, transparency, regulatory, fairness and cost perspective are driving more automation and electronic trading solutions. Celent will be discussing the evolving landscape of innovation in automation and technology at two upcoming roundtables. On September 15th in London we will be looking at changes in the US and European fixed income markets and how new technologies are driving change. Then on September 22nd in Zurich, we will be looking at wealth management and the capital markets and the many changes that are occurring in Swiss banking.

Swiss Banking 2025: getting to tomorrow

Swiss Banking 2025:  getting to tomorrow
What will the Swiss Capital Markets look like in a decade from now-in 2025? As private banking and wealth management digest the many changes in the post-crisis financial world what will be the implications on sourcing financial products and liquidity? We have already seen new business models reacting to these new pressures. At our next client roundtable this September 22 in Zurich, the Celent wealth management and capital markets teams will look at opportunities for innovation in the face of regulatory and economic pressures, including the pressures on flow businesses that support a variety of clients, operational forces driving automation and the hunt for liquidity in capital markets. Topics such as competition from emerging offshore hubs such as Singapore will be discussed as well. Joining us for a lively and interactive discussion will be strategy, technology and innovation leaders from European banks, brokerages and other financial institutions. This will be a great opportunity to hear the views of numerous financial service leaders in a private setting. While space for the roundtable is limited, I’d welcome hearing from individuals interested in the topics above and/or potentially attending.

DA oh…O! Bitcoin is forking

DA oh…O! Bitcoin is forking
Some days ago I alluded to the fact that there was a divergence occurring within the Blockchain ecosystem as different camps begin to emerge each of which is approaching the technology in slightly different ways. Some are permissioned whereas others are permissionless; some use a cryptocurrency whilst others do not; and so on. Well, it seems that there is now divergence in the Bitcoin Blockchain itself as reports emerge in recent days of different groups of Bitcoin developers having different views on the future of the Bitcoin network. The central issue is around block capacity of the network-the existing 1mb it is argued is insufficient for the scale-up of transaction processing envisaged and a separate version of Bitcoin, called Bitcoin XT, will have capacity of 8mb. Bitcoin XT will be incompatible with the original Bitcoin software as I understand it. There is a long debate between both the 1mb and 8mb camps as to why the capacity should or should not be changed. Frankly, it doesn’t really matter at this point. The central issue here is that the Bitcoin Blockchain is a DAO-a decentralized autonomous organization-which means that no-one controls it. Unfortunately, just as no-one controls it per se it can also mean that it can be uncontrollable. Decentralization is fine when you are talking about, say, the internet where the uncontrollable pace of growth of new websites and their variety are what contribute to the richness of the on-line experience and fosters innovation. However, something like Blockchain which includes a protocol, mining, cryptocurrency, and a huge ecosystem of developers, wallets, VCs, start-ups etc. dependent upon it means that interdependency can become very tricky. Which fork should a start-up follow? What about future forks? You get my drift. This DAO issue of Bitcoin and the potential for splintering is one which I have been talking to clients about for some months and is highlighted in my research. Bitcoin will likely face other significant structural choices around its protocol (capacity in this case but there are others down the road which are potentially even more critical) and driving consensus is likely to prove challenging and likely to create further forks in the road. There are a couple of critical takeaways here from my perspective:
  1. Anyone interested in blockchain technology should focus on companies that control their own destiny and are not dependent upon the collective decisions of others. The general idea is that start-ups must be able to pivot their business model as they see fit as opposed to having the protocol on which they are programming change on an ad hoc basis which may substantively impact their own business model.
  2. Secondly, a solid platform is required in order to support innovation of distributed ledgers/ blockchain technology and that platform, at least from a banking & capital markets perspective, is likely to come from fiat currency.
You will be hearing a lot more about #2 going forward…