The Surging Appetite for Cloud-Based Services

I recently wrote an article for Capital Markets CIO Outlook that incorporates my thinking on the transition from one architecture to another in capital markets. I have the benefit of some of the great thinking of our analyst team on cloud, emerging technologies, and DLT.

While the end-state is unclear, directionally more and more capital markets firms are moving to cloud-based infrastructure, BPO, and IT outsourcing.

CIOs take note: I encourage you to, as much as possible, look outside your own four walls for inspiration.

See here.

Celent’s Innovation and Insight Day: Wealth and Asset Management Stream

We are only weeks away from Celent's 2017 Innovation and Insight Day where we will explore how players in the financial services market are leveraging technology in innovative ways in order to differentiate themselves in an increasingly competitive and challenging marketplace. We will be featuring a number of case studies, discussions, and deep-dives into topic areas surrounding innovation and focusing on themes, such as:

  • Customer Experience
  • Products
  • Emerging Innovation
  • Operation and Risk
  • Legacy Transformation

This is the first year we will have a Wealth and Asset Management (WAM) breakout session where we will cover a range of topics around innovative solutions and trends in WAM.  The agenda can be found here: Wealth and Asset Management (WAM) Program and will be presented by analysts from the Celent Securities & Investments and Wealth & Asset Management teams:

  • David Easthope, Senior Vice President, Securities & Investments
  • Brad Bailey, Research Director, Securities & Investments
  • Kelley Byrnes, Analyst, Wealth & Asset Management
  • John Dwyer, Senior Analyst, Securities & Investments
  • Ashley Globerman, Analyst, Wealth & Asset Management
  • Arin Ray, Analyst, Securities & Investments
  • William Trout, Senior Analyst, Wealth Management
  • James Wolstenholme, Senior Analyst, Wealth & Asset Management

I particularly look forward to sharing research around the evolving wealth management landscape as the core client base shifts from baby boomers to millennials. While much ground has been covered from the perspective of wealth managers to meet the digital needs of nextgen clients, wealth managers continue to be behind the curve in their digital offerings.

How are wealth managers and vendors responding to the paradigm shift in the development and execution of services and products to meet millennials’ distinct expectations?

This is just one example of the many topics that we will discuss at I&I day – we hope to see you there!

 

Cloud is Down

Yes, even the cloud can go down!

For the many firms, including the SEC and CIA, who run their infrastructure in the AWS cloud, Tuesday’s outage was a pain. The economic impact of the outage will easily be in the many tens of millions.

It is particularly poignant as it comes at a time when so many core processes are moving into the public cloud and more and more capital market participants are building in the cloud, or toward a cloud future, as we discussed in The Cloud Comes of Age in the Capital Markets: All Clear for More Cloud.

This outage is a reminder that not only can all technology fail at some point, but it will. The scale of this week’s outage, along with its rarity makes it newsworthy. However, the scale masks the simple truth that the net downtime of this failure is far less than the aggregate downtime, had all impacted firms been running their own infrastructure.

Furthermore, it is a lesson for firms moving into the cloud to consider how to best manage risk profiles across various clouds and models, or ensuring that they are running across regions (a single AWS region went down).

But the news flow now suggests the most common point of failure: the human. And, of course, the proverbial fat finger. As in many cases, in market technology failures, it is at the human/machine interface that is the weakest link.

This is a time to learn, access the risk and move forward.

Impact Investing Gains Momentum

The polarizing political climate appears to be serving as an impetus for some firms to take socially responsible investing more seriously.  At today’s Impact Investing conference hosted by The Economist in NYC, Audrey Choi, Chief Executive of Morgan Stanley’s Institute for Sustainable Investing, said there is research that shows that 70% of investors want to align their investments with their values.

Not surprisingly millennials are interested in impact investing. Audrey Choi also referenced research that that millennials are two times as likely to buy or divest stocks based on their personal beliefs.

Most speakers throughout the day were aligned in that they wanted to see impact investing become more than just a sleeve of an investor’s portfolio; impact investing should be mainstream as suggested by the full name of the conference, “Impact Investing: Mainstreaming purpose driven finance.”  Jackie VanderBurg, Managing Director and Investment Strategist of US Trust and co-author of “Gender Lens Investing: Uncovering Opportunities for Growth, Returns and Impact,” explained that gender lens investing, like other responsible investing should not operate in a silo.

Another common theme throughout the conference was that impact investing is smart investing. Understanding sustainability and opening one’s eyes to the different geo-political risks that face our world, is wise and exposes a company to less risk. For example, Audrey Choi, shared a statistic from the Sustainability Accounting Standards Board (SASB), which found that 93% of companies stand to be impacted by climate change or the need to defend against it, but only 12% of companies are disclosing the risk.

A roadblock in the world of socially responsible investing is proving to investors that they do not have to compromise return when investing according to their beliefs.  As Jackie VanderBurg said in reference to gender lens investing, “Gender lens investing is not small, soft and pink. It is smart investing. Gender lens investing is the deliberate, intentional integration of gender-based data into financial analysis with the expectation of finding additional opportunities and mitigating risk”.  Money managers and personal investors must apply the same rigorous process to impact investments as they would with any type of investment. 

Joshua Levin, co-founder and Chief Strategy Officer of OpenInvest, a robo-advisory that permits clients to choose investments supported by their personal beliefs, brought up another challenge: intermediaries. He gave the example that when people first started out investing, people invested to have an impact; that impact may have been to start a factory or own part of a company to influence a company’s decisions. Now with so many intermediaries, investors no longer think of investments as having an impact. Now people invest for diversification.  With a platform like OpenInvest, people can have an impact by choosing not to invest in a company if the company is not aligned with their personal beliefs. 

Many speakers were also in agreement on other challenges facing impact investing: reliable metrics, more products across asset classes, and more education for consumers and advisors alike.  After attending this conference, I am hopeful that firms are working to address the roadblocks to impact investing. While perfect solutions may not be possible this should not impede the value that can be added from investing in a socially responsible way.

New Year New Tech New Research

In your new year resolutions, did you pledge to understand more the technology that scares you? Or at least the one that some people (aka analysts like me) claim will replace you? If the answer is “No” and you are working in the field of Investment Research, whether producing, consuming or distributing it, then you may want to read our latest report Start Coding Investment Research: How to Implement MiFID II with Robots and AI.

I get paid to write research on fintech so theoretically I am not the tech scared type though I am the first one to control screen time at home. I know we have more and more competition from free research you can all find at your fingertips on the internet, and from cheaper research that leverages outsourced resources crunching a lot of data, but so far we are keeping up probably because our clients think we provide insight that those competitors do not provide yet.

I know however that we have competitors that have technological platforms that distribute their technology in a more user-friendly way with podcasts and fancy databases, that write their research in a more automated way and that you can consume easily because you pull the information with selective search technology that knows what you want and how much you can pay for it.

So before the holiday season, to make sure we were all going to start this new year with the right information in hand, I did look into what artificial intelligence and robotic process automation tools will be doing to research; not exactly my kind of markets fintech research, but more specifically to Investment Research, those written recommendations about equity or bonds or macroeconomic environments to help the buy side make investments.

The result is very honestly scary and exciting at the same time. These new  technologies are maturing at a time of big regulatory change in Europe, MiFID2 is finally kicking in and that means the unbundling of investment research cost from the execution costs the brokers and banks charge their buy side clients. Some buy side will keep using them and be happy to pay that fee, some clearly will start looking at other solutions that will have to propose a different business model provided by banks or by new market players, based on technology.

In our recent report we do look exactly at that: new business models and live case studies that have already been implemented in investment research production, distribution and consumption. Enjoy.

The Under-Tow in the Data Lake

The word on the street is big data, data lakes leading to insight, uncovering the hidden opportunities within your massive trunks of data. All true but the majority of the buy side, asset managers, asset owners are still desperately struggling with getting their fundamental data in order.

Over 80% of AMs are $100billion AuM and below and 60% are $50 billion AuM and below, many of these AMs are progressing on solidifying their IBOR (Investment Book of Record) foundations. IBOR and the IBOR Services Matrix (see Inside the Matrix: The Future of IBOR) is still the architectural goal but not yet a necessity for all levels of the asset managers.

Many are not yet up to an IBOR level architecture and still dealing with more basic EDM (Enterprise Data Management) realities. A significant number of AMs are dealing with implementing solid data management and data governance across their portfolios and funds, don’t yet demand millisecond real-time but are operating in a near-time environment, that is operationally sound and cost sustainable.

Now the good news is that as AMs and increasingly institutional asset owners can take advantage of superior vendor solutions and bypass non-differentiating EDM issues. There is certainly little reason, in this day and age, for AMs to attempt to build their own EDM structures. Vendor products can provide core ETL (Extract Transform Load) processes and perform the core standardization, editing and cleansing of the data. Eventually this will all become utilities but for now it is still needs to be dealt with firm by firm.

Data lakes are phenomenal but before the majority of the buy side AMs and asset owners are primarily utilizing their data lakes they are feverishly executing the initial layers of data management and governance to stay market competitive.

Straddling the Old and the New – Fintech in the Capital Markets

We are sitting at an extraordinary inflection point in the capital markets. The competitive landscape is in flux as competitors find their way through a maze of constraints. The constraints are well known-increasing regulation, rapidly changing market structure, liquidity challenges, and difficult macroeconomic conditions. There is also a feedback loop with the broader economy; many of the same forces that are constraining the capital markets are creating an unusual political landscape. We have seen this playout with Brexit, and the world awaits the outcome of the US presidential election. These then feedback into the capital market as uncertainty around managing volatility, risk and whether regulation will proceed as expected will be delayed or, radically altered.

For many capital market incumbents: the investment banks, broker-dealers, asset managers, and infrastructure firms are also saddled with extremely complicated legacy systems that are highly siloed, very expensive to run and even more expensive to change. While many are rationalizing systems, in certain areas it is just not possible. In many cases, ancient systems are running broad swaths of the back office, and sit under decades of add-ons, fit-ins, force-ins, and integrate with countless systems internal and external. Capital market firms are often in the habit of creating an abstraction layer above systems to tie more and more data and systems together. This creates a kludgy infrastructure, but it can, and does work.

Given that there are so many challenges, and hence opportunities, we have seen a slew of fintechs increasingly offering capital market solutions. There are those that come from the capital markets and speak the language of the markets. They have grown up in the space and see an opportunity to solve a particular pain point in investment process, trading or operations. There are other fintechs that have entered the vertical from another and are leveraging their data processing, analytical, machine learning, and hardware acceleration prowess in the capital markets.

We have seen fintech disruption in banking, but in the capital markets, so far, it has been much more collaboration than disruption. Fintech firms are bringing unique data, analytic, technology solutions into a highly regulated business. Fintechs that partner with existing firms are offered scale, legitimacy, and clients in a highly risk averse and regulation heavy business. For the brave incumbent firms who are providing capital and nuanced expertise to these innovators, there are rewards: new ways of looking at their business, but more importantly, ready built solutions that they can scale. Overcoming the fear of engaging these firms effectively is a path to finding better and more cost-effective solutions.

In my report, From Financial Technology to Fintech: Trends in Capital Markets, I look at the areas in which the rate of change is greatest, the nature of fintech partnerships in the capital markets and how they are evolving. I look at the pain points in KYC, liquidity, trading, liquidity, collateral and operations. I investigate the growing acceptance of cloud, the importance of leveraging data correctly and analytics and tie these to specific providers with solutions in InvestmentTech, MarketTech, RegTech and AltData. I also look at emerging technologies such as distributed ledger technology, AI, and business models that are looking to remap the capital markets at its core.

Yes, we are at an inflection point and some of the systems out there are kludgy, but in the short term, solving specific business pain points is the key to solving some of the industry’s thorniest problems.

Utility-Managed Services in Capital Market

Need to cut cost to boost sub-optimal levels of RoE is becoming essential for capital market firms in the backdrop of tepid revenue growth and increasing compliance burden. Firms have tried short term measures to cut cost, but should now consider long term strategic review of business and operations.

Moving beyond traditional outsourcing arrangements, mutualization of costs at a group or industry level through adoption of shared service and industry utilities would enable long term cost reduction.

Celent has been tracking the utility landscape for the last two years starting initially its coverage of the utility solutions in the Know Your Customer space, as that area saw a number of solutions emerge in a quick period of time. However, the industry has seen development and launch of newer solutions under the managed service/utility model that span across the value chain of capital market ecosystem – such as post-trade operations, reference data management, collateral management, regulatory reporting etc.

The utilities in capital markets are a new phenomenon with the potential to significantly transform how operations are carried out at financial institutions. Understandably, this has created a lot of interest and curiosity among several participants as they look to redesign their operations and solutions around the utilities to adapt to the changing situation. Uptake of the utility and shared services will be driven by a growing realization of value and can take a while.

Many large banks have already realized the valuable proposition that a utility can bring and have therefore taken an active role in adopting, and even in the development of, some of the utility solutions. Such large institutions are best suited for utility adoption in the near term. Some of the utility providers are large industry players with significant industry penetration in their respective markets; they can hand hold and provide a level of comfort to clients who are now considering adopting utility solutions. This would pave the way for next wave of adoption of the utility model and will likely take place over the short-to-medium term. As the firms in the above two categories adopt utility solutions in the short-to-medium term and demonstrate successful use cases, others who are currently on the wait and watch mode are likely to adopt this new model in the medium-to-long term.

A recent Celent analyzes salient features of the emerging utility-managed service in capital markets including detailed discussion on thirteen such solutions; the report is available for download here.

Spot FX Gets Walloped!

The BIS triennial survey, the most comprehensive data point, indicated that overall FX volume shrunk 5% from $5.36 Trln in 2013 to $5.09 in 2016. However, FX spot fell by a whopping 23.7%. London maintained overall geographic leadership but saw its share move down to 37% from 41% in 2013. APAC trading centers saw growth from 15% to 21% market share.  Overall, FX swaps and currency swaps grew, and cross currency swaps grew sharply, while FX option volume nosedived.

Spot fell across the major currency pairs Euro 12.5%, Yen 12.5%, Swiss Franc by 13.6% with Sterling rising by 2.6% as the lead up to Brexit caused considerable repositioning in Sterling assets.  No surprise as the Chinese Renminbi rose 41% and became the 8th most traded currency pair.

Capital constraints, digestion of regulatory change in the US and impending global regulation, changes in traditional liquidity provision, scandals and market disruptions since the last survey in 2013 are the main causes of the drop in spot. Additionally, the impact of the SNB’s surprise move in 2015 dislocated active FX trading and had many prime brokers reevaluating  their risk considerations. Creating challenges for smaller and riskier trading shops and hedge funds in maintain FX prime brokerage probably moved some of the FX spot volume onto exchange trade FX futures.


The market structure in FX continues to change quickly with acceleration in the adoption of digital models for trading and analyzing data in the FX market at the same time as major changes in FX market making and liquidity provision which has impacted spot FX trading.

 

 

Micro Gold –This is going to be very big

I published a report today looking at the powerful combination of DLT with physical gold to create an asset class we call Micro Gold.

The report explores the key drivers for this use case including the prevailing environment of negative nominal interest rates, full interoperability with legacy systems, and a blue sky opportunity due to the lack of incumbency.

The combination of a regulated central bank asset with the functionality of DLT presents an enormously compelling platform for payments, wealth management, and a host of other use cases.

For those who have read our report, Beyond the Buzz, you have seen our framework for assessing the maturity of DLT use cases based upon the level of cooperation required with competitors, new FinTech entrants, other market participants, regulators, and so on.

Ultimately though, the key question is how does one achieve broad adoption of a new technology in the financial market place? Well, Micro Gold has demonstrated rates of adoption which outstrip technologies such as Uber, Facebook, and PayPal when they were at similar stages of maturity.

The breadth of relevance of this technology is simply staggering including individual payments, individual savings, global business payments, private wealth management-even the underbanked. Emerging markets and developed markets alike will see the utility of Micro Gold while a seamless UX, regulatory clarity, and micropayment functionality will continue to support adoption rates and, critically, network effects.

It also has a range of ways of mitigating ‘hacking risk’ which continues to be an issue for cryptocurrencies, financial institutions, and (let’s face it) everyone.

The potential for new use cases to emerge via developer APIs adds additional sizzle factor. Hence, I have enormous confidence in Micro Gold. It will be interesting to observe how this story unfolds as vendors and FIs step up their intensity as the pressure grows to implement and commercialize DLT use cases.

This report is the first of a series of three reports which I will be publishing which will explore the implications of DLT for fiat currency; the next report will look at the hot topic of Central Banks and provides a framework for how they may be thinking about its potential.