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.

French effort to use Blockchain for SMEs could have relevance for emerging markets

The recent news that a French consortium is beginning work on building post-trade infrastructure for trading of SME stocks in Europe will be of great interest to market participants across the world. The consortium comprises of BNP Paribas Securities Services, Euronext, Société Générale, Caisse des Dépôts, Euroclear, S2iEM and Paris Europlace.

There have been several notable developments with regard to experiments and adoption of Blockchain and distributed ledger technology in the leading capital markets globally. However, the signficance of this particular announcement lies in the fact that it tries to address the needs of the a sector that usually struggles to obtain easy access to the capital markets. If successful, such a project could drastically reduce the time taken for post-trade operations, slash costs and generally make it easier for SMEs to raise funds.

In a recent Celent report, we had found that most of the leading global post-trade providers believed that it was still a little early to expect major changes due to Blockchain technology. While this may be true, the current development would be of a lot of interest to the emerging markets around the world. In several such countries, the cost of accessing capital markets is comparatively high and the technology is also often found lagging, as in the case of European SMEs. If the French effort becomes successful, it could pave the way for application of Blockchain technology to specific tasks in emerging markets, not just to enable SMEs to raise capital better, but to help the overall market to leapfrog in terms of modernizing the market infrastructure.

Regulators and market participants in emerging markets should now see Blockchain and distributed ledger technology as a relevant means for streamlining their trading infrastructure. To that end, it is also important that they encourage firms within their jurisdiction to experiment and adopt such technology for specific local applications and requirements, and not just wait to see how it evolves in mature markets in the next few years. 

The next wave of fintech disruption

The bank has traditionally sat in the center of the broader financial world.  The post-crisis challenges have allowed fintech firms to capture market share in traditional banking endeavours such as payments, lending, investments, and financial planning. First wave fintech disruptors with no asset base or legacy banking infrastructure have made significant inroads into challenging banks in their core businesses. Banks have reacted in a variety of ways to these challenges with disparate degrees of success, but only those actively partnering with and supporting fintech innovators have gained a competitive edge.

Similarly, exchanges have stood at the centre of the capital markets for much of human history. The years of connectivity, combined with the earth-shaking changes in the ability of firms to access capital and a global regulatory model that has focused on risk mitigation, have created an ideal world for next wave disruptors to bring solutions to complex trading, liquidity, regulatory, and operational problems that have been difficult for incumbent firms to solve on their own. This investment is going toward blockchain, RegTech, AI and other tools for driving change in the capital markets.

As it has happened with banks, those market infrastructure providers that decide to embrace, leverage and coexist with upcoming fintech firms will be able to further their historical strengths and stay at the core of financial markets.

Since 2008, capital flow into fintech investments has grown sixfold. Last year, about $19 billion in capital was invested in fintech across approximately 1,200 deals, nearly doubling funding flows in 2014. We have seen banks partnering with fintech, filling gaps and bringing critical experience and enterprise scale to these endeavours. Major parts of the financial services ecosystem run the risk of being transformed by pioneering financial technology firms. At the same time, strategic firms have developed innovation centers of excellence, laboratories, and their own CVC funding vehicles to invest and guide in areas of core interest to these firms. CVCs now represent 25% of global fintech capital flows.

This week the Deutsche Bourse announced the creation of its CVC DB1 to fund innovativation in the capital markets. Celent, on behalf of Deutsche Bourse, explores this next wave of fintech in the capital markets and highlights the power of future collaboration between leading financial infrastructure players and fintech firms.

Future of Fintech in the Capital Markets can be downloaded from the DB1 Ventures website. I look forward to your comments.

Is this the best time for an event such as Brexit?

It is difficult to read financial news at present without coming across extensive coverage of the Brexit referendum in the UK and its possible impact. As part of the financial sector, capital markets could be at the forefront in terms of bearing the impact of any likely change. There are already widespread claims of how London could lose its position as the premier European financial center. Of special relevance is the advantage that London has due to the 'passporting' principle, which allows leading U.S. or Asian banks and other firms to access the Europan market without any restrictions. Certainly with regard to these firms, if the UK leaves the EU, US and Asian banks that have based their teams in London while serving the European market will have second thoughts about doing so. Different alternatives have been touted, including Paris, Frankfurt and even Dublin. Some believe that all of these cities, and some other European financial centers as well, would benefit from the departure of the leading global banks from London, but this could lead to fragmentation in the European financial industry and reduce the effectiveness and competitiveness of European firms. 
There are various views and opinions that have been expressed during the run-up to the referendum. Many of these hold water. But in my humble view, when it comes to competitiveness, if the departure of the UK from the EU does lead to a fragmentation of the European financial industry, then this is the best time for it to happen. Technology has today advanced to a level that to an outsider, there would be little tangible difference if a thousand people in a bank are based across four difference financial centers in Europe instead of being in one place they were earlier, namely, London. There would certainly be a one-off rise in cost due to such as move, but the industry should be able to take that in its stride. Furthermore, a more fragmented industry in Europe would also have the ability to address national and regional requirements better than a single leading financial center. So financial creativity and innovation might get a boost across Europe. One would expect that London would continue to be a leading financial center globally, but it might be forced to reinvent itself to continue to be relevant for global banks and financial firms from outside the UK. Therefore, as a neutral and a student of capital market technology trends, Brexit does not necessarily hold many fears and might even lead to some interesting outcomes. Whether people in the City of London or the rest of the UK or indeed Europe have the same view, is of course, another matter!

Cyber Security: Is Blockchain the Answer?

Cyber security has long been a serious matter for financial institutions and corporates alike, but fintech and the digital era make cyber security more of an issue. Delivery of products and services through digital channels means that more systems are available to scrutiny by malefactors. The continuing adoption of fintech APIs (by which institutions provide their clients with third party services) and cloud computing may introduce further vulnerabilities. Meanwhile, the growth of the digital economy is also creating a large population of highly trained technologists — potentially creating greater numbers of cyber attackers and cyber thieves.

Cyber threats affect all industries, but financial institutions are particularly at risk, because of the direct financial gain possible from a cyber intrusion. An important question is whether the existing cyber security guidelines issued by various industry organizations will continue to be adequate in the age of fintech and digital financial services.

Fortunately, the evolution of fintech also entails the development of new technologies aimed at creating the next generation of cyber security. A number of startups are beginning to develop applications using semantic analysis and machine learning to tackle KYC, AML and fraud issues. Significantly, IBM Watson and eight universities recently unveiled an initiative aimed at applying artificial intelligence to thwart cyber attacks.

The traditional cyber security paradigm is one of “defense,” and unfortunately defenses can always be breached. Artificial intelligence, as advanced as it is, still represents the traditional cyber security paradigm of “defense,” putting up physical and virtual walls and fortifications to protect against or react to attacks, breaches, and fraud or other financial crime.

What if there were a technology that broke through this “defense” paradigm and instead made cyber security an integral aspect of financial technology?

This is precisely the approach taken to cyber security by blockchain technology.

Bank consortia and startups alike are engaged in efforts to develop distributed ledgers for transfer of value (payments) and for capital markets trading (where the execution of complex financial transactions is done through blockchain-based smart contracts). Accordingly, distributed ledgers and smart contracts are likely to one day have a place in treasury operations, for both payments and trading.

Blockchain is gaining attention primarily because its consensus-based, distributed structure may create new business models within financial services. In addition, though, blockchain technology has at its core encryption technologies that not only keep it secure, but are actually the mechanism by which transactions are completed and recorded. In the case of Bitcoin, blockchain has demonstrated that its encryption technologies are quite secure. The further development of blockchain will necessarily entail significant enhancements in next-generation encryption technologies such as multi-party computation and homomorphic encryption, which are already under development. In other words, blockchain is likely to not only play a role in altering the way payments and capital markets transactions are undertaken, but also in the way next-generation financial systems are secured.

Your customers hate your group email box (and you should too)

I’m currently dealing with two group email box issues. In one instance, I’m a frustrated customer, irritated beyond belief by the lack of response to my repeated email service requests. In the other instance, I’m the party ultimately responsible for a group email box, and I’m getting an earful from a frustrated customer. The overlay of these two, unrelated incidents is perfect: Some sort of cosmic justice is clearly being served.

Stages of Group Email Box Grief

You might be familiar with the Kübler-Ross model, which shows how grieving people progress through Denial, Anger, Bargaining, Depression, and Acceptance. I think something similar happens when any of us try to use a poorly managed group email box. It goes something like this:

  • Hope. After the initial disappointment of not finding a human being with whom we can interact directly, we console ourselves that, at least, our problem has been recognized by our service provider. By creating a named email box, the service provider is clearly implying that help is a click or two away. Got a generic question about your health plan coverage? Email coverage@xyzhealthplan.com. Need help from someone in Finance to get an expense check cut? Why, ExpenseTeam@yourcompany.com sounds like a productive place to turn. But the relief at finding such elegant, targeted service solutions is often short-lived.

  • Perplexity. After a day or so of non-response, we wonder. Did I really send an email to that email box? Did it get through? If it got through, did anyone read it? This stage is characterized by self-doubt and forensic examination. We check and recheck our Inbox, Spam Folder, and Sent Mail under the (reasonable, by the way) assumption that if the tool was working, someone would have responded by now.

  • Dismay. A week has passed. On the realization that no process could possibly take this long, Dismay sets in. In this stage, we ratchet up the pressure, typically by resending our original note with a snarky addition, like, “I really would like to hear from someone on this! Please?”

  • Anger & Activation. At this stage, we realize that help is not forthcoming. For most of us, this happens between Day 7 and Day 8. (Though my experience with them suggests that Millenials make the entire progression from Hope to Anger & Activation in as little as an hour.) We start looking for alternatives, as confidence in the system plummets. In the extreme, we try to get face to face with someone who can solve our problem (“I’m going to drive in to the cell phone store and make them solve this billing issue!”). But alternatives include calling switchboards and asking for the CEO, starting a Twitter rant, or activating a defection to other providers. None of these reactions enhance a customer relationship.

The Service Provider’s Response

As a service provider myself, I’m embarrassed to admit that emails to info@celent.com don’t always get perfect, productive responses. Of course we have a process in place that routes inbound queries to more than one person, to make sure we don’t run into out of office issues. But things occasionally fall through the cracks, due to technical reasons (e.g., aggressive, evolving spam filters), scheduling quirks (e.g., all Celent staff are in the same meeting), or simply due to human nature.

The latter category is particularly vexing. When several people are responsible for something, the real-world effect is that no one feels responsible. I’m convinced that using an info@ email box inevitably lessens the sense of accountability and responsibility that drives all effective service teams. Add in the dynamic of impersonal, electronic communicationswhich by its nature generates less empathy than a simple conversation between two human beings and you’ve got a recipe for disaster.

In this annoying age of one-to-many communication (says the blogger, ignoring the irony), there’s a strong case to be made for enabling more direct, personal connections. Many companies will resist this old-fashioned, and by some measures, expensive, view. They will go down the path blazed by online retailers, and try in vain to provide acceptable service levels via FAQ and info@ email boxes. But the price they will pay is customers who frequently progress to Anger & Activation, and then walk away grumbling.

A smarter play is for firms to foster real relationships with their customers. For me, that means going old school. Making it easier for customers to navigate to a real person who is ready to listen and willing to solve problems. I’ve told my team to plaster their direct contact info on every report, presentation, and marketing piece. I’ll keep the info@celent.com address open as a benign trap for spammers. But the rest of you are encouraged to email me directly at cweber@celent.com.

Future architecture: All roads lead to Cloud

Present vs. Future-State Architecture

Our frenetic activity of client meetings, briefings, conferences, and events heated up in the last few months. We recently spoke to audiences in New York, London, and Tokyo.

The present environment of cost-cutting, evaluation of profitability, capital efficiency, and compliance implementation is consuming much management attention and IT budgets. Operational efficiency and operational risk mitigation are top of mind.

However, across our client base and network of financial institutions and vendors, there is also a continued desire to understand emerging technologies like blockchain/DL and artificial intelligence. Many of you are expressing a strong interest in our opinions on the future state of the technology architecture in parallel with these day-to-day operational considerations.

From this vantage point, we believe the potential of blockchain technology (including smart contracts), IoT, and artificial intelligence will drive incremental IT spending going forward as solutions are implemented, further uses cases are developed and tested, and ecosystems and IT partnerships are expanded.

All Roads Lead to Rome Cloud

With respect to the future IT architecture, one striking conclusion we've reached is that all roads lead to cloud. For instance, major blockchain use cases are being built atop cloud providers. Technology firms such as AWS, IBM, Microsoft, and others appear to be prime beneficiaries of this frenetic activity, some of which is strategic, and some of which may be simply tactical and later disappear. In addition, artificial intelligence may be best leveraged in the future with data that resides in the cloud as opposed to in siloed business operations. Moreover, wealth managers increasingly are considering cloud-deployed solutions. Even compliance (e.g. RegTech) is increasingly being sold "as a service".

Clearly not all capital markets, wealth management, and asset management operations are cloud-friendly, both now and in the future, but many types of operations will move to the cloud.

We see this happening gradually and powered by availability, greater standardization, and creative vendor offerings across a spectrum (from ITO and BPO to managed services, utilities, and yes … cloud possibilities throughout).

Proof of artificial intelligence exponentiality

I have been studying Artificial Intelligence (AI) for Capital Markets for ten months now and I am shocked everyday by the speed of evolution of this technology. When I started researching this last year I was looking for the Holy Grail trading tools and could not find them, hence I settled for other parts of the trade lifecycle where AI solutions already existed.

Yesterday, as I was preparing for a speech on AI at a conference, one of my colleagues in Tokyo forwarded me an Asian newswire mentioning that Nomura securities, after two years of research, would be launching an AI enabled HFT equity tool for its brokerage institutional clients in May –  here it is: the Holy Grail exists, and not only at Nomura. Other brokers have been shyly speaking about their customizable smart brokerage, e.g. how to use technology so that tier5 clients feel they are being served like a tier1. Some IBs are working on that, they just don’t publicly talk about it.

Talking to Eurekahedge last week I realized that they are tracking 15 funds that use AI in their strategy, I would argue there are even more than that because none of those were based in Japan (or Korea where apparently Fintech is exploding as we speak).

All this to reiterate that AI is an exponential technology, ten months ago there were no HFT trading solutions using AI, and we thought they were a few years away but no, here they are NOW. And the same with sentiment analysis, ten months ago they were just a marketing tool, now they are working on millions of documents every day at GSAM. Did I forget to mention smart TCA that’s coming to an EMS near you soon?

Stay tuned for more in my upcoming buy side AI tools report.

Asset managers turn up the volume

There are two ways to make net profits – maintain a high margin and/or sell more volume at lower operating costs.

Asset managers find themselves in a low margin environment so the tactical and perhaps strategic path forward is to find volume at lower operating costs. The recent buy of Honest Dollar out of Austin, Texas by the Investment Management Division of Goldman Sachs is the continued direction of purchasing volume by buy side asset managers.

Overall asset managers are buying up robo advisors, not because they are overly threatened, but to expand the AMs existing client base. With automation AMs can add new clients at a relatively low operating cost and find an expanded demand side for their collective funds and ETFs. Look behind the scenes on any of the nascent robos and you’ll see all AMs product supply.

So the purchase of Honest Dollar is an early indicator that increased volume is in play. As Goldman stated, over 45 million Americans do not have access to employer-sponsored retirement plans. With targeting small businesses with less than 100 employees, utilizing automation and AM supplied ETFs and other funds a volume growing profit base is viable.

A major play of the automation of investment advice is increasing the total addressable market of investment consumers. The democratization of investing is being made a reality by the ready access to technology, but it must also be said that there is no correlation between democracy and actual wealth accumulation.

Being smart with artificial intelligence in capital markets

Artificial Intelligence (AI) is the new buzzword to talk about on the street. Financial institutions need to embrace AI, as we have explained in our January report, or else they risk to lose competitiveness or be coded by the regulators more than they can do it themselves.

I am in NYC next week to share Celent’s view on AI for capital markets. A little preview for your here.

Today we are at a crossroad where data scientists have the computing power, the alternative mind-sets to search and the willingness to look for narrow AI solutions, not the wide AI brain that we should get to in 2030 according to experts. This enables vendors to come up with amazing solutions from Research Scaling with Natural Language Generation to Market Surveillance/Insider Trading with Machine Learning Natural Language Processing or even Virtual Traders via Deep Learning of technical analysis graphics traders look at to take decisions.

The amount of data available is another big driver for the rebirth of AI, and regulators are looking at ways of accessing that data and using it. This is borderline what my colleagues would call RegTech, and it’s coming.

Our Q2 agenda reflects our understanding that you want to know more about AI: we will share ideas on solutions for the buy side, for exchanges and for the sell side. But in the meantime I hope to bring back some cool ideas from the big apple, hopefully also from the secretive quants working in the dark Silicon Alleys.

Most of the vendors I have profiled are specialists’ boutiques, but the cost of such research is however so enormous that generalists are trying to productize their fundamental research for various sectors, from health to homeland security, including financial services in partnership with financial institutions.

This morning I woke up to great news that Microsoft is at the forefront of Deep Learning on voice, imagine what this could bring to Anti-Money Laundering or Insider Trading products.  The other news was that some top quants of Two Sigma just solved an MRI algo to predict heart disease, and I hope other great minds will, as most of them usually do, also give back to society by applying their amazing knowledge to such grand challenges.