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.

Run, hide, partner, or buy: Fintech, automation, and disruption in wealth management and capital markets

Run, hide, partner, or buy: Fintech, automation, and disruption in wealth management and capital markets

Readers of a certain age may remember Frankfurt's aspirations of surpassing London as the world’s leading banking center. While that vision has not come to pass, Frankfurt remains a powerful hub for global finance. Home to Deutsche Bank, the European Central Bank and the Deutsche Börse exchange among others, Frankfurt’s importance is reinforced by its location at the very heart of Europe.

With this in mind, Research Director Brad Bailey and I are excited to bring the next Celent Wealth and Capital Markets roundtable to Frankfurt on Tuesday, May 10th. Of particular interest will be the role played by fintech firms in disrupting an ecosystem long dominated by large financial institutions. Brad and I will share ideas and examples from recent research, while senior executives with banks and asset managers and other large institutions from Germany, Switzerland, the UK and Italy will offer their perspectives on the disruption and the technology strategies they have adopted in response.

To maximize the participatory nature of this event, Celent is capping attendance at 20 individuals. At present, we have a few seats still open and would love to hear from other clients interested in joining us.

Being smart with artificial intelligence in capital markets

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.

Digital Asset Holdings, R3 emerging as Blockchain leaders in capital markets

Digital Asset Holdings, R3 emerging as Blockchain leaders in capital markets
The news from this morning about R3 testing a trading system with eleven firms (Barclays, BMO Financial Group, Credit Suisse, Commonwealth Bank of Australia, HSBC, Natixis, Royal Bank of Scotland, TD Bank, UBS, UniCredit and Wells Fargo) on  Ethereum blockchain fabric hosted by Microsoft Azure was enough to discuss. Now Digital Asset Holding (DAH) has announced that it has raised US$50 million from thirteen capital market players, which can only be eclipsed by the announcement that ASX will engage DAH to build a distributed ledger solution for the Australian equity market. That was just today! Add in the announcement from Nasdaq with Chain around primary issuance of private equity securities at the start of the year and 2016 is turning into an exciting year for distributed ledger and blockchain applications in the capital markets.   The ASX news is fascinating and speaks to the rapid exploration of the distributed ledger space- according to the announcement:
  “In February 2015, ASX announced that it would replace or upgrade all of its main trading and post-trade platforms. Phase 1 of the program runs to the end of 2016 and will replace ASX’s existing trading and risk management systems. Phase 2 focuses on ASX’s post-trade services, including clearing and settlement of the cash equities market. The system that currently provides the clearing and settlement services to the Australian equity market is known as CHESS (Clearing House Electronic Sub-register System).”
  ASX hopes to achieve the call of leveraging a distributed ledger fabric to: reduce costs, latency, errors and minimize capital requirements.   ASX was one of the thirteen firms mentioned in the DAH capital raise. The other firms are: ABN AMRO, Accenture, BNP Paribas, Broadridge Financial Solutions, Inc., Citi, CME Ventures, Deutsche Börse Group, ICAP, J.P. Morgan, Santander InnoVentures, The Depository Trust & Clearing Corporation (DTCC) and The PNC Financial Services Group, Inc.   The current distributed ledger and blockchain environment is yielding interesting cross-pollination of competitors and vendors, with many firms active in multiple initiatives.   Celent will be among the firms that speaking at The Blockchain Conference on February 10 in San Francisco—there will be a lot to talk about!!!

A last look at Last Look? Barclays and FX market structure

A last look at Last Look? Barclays and FX market structure
The FX market is trying to digest the latest large FX fine and the impact on market structure. According to last week’s press release from the New York Department of Financial Services (NYDFS), Barclays was fined US$150 million for “automated, electronic foreign exchange trading misconduct.” The order goes on to detail this additional fine is a result of using its Last Look system to automatically reject what Barclays determined would be an unprofitable trade within the time window created by the system’s defined Last Look window. This brings foreign exchange fines by NYDFS against Barclays to $635 million. After spending time this weekend reading the order, it is clear that the issue at hand is not a Last Look issue, but rather improper customer notification and trading practice. In this case, Barclays was abusing both the intent and scope of Last Look. While Last Look gets a lot of discussion recently, it is a byproduct of market making in principal markets, such as FX and fixed income from a pre-electronic age, and the translation of those markets into electronic trading. As FX became more electronic, the European banks were early innovators in mapping principal trading functionality into electronic trading. In the case of FX, it became necessary to create a means to quote to thousands of customers through various channels (i.e. single dealer portals, multi dealer platforms, aggregated feed channels) at acceptable bid/ask spreads. Given that there are different types of clients, it is necessary to be able to quote different types of clients with very different risk profiles, technology ability, and holding time frames in different ways. A liquidity provider looks at an HFT counterparty much differently than a large asset manager putting on a hedging FX trade. Last Look is not inherently a bad practice, but it is a practice that when performed needs to be clearly mapped out to users of a platform. Platforms that incorporate Last Look functionality will be ensuring that guidelines are clear, functionality is sound, and procedures are well documented. In an OTC principal market, liquidity provision is not free. In the current FX market structure, Last Look is a necessary tool for many liquidity providers. Over time Last Look will become a less important component of FX trading. It is not clear that can be regulated away without disrupting the ability of market makers to provide liquidity in the current market structure, and given the global nature of FX. At the same time, concerns around Last Look are changing the calculus of liquidity between disclosed liquidity and anonymous liquidity. In my latest report FX Trading 2.0: Technology and Platforms, I explore the evolution of FX and how the market will incorporate all the forces at play. In many ways, after building on incremental change over decades, the FX landscape has shifted abruptly recently. The venue landscape has brought together once disparate centers of liquidity within the same firms. From the perspective of identifying the ideal venue to interact with, the landscape has become more challenging. Many of the FX platforms are separate or partially separate pools of liquidity within the same firm.

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, multi-asset trading among key themes at Fixed Income Leaders Summit

MiFID II, multi-asset trading among key themes at Fixed Income Leaders Summit
Several key themes emerged from the sessions at the Fixed Income Leaders Summit last week in Barcelona. Below are the two of the major themes: Regulation – MiFIR/MiFID II dominated the agenda Following last month’s RTS release, most people wanted details on the impact to their business, likelihood of changes to the ESMA document and if there will be a push back to the January 2017 start.
  • While European sell side and large buy side have been engaged in varying degrees with the process, US firms and smaller European buy side firms are still not clear that Europe is boiling the ocean with MiFIR/MiFID II.
  • It was clear that buy side preparation for engaging with the evolving execution space OTF/MTS/RM and SI is extremely low. And of course, the reasons are clear—there is a fundamental lack of clarity on expectations to operate in the new regime as well as the actual timing when these requirements will be manifest.
  • While the debate to finalize and accept the RTS proposal from ESMA occurs, there is tremendous confusion on final requirements. Without a delay to the January 2017 implementation, the longer the debate, potentially the less time firms will have to prepare and implement to the final required state.
  • The top concern that the buy side had was the fear that their traditional market making liquidity providers will exit the credit and rates markets and the liquidity from alternative providers,and in platforms, will not be sufficient to satisfy their trading needs.
Multi-Asset Trading Most buy side firms are looking to leverage the best tools that exist from other asset classes into their daily workflows in fixed income products. While all were cognizant of the deep differences between equities, FX and the fixed income universe, the buy side was engaged in discussions on the details of the regulatory, market structure, liquidity, and technology challenges; and clearly were looking for multi-asset solutions for fixed income connectivity, analysis and TCA.
  • Firms were deeply engaged in discussions that shed light on the process that other asset classes went through, and how that process played out. There is a great deal of trying to understand the context of the MiFIR/MiFID II change with lessons from other recent regulatory changes. There was a strong desire to understand the implications of Regulation NMS on US equities and the respective market structure, fragmentation and technology implications. Likewise, MiFID I and the SEF rules in the US and the move to centrally cleared swaps and derivatives in the US was another area that was discussed to glean lessons for changes that might come to Europe.
  • Europe is boiling the ocean in fixed income with MiFID II and firms are trying to understand the myriad changes, the timing of change, and the many complicated means of judging the type of rules that will apply in government and corporate bonds.

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.