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.

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.

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.

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.  

Everyone wants the LSE

I cannot imagine that too many people are surprised that there are others who would like to own the London Stock Exchange (LSE); ICE has just confirmed and CME is said to be considering a bid. I do not even want to attempt to count, beyond the three times that Deutsche Boerse has attempted to acquire LSE, the numerous other bids and courtship talks that have arisen over the years. In each case, however, it was a case where the courtship failed to make it to vows. At the same time, any banker worth his/her salt will be making noise around the possibility of other bids, to maximize economic value of the deal. Furthermore, in the case of a freely available exchange (which is mostly not the case given national protection, and the historical pride associated with having a national exchange), they rarely remain single for long. In the regulatory and trading environment in which we live, there is tremendous operational scale in very large exchanges. The technology infrastructure and maintenance cost is high, and global regulation, generally favors a migration to exchange trading and central clearing. And, given the turmoil that blockchain might cause in the exchange and clearing landscape, it will require high levels of R&D budget. Additionally, the continued march toward multi-asset trading, across all asset classes is another factor in this steady drive toward global mega-exchanges. As we have seen the desire for more and more insight, analytics, TCA, and best-execution in equities, we have seen the same call, in FX, and now the clarion is sounding for fixed income. Exchanges with the breadth of product, depth of experience, and vision of a multi-asset future are best positioned to compete with the best product mix, clearing choices, and regulatory insight for their customers. A deal with LSE is not going to be easy as the competitive concerns will have sovereign and European regulators deeply concerned about the implications on equity trading and clearing dominance. Finally, on a European level the deal makes sense; the German and UK exchanges merging under the European flag. However, the UK is not so sure it wants to remain as part of Europe. The Brexit discussion might translate into strong national feelings of pride for the LSE.

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!!!

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

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).

BlackRock’s vision for the Future(Advisor)

Since my last post, there has been a lot of speculation as to why BlackRock would pay what is said to be more than $150 million for FutureAdvisor. One thing is clear: it’s not to market algorithm-created portfolios to retail investors. Rather, BlackRock seeks to build out its B2B business and secure distribution for its flagship iShares product. Providing institutional customers such as RIAs and brokerages with snazzy, built in onboarding and aggregation capabilities will help the asset manager more effectively sell its ETF wares. This goal explains why the firm is retrofitting its Aladdin Risk Management system to support the independent advisor market. Securing distribution makes sense given industry price pressures and the emergence of potentially disruptive strategies such as direct indexing. The strategy also speaks to BlackRock’s recognition of the dangers faced by pure play product manufacturers (this category includes insurers as well as asset managers) who become too far removed from the end consumer of their product. These dangers include the development of a tin ear for investor needs and the gradual erosion of pricing power.

FutureAdvisor: stuck between a (Black)Rock and a hard place

In May 2014, CNBC reporter Eric Rosenbaum concluded an interview with FutureAdvisor CEO Bo Lu with a straightforward question. “So who acquires FutureAdvisor ultimately, or who do you become?” Replied Lu: “No one acquires us. We become the next-generation financial advisor.” Insert drum roll. In fairness to Lu, the pressures that led to the acquisition by BlackRock were just starting to unfold at the time of that interview. As I note in a previous blog post, the robo advisor phenomenon has been veering from a direct to consumer model to B2B for some time. Motif, Betterment and now SigFig are all examples of firms bent on securing advisor-led distribution. How could things be otherwise? Portfolio management has been commoditized, and the significance (namely, pressure on fees) of this development weighs as heavily on the automated advisor as on the “man and his dog” RIA. The launch of Schwab’s zero fee Intelligent Portfolios was a clear sign of where pricing is heading. And with hints of a market correction as visible as the changing fall foliage, it made sense for Mr. Lu and his friends at FutureAdvisor to get out while on top. I’ll talk about the impact of this deal in my next post.