New Year New Tech New Research

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.

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

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.

To Brexit and beyond!

To Brexit and beyond!

So the Brexit has finally happened. The equity, forex and bond markets are still reeling from the news, the volatility probably caused as much by the fact that Brexit was unexpected as of yesterday night in the UK as by the event itself.
While the overall impact will reveal itself over the next several years, in the next few months the capital markets would have to deal with issues such as the future of the LSE-DB merger. Does it make sense anymore, and if yes, how do the two parties proceed? One would expect that now there would be political pressure to ensure that trading and jobs do not move away from either London or Frankfurt. Keeping all stakeholders happy would be a more complicated affair, although it could still be done.
EU wide market infrastructure regulations such as T2S and MiFID II would also now be seen in a new light. London was seen as the financial capital of Europe. The EU would now have to proceed with these significant changes at a time when the UK is preparing to exit, and is weighing its options in terms of how best to deal with the rest of Europe. It could take a middle ground as Switzerland has taken, or position itself even further away with more legal and policy independence but less overlap with the European capital markets.
In an earlier blog that considered the possibility of Brexit, I stated that technologically this might be the best time for an event such as the Brexit. Technology is more advanced and we are better connected than ever before across nations and continents. However, undoubtedly there will still be significant impact from an economic, financial and demographic point of view. As always, there will be winners and losers. As a neutral, one hopes that the people in the UK are able to achieve the goals they had envisioned in making this decision.

Intra-inter dealer broker deal: facing the future

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

MiFID II on the minds of fixed income leaders

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

MiFID II and you – here before you know it

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

The future is here

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

All MiFID, All The Time

All MiFID, All The Time
I just spent a week speaking to many of Celent’s UK based clients.  I was surprised by how high MiFID II was on everyone’s agenda.  Whenever I posed the question—what are you most interested in discussing? The answer was firmly-MiFID II.  The response was typical for the entire client spectrum: buyside to sellside; venue to infrastructure provider; vendor to regulator. It was most apparent regarding anything fixed income, given the potential magnitude of change coming to those markets. It is interesting to note the divergence, from a fixed income perspective between the US and Europe. On the US side, we have been discussing the evolution of fixed income markets-the gradual pace that occurs as a function of a naturally changing environment. Generally, change is slow, but sudden shifts to the established environment can occur. In a similar vein, think of the Cretaceous period-80 million years with incremental natural selection occurring over vast time frames but ruled by dinosaurs.  Of course, during those long periods of time stresses occurred that accelerated the process of change. In the US fixed income market, those stresses come from dealer decreasing balance sheet, transition to alternative liquidity, buyside flexibility, rise of new venues, QE, and, ever restrictive capital/regulatory regimes. By contrast Europe, where under MiFID II, slated for implementation in the next 18 months, market participants are looking at a major shift in the climate. Implemented as currently written, MiFID II will be a radical remapping of trading across the universe of FI products-an asteroid, plummeting into the Gulf of Mexico-ending the cretaceous period with a “bang”, and life/trading as we know it.  Of course, we know how that story plays out – the dinosaur die off made way for those nimble, tiny creatures to find their way and-well, become the established order.

Fixed Income vendors: Ready, Steady, Go!

Fixed Income vendors: Ready, Steady, Go!
Celent has been following Fintech innovation in the Fixed Income trading space for a few years now. If you didn’t know (sic!) please check out the following reports: http://celent.com/reports/innovation-focus-analytics-powering-fixed-income-matching or http://celent.com/reports/technology-european-fixed-income-time-open-pandoras-box and listen to our Webinars, come to our Innovation roundtables, or just ask for a briefing with us 😉 But like most of you, I was starting to have the feeling that I kept hearing or writing (worse!) about the same things and that nothing was really changing in Fixed Income trading.  That was until probably the beginning of 4Q13, when we heard some exchanges were starting to make bold moves, some platforms gaining traction with new functionalities (Tradeweb with Sweep) and some specialized vendors expanding globally (Algomi). Then we all spent the latter part of 4Q13 writing business plans, end of year reviews, new year objectives (if not resolutions!), hiring plans, strategy implementation plans, etc. In the meantime however the European Commission, Parliament and Council finally agreed on MiFID II at the last hour, triggering sudden interest in all of the vendors that had been trying to evangelize the market about Fixed Income pre-trade transparency tools, price aggregation and/or distribution, Best execution algorithms and Smart Order Routing (SOR). Think List Group, GATElab, SoftSolutions!, SmartTrade or Axe Trading. The last nail in the coffin of change came in last week when UBS announced it was outsourcing its Fixed Income trading platform to Murex and Ion Trading, two long-established vendors. Here we are talking their institutional voice and electronic trading business, lots of real sales with real traders, not UBS-PIN-FI. This is big news for Fintech. Tier 1 Fixed Income Investment Banks (IBs) historically developed all their technology in-house. Some of them had started since the crisis to integrate small parts of vendor solutions in their in-house systems (e.g. Broadway Technology for GS in Rates), but the outsourcing the entire trading platform: that never used to take place.  Think all these personalized valuation models the big fancy trades used to need – that had to be proprietary and developed by a team of in-house quants. UBS is a great first because it obviously has 1) lost more of its shirt in the crisis, 2) publicly made a strategic decision to move its fixed income focus away from the big fancy (and risky) trades and towards less risky and more standard client business (that can have more standard booking, affirmation and valuation systems obviously). It should therefore come as no surprise that they would be the first big IB to make this move. But I don’t think this is the last one. Just looking at the 2013 FICC revenues estimates of my Oliver Wyman colleagues made for the 6 big IBs that have reported earnings so far (JPM, BoAML, GS, C, MS, DB), down more than 12% year on year, one can easily see that the pressure on cost will keep sending IBs to the innovative vendors. After Ready and Steady, time to Go for fixed income vendors!