Cloud is Down

Cloud is Down

Yes, even the cloud can go down!

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

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

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

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

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

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

Ellevest Knows Their Customer

Ellevest Knows Their Customer

At the end of last year, I decided to try Ellevest, an automated advisory platform that specializes in serving women’s distinct needs.

Ellevest’s email communication and marketing have stood out to me. Ellevest understands their audience.  The emails sent by Sallie Krawcheck, cofounder and chief executive, resonate with my beliefs. Her communication strikes the right balance of sensitivity to women’s issues, responsiveness to current events, and emphasis on the importance of financial goals/investing, while also coming across in the same organic language one would use with their best friends. Emails from other Ellevest team members are equally relatable and informative.

I even received beautiful flowers in the mail around the New Year from Ellevest. The flowers were delivered by Bouqs, a company that delivers farm to table flowers and is a provider that I personally use frequently, so this gesture was on point. 

The passive investment platform is much like the others. However, the infographics are nice and the user interface is more attractive than competitors.

While I wouldn’t be surprised if Ellevest expands beyond its focus on women (though I have not heard anything to support this), I am confident Ellevest understands its consumer base and will continue to reach out and serve women uniquely.

In the world of robo 2017, C.A.S.H. is king

In the world of robo 2017, C.A.S.H. is king
For those of you who seek yearly prognostication, here we go. I see four factors or trends driving the evolution of robo world in 2017, and attempt to capture them here with a simple, suitable acronym: C.A.S.H.
  • Cross border activity: We’re now seeing robo advisors extend their reach across national borders. This is not just the case in Europe (think German-UK robo Scalable and Italy’s Moneyfarm, which launched in the UK) but in North America as well. I comment on the planned entrance of Toronto based robo Wealthsimple into the US market in Financial Planning.
  • Asset managers will continue to seek distribution, launching robo advisory platforms that enable the advisor to market their products. They’ll also want a share of advisor profits.
  • Synergies with CRM, compliance and other tech providers will deepen, as robos become more tightly integrated into the wealth management ecosystem. It’s no coincidence that two of the portfolio optimization software providers featured in my last report offer robo advisory platforms.
  • Hedge fund-like robos will prosper in an more volatile economic environment. These robos will use passive instruments to take a position on the market, and in some cases, allow users to “steer” (or apply their own views to) investment decisions.
Taken together, these trends signal the “mainstreaming” of robo advisory capabilities. Robo advice platforms are now less a “nice to have” than a core part of the incumbent advice offer. As such, these platforms are becoming increasingly bound up in the larger industry infrastructure. Those robos that seek to keep themselves distant or apart from this ecosystem will find themselves exposed, and short of cash, once the current funding cycle dries up.

Central Bank-Issued Digital Currency

Central Bank-Issued Digital Currency

I just published a new report titled Central Bank-Issued Digital Currency: Assessing Central Bank Perspectives of DLT and Implications for Fiat Currency and Policy Stimulus.

The future of DLT appears inextricably linked with the future of banking & capital markets and given the significant impact that central banks are having upon finance, the perspectives of this critical constituency warrants careful examination with respect to such a game-changing technology.

On 28 September 2016, the Financial Services Committee met with Federal Reserve Chair Janet Yellen at the Semi-Annual Testimony on the Federal Reserve’s Supervision and Regulation of the Financial System. Yellen informed the committee members that blockchain could have very significant implications for the payments system, and innovation using these technologies could be extremely helpful and bring benefits to society.

This is further evidence of the significant and growing interest of central banks in DLT, but what is much less understood is how such technology could transform the role of central banks and commercial banks. Central bank-issued digital currencies present an opportunity to re-architect the financial system to achieve key central bank objectives. The perceived benefits include a new payments system, granular data on key macroeconomic variables, expansion of the policy stimulus toolkit, and improved prudential regulation.

Central banks themselves seem at an important juncture as they appear to be reaching the limits of their current policies — whether or not they are will only be determined with hindsight. In the meantime, in this report we delve into the mindset of central banks through analysing their extensive back catalogue of research to gain critical insights into the policy framework they may adopt going forward and how advances in technology may increasingly play a part.

This is the second in my current series of three reports on distributed ledger technology:

  • The first report considered DLT with gold (Micro Gold);
  • This report considers integrating DLT with Central Bank-Issued Digital Currency (CBDC);
  • The final report will compare fiat currency, Micro Gold, and cryptocurrencies as competition for payments systems, storing value, and money itself continues to rapidly unfold.

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.

Spot FX Gets Walloped!

Spot FX Gets Walloped!

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

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

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


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

 

 

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.

The next wave of fintech disruption

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.

Keeping up with the Canadians

Keeping up with the Canadians

In my last blog post I described the challenge posed by robo-advisors to the bank dominated wealth management industry in Canada. Here I share observations from my recent report, Thawing Market, The Growth of Robo Advice in Canada, while exploring the implications for other markets as well.

The robo advisory business in Canada lags several years behind its US counterpart, but in terms of learnings and understanding, it is catching up fast. This trajectory reflects the natural development of the robo learning curve as well as economic, regulatory and demographic factors common to Canada and other developed markets. These include a low interest rate environment; a graying population and regulator umbrage towards practices that long have defined the wealth management business.

The Regulators Are Talking to Each Other

Let’s start with the regulators, who are clearly are speaking to each other across borders. In the English speaking world alone, the UK and Australia have banned commissions, while Canada and the US have essentially gelded them.

Directives aimed at conflicts of interest and revenue sharing represent a worldwide tailwind for passive instruments (such as ETFs) and the robo advisors that offer them. In Canada, the high fees charged by active mutual funds have battered those older and affluent investors least able to afford them.

The interest rate starved Canadian banking sector, which accounts for a large part of mutual fund sales, can no longer count on the willingness of consumers to pay 200 plus basis points for a fund. Like the citizens of the defunct East Germany, they’ve looked over the proverbial Wall and seen a better way.   

Small but Mighty

In dollar terms, the robo advisory business in Canada is miniscule. But the modest scale of the business belies a complexity of outlooks and approach.

Canadian regulation presumes portfolio oversight by a real life human being. In practice, this means communication from a dedicated advisor to confirm the suitability of the client portfolio, and to ensure the client understands the risks. While communication can be as basic as an email, it appears that advisors will soon be required to pick up the phone and call their clients, or at least those populations (such as the 65+) in need of more tactile support.

All It Takes Is a Phone Call

This requirement represents an alternative to the binary lens through which US automated advisors have played the market. Their worldview has been black and white (i.e., the advisor-assisted “hybrid” model versus “digital only”) and their messaging shrill if not patronizing (“investors need the guidance of an advisor”). Pure play robos have also become more dogmatic. Remember when Wealthfront used to talk about its brainy investment committee led by Burton Malkiel? This message has since been subordinated to talk of APIs and algos.                                                

Instead of using the concept of human engagement (or lack thereof) as a litmus test, or as a cudgel to bash other models, maybe US automated advisor could acknowledge the robo shades in between black and white? The Canadians, in their temperate and accommodating way, appear to be doing just that.

Cyber Security: Is Blockchain the Answer?

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.