Buyside Looks to Fintech to Boost Returns

Shanny Basar

Buyside firms are interested in using technology such as machine learning to improve predictive analysis in funds according to a panel at the London Stock Exchange.

Mark Sykes, chief operating officer at Kx Systems, said on the panel: “Ultra- high frequency traders are extremely leading edge but the rest of the buyside are interested in using technology to achieve greater returns. They want to improve predictive analysis in their funds using machine learning and data collection and aggregation to make decisions in real-time. It is pretty exciting on the buyside.”

Sykes spoke on a panel on whether technology can truly disrupt the existing capital market ecosystem at the London Stock Exchange Fintech Investor Forum on 26 February. Kx Systems, a subsidiary of First Derivatives, provides kdb+, a time-series database for performance-critical environments used by financial institutions including Fidelity, IEX and the top ten global investment banks.

Taras Chaban, chief executive and co-founder of enterprise behavioural analytics company Sybenetix, said on the panel that buyside firms have been more willing to use new technology but banks are changing.

“Machine learning techniques are being developed today but are not the holy grail for the buyside,” Chaban added. “They are looking for a symbiotic relationship between man and machine to make better decisions.”

Nikhil Rathi, chief executive of the London Stock Exchange Group’s UK business LSE Plc, introduced the forum and said that since 2012 venture capital investment into UK fintech has grown by around 500% with a 35% increase between 2014 and 2015. He added: “We would like to see many more fintech companies in the FTSE 100.”

Last year Worldpay, the payments processor went public in London and raised £2.48bn ($3.45bn) in the largest global technology IPO in 2015. Charlie Brennan, technology research analyst at Credit Suisse, added at the forum: “European fintech lacked a critical mass of publicity listed companies but Worldpay was a game changer.”

Brennan said that in 2014 the market capitalisation of the top eight fintech companies in Europe was €16.9bn but that doubled last year. He continued that payments companies will be attractive due to structural growth, the transition away from cash and increasing margins as they add volumes to their platforms.

Eileen Burbridge, partner at Passion Capital, HM Treasury Special Envoy for Fintech, and chair of TechCityUK said at the forum that the UK government is not just paying lip service to fintech but genuinely believes that it leads to innovation and promotes competition.

In 2014 the Treasury commissioned EY to produce a benchmarking study of the UK and selected international fintech ecosystems. The study released last week said UK fintech generated £6.6bn in revenue and attracted £524m in investment last year. The sector employs 61,000 people, second only to California which has a fintech workforce of 74,000.

EY said: “The UK also ranks first as having the strongest fintech ecosystem based on our benchmarking exercise. A particular competitive advantage is its world-leading fintech policy environment. This stems from the supportiveness of regulatory initiatives, tax incentives, and government programmes designed to promote competition and innovation.”

Christopher Woolard, director of strategy and competition at the Financial Conduct Authority, said in a speech last week that the UK regulator had set up Project Innovate in October 2014 to providing direct support to innovative firms and improve policy and process. An Innovation Hub team offers guidance pre-authorisation and advises firms on how to best prepare for regulatory approval.

The Hub has received 413 requests for support and supported 52% of these firms. In the past year, 25 non-UK innovators have also approach the Hub.

“It is important to note that the 48% of firms we did not provide support to was because in most cases the idea was already established, in which case they can still take a standard route to authorisation, or more rarely we did not think it was likely to be in the interest of consumers,” Woolard added.

Out of the first wave of firms supported by the FCA, 18 have been authorised, and 21 are in the process of going through the approval process.

Woolard said the next area of focus is improving policy and process. “We set ourselves an ambitious goal to create something practical and useful to foster innovation and are opening up the possibility of answering regulatory uncertainties through testing in a live environment. This will be known as the sandbox,” he added.

The sandbox will allow businesses to test new financial services without incurring all the normal regulatory consequences of engaging in those activities through authorizations for testing; no enforcement action letters, and individual guidance and waivers for all firms.

Last week Mark Carney, chairman of the G20’s Financial Stability Board, said global regulators may propose rules to prevent fintech innovations from destabilizing the broader financial system. Carney said in a letter: “The regulatory framework must ensure that it is able to manage any systemic risks that may arise from technological change without stifling innovation.”

Featured image by axsim/Dollar Photo Club

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