Capital Markets at Tech Inflection Point
Brad Bailey, research director, Securities and Investments Group, at consultancy Celent said the fintech disruption in banking is ready to hit capital markets.
Bailey said in a blog: “We are sitting at an extraordinary inflection point in the capital markets.”
He added that there has been fintech disruption in banking but in the capital markets, so far, it has been much more collaboration than disruption.
“For the brave incumbent firms who are providing capital and nuanced expertise to these innovators, they are being rewarded with new ways of looking at their business, but more importantly, ready built solutions that they can scale,” said Bailey. “Overcoming the fear of engaging these firms effectively is a path to finding better and more cost-effective solutions.”
In a report “Financial Technology to Fintech Trends in Capital Trends”, Bailey wrote there has been increasingly rapid adoption of electronic trading as asset classes become available through virtualized trading environments. As a result clients want tools and services to aggregate liquidity from all available sources as well as flexible market structure models in order to ensure best execution.
“Clients also want greater access to data for analysis as well as speed of connectivity to each new, innovative trading venue that has the potential to lower total cost of ownership,” Bailey added.
For example, in foreign exchange, the largest banks have the analytical skills to continue creating their own pricing engines and algos.
Bailey said: “But even they are looking for lighter infrastructure plays. Firms are questioning the value of their principal trading desks as they compare and contrast coexisting agency desks that offer clients diverse execution choices. These choices go beyond FX to other principal markets like rates.”
He gave the example of JPMorgan, which announced it would partner with electronic market maker Virtu for aspects of treasury market-making and said fixed income, rates, and credit are undergoing similar transformations.
As a result both the buy and sellside are looking for more detailed analytics, in real-time, on market microstructure, broker/client engagement, and statistically based predictive analytics.
“Analytics are often constrained by the access to “small” data (i.e., market data, pricing, etc.), especially in markets like fixed income, or, even FX where there is no centralized data for benchmarking. However, transparency continues to come to these markets as Trace continues to expand, and more firms build tools to scrape data from counterparty engagement,” said Bailey.
At the same time computing power and advanced statistical modelling advancements have made artificial intelligence a nascent reality across the financial world. Bailey said: “Machine learning will be central in a shift from post-trade and history-based analytics to pre-trade predictive analytics.”
This month the Milken Institute Asia Summit held a panel on “Artificial Intelligence: Blurring the Lines Between Humans and Machines.” Ben Goertzel, chief scientist of Hanson Robotics and of artificially intelligent hedge fund Aidyia said on the panel that industry-specific AI is already a “done deal,” especially in finance.
Goertzel explained that Aidyia uses a combination of machine learning, natural language processing, deep learning, and probabilistic logic to trade stocks and make financial forecasts weeks to months in advance, automatically improving its decision-making with each iteration according to the Milken Institute blog.
Bailey said a partnership that makes the most out of the capabilities of an existing capital market firm and a fintech firm presents the greatest chance for success.
This month, for example, Misys launched its platform-as-a-service strategy in which the the financial technology provider opened up its core systems to third parties, including banks, fintech companies and developers to launch their own applications.
John Easton, senior cloud advisor at IBM, said in a statement: “As the technology and business needs of the financial services industry evolve at an accelerating pace, there is a growing need for banks, fintechs and partners to collaborate.”
Bailey added that the cloud is the disruptor that is most profound in allowing the fintech revolution to occur in capital markets.
“Cloud enables a lower cost of failure, shifting cap ex to variable costing, and demand based usage,” added Bailey. “More importantly it allows better data models for analytical insight across the capital market value chain.”
More on fintech:
Fixed income asset managers need to adapt the way they trade derivatives under new regulations.
Fee compression is responsible for 80% of the decline.
Firm positions itself as an execution partner for the buy-side trading desk.
Increasing workflow and pressure on trading desks is driving investment managers to adopt greater automation.
The Investment Association's new hub is supporting fintechs based in the West Midlands.