Capital Markets Undergo ‘Generational’ Change

Shanny Basar

Mark Beeston, founding partner at Illuminate Financial Management, said the venture capital firm is investing in fintech companies that provide a clear solution for capital markets.

Beeston told Markets Media that the financial industry is going through a generational change in market structure due to deleveraging, regulation and zero tolerance of compliance failures.

Illuminate was launched in 2014 to invest in fintech companies in capital markets that create change through providing solutions for cost, control, capital efficiency or compliance with regulations. The venture capital firm is in the Bank of England fintech community that is part of the central bank’s accelerator program which will run short proof of concept projects to help the BoE enhance its understanding, and support development, of new technologies.

“Illuminate Financial Management is first and foremost a solutions investor, not a technology investor,” said Beeston. “Our industry can ignore cool tech forever if it does not provide a clear capital markets solution. For example, we could easily invest in multiple solutions for MiFID II without ever investing in a single blockchain provider. Although we don’t exclude that possibility.”

MiFID II, the regulations covering financial markets in the European Union, will come into effect at the beginning of next year. One of the requirements of MiFID II is to separate payments for research, which have historically been bundled into trading commissions, in order to increase transparency and reduce conflicts of interest. Asset managers can choose to either pay for research out of their own P&L or from research payment accounts, where they have agreed a budget with their clients. The buyside will also have to track their consumption of research and assess its quality.

As a result of the unbundling requirements Illuminate has invested in FeedStock, an intelligent information management platform. FeedStock filters, categorizes and tracks investor research using artificial intelligence software, which can be embedded into clients’ internal systems.

Lucas Wurfbain, managing director and founder of FeedStock, told Markets Media: “FeedStock delivers a productivity solution for the buyside through the use of algorithms and artificial intelligence. Fund managers can spend on average two hours a day going through research emails, which is the equivalent of 50 days a year.”

Clients can set their own filters and personalized algorithms also learn to prioritise research from client behaviour. Using multiple data sources, FeedStock automatically calculates all research consumed, accounting for meetings and calls, enabling buyside institutions to produce quantitative and qualitative data to justify research payments.

FeedStock already has a number of asset managers on the system and will continue to evaluate additional direct information sources to feed into the system.

Consultancy Oliver Wyman and Morgan Stanley Research said in a report last week that research unbundling under MiFID II will place cash equities platforms under further pressure over the next one to two years and they will face consolidation and compression of cash commissions. The study said leaders enjoy strong economics but mid-tier players will increasingly question the integrated equities complex, and there will be deeper restructuring if revenues disappoint again.

“Asset managers will need to decide how much to purchase in future and what capabilities to build in-house,” said the report. “Big data and artificial intelligence techniques are already being used by some asset managers but there is scope for others to embrace new approaches that may offer improved performance as well as cost savings.”

Charlie Henderson, managing director and founder of FeedStock, told Markets Media: “FeedStock has been built for MiFID II research requirements but is expanding to analyse internal research and investor relations announcements.”

FeedStock is the fourth company in Illuminate’s portfolio, which could grow to between 12 and 16 firms for the current fund.

In 2015 Illuminate’s first investment was CloudMargin, a web-based collateral and margin management solution, which closed a significant Series A funding round this month. New regulations requiring the exchange of variation margin on uncleared derivatives came into effect at the beginning of this month and CloudMargin said it has had a 50% increase in the number of clients since the start of this year.

The other two Illuminate portfolio companies are ChartIQ and Privitar. ChartIQ provides a software development kit to help build the next generation of trading platforms, including embedded charting, graphics and analytics. Privitar provides software for privacy protection to leading data infrastructures.

Beeston said Illuminate has seen more than 1,000 companies since the venture capital firm was set up and the pace of fintech firms coming into capital markets has accelerated. “In the whole of 2014 we saw just over 100 firms but this quarter alone we have already met more than 170 new companies,” he added.

He believes there are significant opportunities for fintech across the trade life cycle from point of execution through middle and back office as financial institutions still use legacy technologies that rely on manual processes, are increasingly expensive to maintain and have inflexible pricing models.

“Delivering greater automation via straight through processing and automated reporting might not be new, but we now see a trend toward round-trip processing, automating both sides of the trade, not just getting the transaction out of the door,” said Beeston. “This can deliver operational benefits and new cost models at a time when non-bank competition is gaining traction, particularly in fixed income, currencies and commodities.”

Beeston argued that Illuminate has an advantage as there is a huge amount of fintech innovation in capital markets and it can validate emerging solutions, making it easier for them to be adopted by large financial firms.

“There is a huge chasm that needs to be bridged between large financial institutions that need solutions and early stage entrepreneurs,” he added. “On the bright side, market challenges such as MIFID II or Basel III compliance will continue to generate demand for new solutions within capital markets, problems that the entrepreneurs within capital markets fintech are uniquely placed to solve.”


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