MiFID II and Unintended Consequences

It’s 2020 and it feels like this is going to be the year of change. While 2019 definitely had a lot of change, it still felt like there was ‘resistance’ – I put it in quotes because it’s hard to define, but it felt to me like some people were still holding onto the old world of institutional finance. It felt like there were people who thought things would go back to the way they were. The new year, and the new decade, and the fact that it’s 2020 seems to have changed that. I can feel a general acceptance around the table that the world is changing, and a new shift to looking forward to new shores, instead of looking back and trying to keep our eyes on an ever disappearing land. 

I have a number of thoughts about what 2020 holds in store (which I’m still working on), but I think one of the biggest themes will be a lot of recent changes ‘flushing out’ – there has been a lot of new initiatives in the industry over the last few years, and 2020 feels like it’s the year that they flush themselves out – including the impact of the intended consequences, but also the impact of the unintended ones.

Let’s look at MiFID II as an example. That piece of legislation was predicted to have a monumental impact on the industry – among other parts, it was set to fundamentally unpack and unbundle the connection between research and execution. New businesses and platforms were started to facilitate that new world order – research marketplaces, commission management systems, interaction recording tools. Now, a few years in, we see that while the impact is definitely there, it was less than expected – the industry didn’t change overnight and everything hasn’t unbundled just yet. In fact, with Brexit on the horizon, it looks like there is increasing appetite by the remaining EU parties to revisit the fundamental tenets of MiFID II (including unbundling), and an increasing view that the impact of the regulation has largely been negative

One of the impacts that is front and center is the declining amount of coverage, especially outside the large and mega-cap names. Yes, Apple will always have plenty of coverage – but what about everyone else? The number of covering analysts is declining in almost every other corporate segment. What does that mean? There is less ‘information absorption and processing’ happening with those companies. If a company had 10 analysts covering it, and now has 5, that means that there are half the number of people actively absorbing, processing, writing, and sharing insights and information on the company. That means the story won’t be as broadly or deeply understood, everything being equal. It also means that ‘unexpected’ events are more likely to happen. Earnings will surprise, or underwhelm. Numbers will be different than expected, as models become out-dated. The markets will react more

What does that mean? More volatility – and it seems like some participants couldn’t be happier. As the WSJ highlighted, hedge funds are finding more opportunities as coverage drops among mid-cap and small-cap companies. To paraphrase the quote, it seems that “one group’s regulation is another group’s opportunity.”

When the regulators put together MiFID II, I’m sure they had the best of intentions, and they thought deeply about the consequences. They may or may not have seen the impact the regulation would have on research coverage levels, but that was a semi-predictable impact. What they likely did not see at all was the resulting price volatility it would create within those companies, as coverage fell. I don’t think anyone believes that this regulation was intended to give active managers an olive branch, but it has created opportunities for savvy, timely investors to find alpha. However, it has also created challenges for the companies themselves, as they find it harder and harder to communicate with the market, share important updates, and connect with investors. In an era of increasing regulation, it’s not the intended consequences that you have to watch out for – it’s the unintended and indirect ones.

I believe that we’ll continue to see these second or third derivative impacts this year from regulatory changes over the last few years, evolving market structures, and industry pressures. The good news is that everyone now seems to be fully committed to looking ahead, and planning for the future – 2020 looks like it will be one of the most exciting years to date. I personally cannot wait to see how it unfolds.

Happy 2020, and as always, we’re here to help!

Blair Livingston
Street Contxt

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Building a brand in banking, and information distribution

On the Capital Markets side of the business, and especially within Sales & Trading, the morning note has become almost sacrosanct. It’s essentially a given – you need to be putting our regular content to clients, and ideally in the morning when they are planning how to spend their day. Its purpose is unchallengeable, and it’s value never questioned.

For what it’s worth, I agree with the concept of a morning note. It’s massively valuable for the sell side, and massively helpful to the buy side – but when did you last take a step back, and ask yourself why it’s so valuable? I have a couple of theories:

  1. Synthesizing information – at the very core of it, anyone in a client facing role has one major objective: take the resources and services being produced by your firm, filter them down to what is relevant to your clients, and deliver as much of a personalized experience as possible, with the goal of getting their business. Furthermore, not only deliver what’s important, but also help save your clients by summarizing and synthesizing, and helping them decide where to allocate their most precious resource: time. Our findings would suggest that ‘system emails’ that come from research have an open rate that is 10-25 times lower than sales readership. Why? Too many single topic emails, with no filtering or personalization. Very few people on the buy side read system emails – they filter them into a folder just in case they want to go back to them in the future, but they are instantly ‘removed’ from their main inbox. On the other hand, people really do read notes that summarize, synthesize, filter, and are personalized.

  2. Sparking a conversation – something in a note might spark a conversation, lead to a follow up, or drive an engagement (such as attending a meeting, talking with an analyst, etc.). The more high quality touch points you have with a client, the more opportunities you have to spark a conversation – the genesis moment of all transactions.

  3. Building a brand – this is perhaps one of the most underappreciated or unrecognized parts of sending out a morning note, and it’s the one I wanted to spend some time focusing on today. We’ve done a lot of research on what drives content consumption, and there seems to be a general consensus that it is two reasons: the content and topics  (which you could have guessed), and the sender. The more valuable content you produce, the more likely people are to open your future content – regardless of the topic (that might be why you’re reading this right now!). But building a brand is also a core element to driving higher engagement with your content, and publishing regularly is a major part of building a brand. People are more likely to open information from readers they recognize and have received valuable information from historically.

Building a brand: the venture capital example

Have you ever heard of Fred Wilson? He’s perhaps one of the most successful VC’s today, and he has a blog at avc.com. His fund, USV, is one of the top performing funds in the world. He has prospective LP’s and start-ups fighting to get his attention. He has established a powerful brand – but can you guess one of the ways he really did that, and what he still does every day, and has been doing for years? He blogs. Every. Day.

So, why does he put out a piece of content every day? I can’t claim to read his mind, but if I had to guess I would say there are a few major reasons: to stay relevant, to show his expertise/knowledge, and to build his brand. He wants to make sure that the next Facebook or the next $50M LP knows who he is before they even think of going to market, and that they have a favourable opinion of him. He wants to stay top of mind in the broader community and ecosystem. He’s not alone. Many other prominent VCs, PE funds, and other investors are now turning to daily content production (which is usually delivered via email).

Bringing it back to banking

One of the interesting trends we’re seeing emerge is brand building in banking. Increasingly sector teams are starting to put out regular notes – whether weekly or bi-weekly. They are sending summaries of what has been happening in their sector to corporate clients, whether those updates refer to public news or internal research. They are using that content to drive conversations and inbound, but more importantly, they are using that content to build a brand. If you’re a corporate client, receiving a regular industry update with some unique industry perspective is invaluable. It’s something you’re likely to engage with and respond to. More importantly, as other investors have discovered, it keeps you top of mind with your existing and prospective clients. We’ve already seen growth in distribution lists as these notes get shared and additional corporate clients request to subscribe (in a perfect parallel to what has been happening with desk content for years).

It’s about time

I always find it interesting when something is so obvious in one area of the bank, but for some reason hasn’t made the transition to other parts. It’s so obvious that salespeople need to send out a morning note. It’s a given for everyone on the desk. In banking though, it’s seen as ‘different’ – many banking teams believe they can simply focus on deals. They don’t realize that building a stronger brand, and using content to spark conversations can be the ultimate ‘pre pitch book’ process. Many teams are starting though… and they are getting the first mover advantage.

Some sector teams might respond with “well, we don’t put out content” – and that’s the problem. I’m sure many investors said that when Fred Wilson got started – that they didn’t put out content –  but now his lead is so big that no one starting from scratch today will ever catch him. It’s still early though, and I wouldn’t say this tactic is broadly adopted yet (although some teams have been doing it for years, very quietly). That means the ball is still in the air, and anyone can grab it.

I would encourage you to ask your banking teams how they are building their brand with content and thought leadership, or think about it yourself if you happen to sit in that seat – it’s a question that will become increasingly important in the future. Some of the best practices from the capital markets side of the business are coming over to banking – and it’s just getting started.

Good luck on your journey, and as always, we’re here to help!

Blair Livingston
Street Contxt

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Sales technology still hasn’t come to capital markets

The Capital Markets is an industry going through massive and accelerating change. That change seems to be everywhere – new technology, new tools, new markets – it goes on and on. However, one part of the business hasn’t changed at all in the last 10-15 years: the tools and technology used in client facing roles. Sure there have been little flares of evolution, and some new entrants are looking promising, but it’s still mostly the same. The suite of tools and technology used looks almost identical to what it looked like 10+ years ago. I always joked that if you took a trader from 10 years ago, and teleported them to today, they would be lost – there has been so much change in OMS, EMS, algos, and other trading tools. But take a salesperson from 10 years ago, tell them the accounts they cover, and they would be off to the races – the tools, technology, and tactics are almost identical. It’s not meant as a slight – it’s just a reality of the business and where we are today.

Before I get into why I think that is true in the Capital Markets, let’s take a moment to look at the rest of the world. Sometimes we get so myopic in this industry that we lose context on the change happening outside our industry. For sales in many other industries (especially those in technology), there has been massive changes – here is a sample of the ecosystem of tools that have evolved to empower and augment client facing efforts more broadly across the board:

And that’s only from 2017 – and only the major tools in each category. There are literally 1000’s of tools in each category, with more coming out every day. What’s even more concerning though, aside from the lack of tools and technology, is that there are terms in there that have never even been uttered in capital markets. Content Sharing. Predictive analytics. Data Automation. Lead Generation. Lead Intel. Development. Customer Success. These new areas of expertise have developed within sales organizations across industries, building into ecosystems of tools and best practices, but for the most part haven’t even been discussed within the capital markets.

To really send this point home, ask yourself a few questions for a moment, regardless of your role:

  • What is your firm’s lead generation strategy? How are you measuring the effectiveness of it? How many leads did you generate last month or quarter?

  • What has been the conversion of those leads? How effectively have your leads converted from Q1-Q3 this year?

  • What is the average time it takes a client to go from a lead to an active client? What does that cycle look like, and what is the trend over the last 12 months? Is it growing or shrinking?

  • How do you approach client success? What are you doing to ensure you’re building deep, long lasting relationships with clients, vs. surface level transactional ones? How do you measure the health of those relationships?

  • What is your sales technology stack? How many of those buckets is your firm leveraging one or more tools in?

Now, sometimes I hear objections to the above – that the Capital Markets is just different – but is it really that different than other industries? In a client facing role (and in sales) your job is to deliver a tailored set of value added services and products in order to service the client, with the ultimate goal of driving a transaction event. Sure, there might be some nuances of the business, but the fundamental role of anyone in a sales capacity – whether Capital Markets sales or technology sales – is to sell the products the firm produces.

Finally, you might be saying “well, we have a CRM!” and that’s a good start – but as you’ll see from the above graph, the CRM is just one piece of the puzzle. You need to have the entire ecosystem working together. This isn’t about ticking a box and having a solution in place. It’s about building an orchestra of tools and technologies that all work together to drive the business forward and produce the results you’re looking for.

It was hard for me to make the change myself, coming out of the industry. There are a lot of new terms, a lot of new tools, and just a whole lot of change. That change needs to come – and it’s going to eventually. You will need to start thinking about your broader client facing organization, and specifically your sales organization, and start to think about what metrics you’re trying to drive. Revenue (or commission) is great – but it’s usually a lagging indicator. You want to start thinking about leading indicators, what you want to measure, and how you will provide the tools and technology to capture that data. That will help you see around the next corner, and plan more effectively.

On implementation, it will be a consolidated push between educational efforts (teaching teams about how sales is evolving, and new best practices) and experimenting with new tools and technologies to see what works best for your people and end goals.

As a final note, I’ll leave you with a story from a recent interaction I had this summer. A global head of sales at a major IB ask me a question: “Blair, what would you do if I brought you in tomorrow to run sales in X asset class?” I paused for a moment, considering the question. Then I answered him: I would go out and hire 50 software salespeople to augment his team. Have the existing industry salespeople teach the nuances of the business to the software salespeople, and have the software salespeople bring in best practices around technology, process, and structure. Build a hybrid team that brings the best of both worlds together. I think the answer was well received (and actually might be implemented!).

Technology still really hasn’t come to the client facing side of capital markets – which means there is a huge opportunity for those who can harness it, and master it first. This is a massive area of low hanging fruit. The square is open, now it’s just a matter of who will get there first and lift the offer.

Good luck on your journey!

Blair Livingston
Street Contxt

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Fax Machines and Unsubscribe

I find the diffusion of technology across capital markets both fascinating, but also perplexing. On one side of the business (the trading side), you have what appears to be an unlimited appetite to invest, innovate, and spend. You have firms pushing the limit to get ahead: building radar towers to speed up execution, and there was even talk of building a particle accelerator to shoot order through the earth, making trading just a little bit faster (you can go through the earth a lot faster than you can go around it).

Then we look at the communication side of the business. Information is being distributed and consumed in essentially the same way it was 10-20+ years ago. There are still several brokerages who print and distribute hard copies of written research. I’m sure there are still clients who prefer to receive and consume it in the same medium. That being said, email was the last major innovation in information distribution technology, but how we use it largely hasn’t changed since it was first introduced.

For brokerages, email has become the main way they distribute information. For an industry that was thinking about building particle accelerators to trade, it’s a little bit perplexing to consider that most information subscriptions in this industry are managed off of Outlook distribution lists, or a combination of Excel, Word, and CRM. While many equity research distribution lists have migrated to a centralized CRM, almost no other lists have. Lists on the sell side exist in a number of locations, all isolated, and rarely accessible to anyone but the owner, including those who find themselves on one and might want to get off.

For funds, email has become a necessary evil. It’s where they manage all the information they receive externally and internally, but it’s a disaster to organize and control. In fact, email has gotten so bad for clients that I had one client (a notable PM in the US) show me his fax machine. That’s right, he’s getting so many emails that he’s given up on even trying to control his inbox. He has only given the fax machine email address to a few people, and it auto prints. If it prints, he knows its important. In addition to the fax machine, he’s also gone through around eight email addresses, each one was supposed to be ‘secret’, but once an email address is known, there’s nothing you can do to stop someone sending to it. I can only guess that, as of this writing, he’s on his 9th.

However, you might be one of those poor individuals in this industry who decides you’re going to try and manage your inbox. After all, the email client isn’t a single application – it’s a series of applications intelligently bundled together. It’s your calendar, content management system, collaboration system, contact management system, distribution tool, compliance system, and a whole suite of other applications that are hard to live without.

What do those poor souls do who try to manage their inbox? They use one of the only tools they have at their disposal: Outlook rules. These rules allow you to set conditions around when content comes in, and what to do with it based on a variety of parameters. One of the most commonly used rules is to sort content based on the sender (i.e. who it came from). Let’s say you receive an email from “blair@streetcontxt.com” – you can tell Outlook to file that email directly into a folder (“Street Contxt Thoughts”), or even (gasp!) trash. Individuals will use these Outlook rules until they run out of space, or give up trying to manage them (it’s quite common to see clients who have 100+ rules).

The need for rules is obvious though – since there is no way for recipients to easily control what they are receiving from the point of production (i.e. they can’t access the distribution list or their subscriptions), they have to manage it at the point of consumption. While it will take some time to make subscription and interest management more elegant (we’re working on it!) there is still some low hanging fruit that is much faster to implement. This industry really hasn’t adopted one of the most basic practices of effective email communication: the unsubscribe button.

In every other facet of your life, including your personal life, it’s easy to manage what you are being sent. At the bottom of every bulk/blast email there is a little button that says “unsubscribe”, which allows you to remove yourself from the list. In fact, with the new CAN-SPAM regulation (US FTC regulation), it’s actually a requirement for any kind of ‘commercial communication’. In capital markets, however, at best you often see “if you wish to unsubscribe, please email so and so at our firm”. That’s neither easy nor quick – and sometimes, it doesn’t even work. Most of the time however, you won’t see anything. Most recipients who wish to be removed will simply reply to the author, and say “please take me off your list”. If that doesn’t work, they’ll fall back to the Outlook rule, and essentially put the sender on auto-delete. If that doesn’t work? Give up and try to ignore it (or buy a fax machine!)

Now, if you’re on the sell side, many of you are thinking “but I want to stay in front of my clients – I’m not sure if I want them to be able to unsubscribe” – but the problem is that by sending them content they don’t want, you may end up either on auto delete, or labelled spam. Then when you really have to get through (for a deal, for instance), you won’t be able to. Isn’t it better to allow the client to manage their subscriptions, and let them see what they are getting, and adjust it as their interests change? Unsubscribing is perhaps one of the strongest indications a client can give you that they aren’t interested in that particular topic or theme.

I can tell you I see this first hand all the time. Even for myself, everyone who I send to (you!) can unsubscribe from my list at any time – in fact, there is a link at the bottom of this very email (please don’t all rush there at once!). I’m not holding anyone hostage, and I encourage you to unsubscribe if you don’t find it valuable – for selfish reasons. It helps me understand the effectiveness and interest in the content I’m sharing.

One of our missions is to improve the way that subscriptions and interests are updated, shared, and managed. Short term, that means simply bringing an industry that lives off distribution lists the ability to add ‘unsubscribe’ to their notes. If you’re already a Street Contxt user, that can be turned on for your account at any time and it’s included with your license. It’s fully whitelabeled, and branded with your logo. So if you don’t already have unsubscribe functionality in your content, think about adding it. Want to know how? Just reach out and I can connect you with our support team. Sorry if you’re not a client, you’ll just have to figure it out on your own!

It’s better for the sender, and it’s better for the recipient.

For an industry that wants to build particle accelerators, subscription management, and an unsubscribe button, shouldn’t be too much to ask for.

Blair Livingston
Street Contxt

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The Cloud is Finally Coming

I’ve been at this a decent while now – if any of you are connected with me on Linkedin, you’ll see that I just celebrated my 7 year anniversary at Street Contxt – how time flies! It’s hard to believe I’m coming up on a decade, as it all feels like it’s gone by so fast. As they say, the days go slow, and the years go fast. From that seat, I’ve gotten to see many trends – but the one in progress now stands above the rest in terms of impact and scale.

That big trend we’ve seen finally (and thankfully!) come to market is the broad acceptance and utilization of the cloud in financial services and capital markets. For those of you who may need a quick refresher, there are two major types of software deployments: 1) ‘on-prem’, where the software is deployed onto the customers servers and hosted by the customer, and 2) ‘SaaS (Software as a Service) / hosted’, where the software is hosted by the vendor on their servers (or a cloud provider they use, such as AWS) – think Salesforce, one of the first in this area. There are lots of shades of grey between those two major categories in terms of customization or options, but those are the two major options.

When we started building Street Contxt, we made the decision to be a hosted solution – that is, our customers had to let us host our software for them on our infrastructure. While very common in almost every other industry, it was still early days for cloud adoption in capital markets. We had several would-be early adopters ask if they could host us on-prem, but we stood fast and stuck to our guns on being a hosted solution (something I credit to our CTO and technology team). Back then, many firms wouldn’t touch the cloud with a ten foot stick. They were concerned about security, availability, confidentiality, integrity and privacy – they were giving up control, and that scared internal teams. After all, they used to regularly ask us: how secure is the cloud?

Fast forward seven years and 100% of our clients are hosted in the cloud. In fact, all the firms that originally required an on-prem solution have now become comfortable with a hosted solution. Have we had to make major investments in security, availability, confidentiality, integrity, privacy, and integration? Of course, but the move to accepting the cloud in capital markets will have some massive impacts.

Now to answer your question of “okay, so what will the impacts be of cloud adoption?”

When software is deployed on-prem, it slows down the software vendor and the client. The client has to wait for internal bandwidth to deploy updates and changes. Even with a new release available, this can end up taking months depending on priorities. There’s a reason large firms only update the Microsoft Office suite every 5-10 years. On the other hand, the software vendor has to spend an exorbitant amount of time, resources, and energy maintaining a number of different versions across all their active clients. Ten clients? You might have ten versions. One hundred clients? You get the trend. The bigger you get, the slower you move. You can’t make frequent updates, and have to slow down their release cycle. You have to support old versions. It becomes an operational nightmare. This, in turn, slows down the pace at which software is developed, updated, released, and improved. Everything becomes a quagmire.

As more and more firms in the capital markets (buyside, sellside, corporates, etc.) become comfortable putting more and more applications on the cloud, we’ll see the pace of software innovation exponentially increase. Fundamentally, having a cloud based solution not only helps you get to market faster, but also release, update, and innovate faster. You have one central version. You can update it centrally. You don’t have to worry about maintaining one hundred versions.

I genuinely believe this is an important shift, but one that many won’t notice. It’s one of those changes that happens below the surface, and people tend to only notice the symptoms, not the cause – and the symptoms are everywhere.

Two interesting articles caught my eye over the last few weeks. First, CME is partnering with Google Cloud to make all of its data more easily and readily available. Data feeds are staple of this industry, but cloud hosting provides the opportunity to make them more scalable and cost effective than ever before. Second, Microsoft is leveraging Azure to help broker-dealers comply with the new CAT regulation. Something as computationally intensive as the CAT (consolidated audit trail) will benefit enormously from the scalability of cloud based infrastructure.

There’s another interesting trend: while it might be new for capital markets, in every other vertical and industry there is an all out war between Google, Microsoft, and Amazon to win the cloud race. They all want to be the infrastructure provider of choice. It now feels like that race is coming to capital markets. I’ve been to several of our client’s technology events recently where they have outlined how they plan to leverage one or more of the various providers across their infrastructure. While Amazon (and AWS) have historically been out in front, you should expect the others to be very active over the coming years.

So, what does this mean? It means you should expect to see a rapidly increasing pace of change in the tools and technology available in this industry. You should expect to see tools and technologies enter the industry that were not economically feasible or practical in an on-prem only world. You should expect to see smarter and smarter tools, as vendors can now leverage centralized machine learning and AI, rather than the old siloed, distributed, and versioned solutions.

You should expect to see the pace of change only continue to accelerate – and you should know that one of the foundations of that acceleration is the adoption of the cloud. The pace of technological change is only going to increase as cloud adoption grows. Everyone should be prepared.

Blair Livingston
Street Contxt

Read the previous Capital Markets Fintech and Technology Trends commentaries:
Sep 27, 2019

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Brexit, MiFID II, and going public

Back when MiFID II was first being discussed as an extension of the original MiFID, and the implications were being considered, I was spending time with the CIO at one of the largest asset managers in the world ($500B+). We were talking about MiFID II, and I asked him for his thoughts. His response was one of the most unique I had heard in all my conversations: people were missing one of the biggest issues with the legislation; that it is written by the EU, and then implemented by the participant countries. He foresaw MiFID II potentially suffering from the same issues as tax law – that while it is written at the EU level, it would be implemented, lobbied, and arbitraged by each country to try and attract more of the financial services industry to their home state. Why wouldn’t France or Germany have a more relaxed implementation or interpretation if it meant attracting major firms, and their business, back to the relative financial hubs, and away from London?

Well, a few years in, and with Brexit on the horizon, it seems like his prediction is coming true. While everyone is focusing on the economic impact, I believe the biggest impact for those in the financial services industry might be regulatory. While part of the EU, the FCA has been one of the biggest advocates for a hard line MiFID II, including the unbundling of research costs and execution (in addition to the other roughly 1.4M paragraphs in the legislation). It seems that with Brexit on the horizon, the other financial centers of Europe (mainly Paris and Frankfurt) are now positioning to reduce or at least relax some of the MiFID II requirements, citing many concerns that have been raised (such as the decline of coverage and research available on small and mid cap companies). As recently as late August, the German government officially asked the EU to ease MiFID II rules. We’re seeing the same trend in France, with the AMF calling for a review of MiFID II several times over the last twelve months. If you’re running a major firm and thinking about where to headquarter your European operation, these trends will definitely be material. Expect to see more positioning ahead of the Brexit decision with the major European regulators jockeying to reduce or remove major elements of MiFID II in an attempt to attract the financial services industry to their related hubs. It took a long time to implement all the MiFID II rules – how long will it take to undo them? Seems, as they say, most things come full circle.

There’s another major issue to consider here. MiFID’s original aim was to “ensure appropriate levels of protection for investors and consumers of investment services across the [EU]”. Post financial crisis, they doubled down with MiFID II, massively expanding the scope and impact of the regulation. While there may be some self interest from the secondary financial centers of Europe looking to take the crown from the UK (nothing changes, does it?) there’s also a second, and more important issue manifesting itself here.

It’s well documented that companies are staying private longer. Regulators are looking to lighten the burden of going public on smaller companies in an effort to get those smaller companies going public earlier, which would open up new economic opportunities to all investors, not just those who have access to venture capital and private equity funds.  However, if new legislation means that only large companies are economical for brokerages to cover and engage, and thus a small company won’t get covered until it’s large, then how is that company expected to go public before it’s large? With that context, one could argue that MiFID II might be creating more issues than its solving, potentially saving investors some small amount of money by unbundling research payments, but in the same stroke, making it more and more difficult for small and medium sized companies to go public, limiting the number of attractive investments available to those same investors, and dampening their returns. So which costs the investor more money, bundled research payments, or missing out on the next Google because they can’t go public until the upside is mostly gone? As the British say, sometimes you can be penny wise and pound foolish.

That’s why I’m watching Brexit – for those two reasons. First, to see what happens to MiFID II, and the EU’s broader regulatory view, if the UK and the FCA are no longer part of the decision committee. Secondly, we’ll see how the knock on effects of the regulation play out – if regulators in the new EU are more interested in maintaining the regulatory status quo (with its potentially negative side effects), or more interested in supporting small and medium sized companies entrance into the public markets, and helping their citizens access a broader pool of investment opportunities.

Only time will tell.

PS want a really quick refresher on MiFID II and its history? There’s a great (and quick) summary here

In the coming weeks, we’ll continue to share our view on the Capital Markets Fintech, and Technology landscape. We hope to provide you with interesting perspectives and updates on new ways of thinking, new tools, and new approaches as the industry evolves. Please subscribe below to keep up to date.

Blair Livingston
Street Contxt

Read the previous Capital Markets Fintech and Technology Trends commentaries:

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Losing the IPO Grip?

We have the benefit of working with over 100 brokerages and investment banks in more than 20 countries around the world. We help them communicate with and cover more than 480,000 individual clients at 70,000 funds and corporates in 173 countries. That gives us a unique macro view into the changes impacting the broader industry, and how all the participants are evolving.

Quite often I get the question: “So Blair, from your viewpoint, how do you think the industry is going to change over the next 5 years?” I really enjoy answering that question – partly because I love the intellectual challenge, partly because I enjoy the abstract thinking, and partly because it’s impossible to be right or wrong – the future is unknown.

However, one of the things I’ve been thinking about more and more recently is the opposite, famously coined by Jeff Bezos of Amazon; answering the question “what won’t change over the 5 years?

So, what won’t change in the capital markets? To provide a few of my high level thoughts, in 5 years, I believe:

  • Companies will still need to raise money to finance new initiatives, get investors and employees liquidity, and take risks

  • Investors will still be looking to invest their capital to earn a return, across a whole spectrum of asset classes, with the benefit of economies of scale

  • Governments will continue to borrow money to finance spending and investments, locally and abroad

  • Those three groups (and the others that come with them) will still need to be educated, connected, and facilitated, which will either be done through humans, technology, or a combination thereof

  • All the parties of the capital ecosystem will be looking to hit a certain ROI/ROE target – which means that as long as revenue pressures remain, cost pressures will remain

One of the reasons I’ve been thinking about this in particular was a recent article in the FT by Michael Moritz from Sequoia. He wrote an opinion piece titled “Investment banks are losing their grip on IPOs”. To me, it feels a lot like he’s missing the forest from the trees. Let me elaborate.

I have no disagreement with the thrust of his thesis that the vanilla IPO might be changing, morphing, or evolving. The process largely hasn’t changed in the last few decades, which means the timing is long overdue. There have been some headline grabbing direct listings recently (Spotify, Slack) that people herald as an end to the role of investment banks in taking a company public. I see it a different way though. I believe we’re simply seeing the process adjust as the broader industry adjusts, but we’re not seeing any fundamental changes to the underlying needs that originally drove said process and industry. Put another way, 5 years from now, companies will still be going public for the above reasons (raising capital, providing liquidity, etc.) but it might just look different. It might not be ‘going public’ at all, but they will still need to satisfy certain needs. That doesn’t mean investment banks will or won’t be key players in the process – it just means the process may be different.

To give a parallel view back to the technology world, there are so many similar stories where the medium of delivery or the appearance of the solution changed, but the underlying need remained and was still serviced, albeit in a different way, with potentially different players. Look no further than the above example of Jeff Bezos and Amazon. Industry pundits predicted the death of retail with the arrival of e-commerce, but we temporarily forgot that people still need to buy things. In fact, with all its efforts in ‘cashier-less’ retail, Amazon is arguably now the leader in physical retail as well as digital. Different solution manifestation, but same need. Retail as we know it is changing, but retail as we know it isn’t dead.

For another example, recall Facebook’s challenges with switching to mobile. The dominant platform changed (desktop to mobile) and genuinely threatened Facebook’s dominance – and I’m sure someone wrote “Facebook’s losing its grip on the social network,” but they ended up adapting, recovering, and moving on to greater heights.

In the words of Mark Twain speaking for every investment banker, “my death has been greatly exaggerated”.

Now don’t get me wrong, there are also lots of examples where the solution shifts (while servicing the same need) and the incumbents don’t adjust. Look at those on the other end of the physical retail shift – Sears, Toys R Us, Barneys, etc. – who didn’t adjust, and never recovered. The need from their customers was still there, they just weren’t in a position to effectively or efficiently service it.

So while I agree with the thesis that IPOs, along with the entire capital markets industry, is in the midst of a massive change, I strongly push back on the corollary that because change is afoot, the incumbent investment banks are in their twilight years and at the end of their life. If anything, the experience of satisfying those needs over the last few hundred years put those existing firms in a good place to address those continued truths, and come up with new solutions to evolving problems, if they are willing to embrace change and lead it themselves.

The death of the Capital Markets, Investment Banks, and Investment Funds is, in my humble opinion, grossly exaggerated. While the next generation of solutions may end up being delivered by new firms, or the incumbents, the problems they address solve fundamental issues and needs in our society, and are unlikely to change anytime soon. In channeling Jeff Bezos, I believe those issues will be the same long into the foreseeable future, but how they are solved, and the solutions, will be continually changing – and it feels like a new race is starting.

The only question now is, who will get there first?

In the coming weeks, we’ll continue to share our view on the Capital Markets Fintech, and Technology landscape. We hope to provide you with interesting perspectives and updates on new ways of thinking, new tools, and new approaches as the industry evolves. Please subscribe below to keep up to date.

Blair Livingston
Street Contxt

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LSE and Refinitiv

Who said August was quiet? It seems to be as busy as ever, with some interesting headlines coming out over the last few weeks. One big headline a week or two ago (that I’m sure everyone saw) was LSE potentially merging with/buying Refinitiv (you can read about it here). From our perch in the industry, I find it interesting for a few reasons.

First, it’s obvious that every exchange player globally now sees the twilight years of execution ahead, and are looking to diversify their businesses. It’s not that there is no money to be made in trading – there is – it’s more that there isn’t a lot of room for expansion (in the traditional sense) and there are limits to the growth potential. The world of execution is already carved up, and the foundations of various competitors are solid and almost untouchable.

It feels to me like all the exchanges are now looking for other ‘marketplace’ opportunities in the industry. Other areas that they can leverage their existing domain expertise against, but don’t have the constraints that exist on the execution side of the business (such as geographical, regulatory, etc.). Look no further than the NASDAQ purchasing Quandl a few months ago. NASDAQ is looking to build the ‘marketplace’ of alternative data, and who better to acquire than the arguable leader in the space. The advantage Quandl has is that unlike a traditional exchange, they have no hard geographic boundaries. They can engage with providers and clients in Canada, the US, UK, China, etc. Nothing is beyond the scope of their potential growth. Also no one ‘owns’ the alternative data marketplace – meaning it’s anyone’s game at this point.

For another example, look at SGX investing in SmartKarma. They’re trying to leverage the partnership to differentiate and empower their listings business, but also extend their reach beyond Asia. It makes complete sense – otherwise they would be limited to the growth in their local market. This way they can strive towards a global strategy.

When I look at the LSE buying Refinitiv, it seems to be the same long term vision with a different strategy. Build out a new marketplace, and look for strategic synergies with their existing marketplace (the traditional exchange business). Refinitiv is an information marketplace. They have a data terminal business, but more importantly, they have a communication network. That communication network represents a social network, which is in its very essence an information marketplace. With the combination of the two, the LSE can expand its footprint well beyond where it is now, but also begin working on a competitive information marketplace to those that are out there already. Why wouldn’t they give every company that lists on the LSE a free Refinitive terminal? Why wouldn’t they give preferential pricing on Refinitiv terminals to brokerages that trade a certain amount of volume on the LSE? Why wouldn’t they put crucial LSE data only on Refinitiv, creating a clear competitive advantage? Cross service subsidization and marketing is nothing new, and certainly not new to the capital markets.

The Exchange industry feels a lot like continental Europe a couple hundred years ago – some very powerful nation states who had essentially carved up Western Europe. However, once one of them started sailing for new lands and new territories, it became a forced opt-in for the rest. It feels that way now with the exchanges. The development and electronification of execution has largely been achieved. Starting with the advent of the FIX protocol in 1992 (it’s actually an interesting quick history, that you can read here), up to this day, we’ve seen massive advancement and change. Now, they are setting their sights on new opportunities to build out the next generation of marketplaces, be that social, alternative data, information, or a combination thereof.

My gut says this starts a race that pulls in all the global exchange/infrastructure players:  ICE/NYSE/SGX and others. They all need to decide what new markets they are going after (and what new marketplaces they want to build) and how they are going to enter them (build vs. buy). All those marketplaces will interact with and engage with their existing businesses in different ways, and I look forward to seeing the pricing model shake up. It’s hard to remember that the ‘maker/taker’ model only came about when trading went electronic – we’ll see what new pricing structures emerge from this wave of innovation. While the old world of trading definitely feels like it’s been settled over the last 25+ years, there are a number of new worlds opening – largely on the ‘communication/client coverage/knowledge management/data management’ side of the business – and they are all up for grabs.

Exciting times ahead!

In the coming weeks, we’ll continue to share our view on the Capital Markets Fintech, and Technology landscape. We hope to provide you with interesting perspectives and updates on new ways of thinking, new tools, and new approaches as the industry evolves. Please subscribe below to keep up to date.

Blair Livingston
Street Contxt

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Capital Markets Fintech and Technology Trends – July 16, 2019

As we start Q3, it seems like the idea of a ‘quiet summer’ is now a thing of the past in capital markets. The industry keeps moving ahead at an accelerating pace, and getting more and more interesting. I feel privileged to have the position I do, and see these changes happening from a front row seat (and get the chance to share my 2 cents on what they mean!)

If you’ve read my past notes, back on June 14th I mentioned that we’re going to see more consolidation in capital markets technology. A lot of the ‘new models’ that were going to be enabled by MiFID II and other regulatory changes are now falling down. I specifically called out all the ‘independent research marketplaces’:

Recently, Liquidnet announced it purchased ResearchExchange from the UK. I expect we’re going to see a lot more acquihires in this space as some of the larger players look to take a swing at the marketplace model in a cheap way (I personally doubt they will see any more success, but we’ll see!)

Fundamentally, I just don’t think that’s how the buy side buys research – on an article by article, or page by page basis. Research is how you market the writer’s mind (for analyst access), and how you tell a company’s story (for banking and deals). Yes, there is value, but most of it is behind the report. That, plus you don’t know how valuable a report is going to be until after you read it – so how can you pay before?

Now, an interesting alternative model is emerging. For all of those who remember, there have been repeated attempts over the last 20+ years to drive “corporate sponsored research” – the idea is that a company can pay an independent firm to write research about them if they are under covered. The model never really took off (there were major concerns about conflicts of interest), but it’s paved the way for something else which has largely gone unnoticed but might just be starting to emerge: “exchange sponsored research”

Just last week, the Singapore Stock Exchange (SGX) announced a strategic investment in SmartKarma, one of the big ‘research marketplace’ players, but based in Asia. SK’s model is slightly different than the others out there – instead of being a marketplace for existing research providers, they went to the other end of the market – individual research providers. On a ‘Netflix style’ model (flat monthly fee) a subscriber gets access to most or all of the providers. Their monthly fee is then allocated based on their readership allocation.

Now don’t get me wrong, I think their fundamental business model is broken for a number of reasons (it’s not how the buy side buys, it creates a new destination (no one wants to leave Outlook), etc.) but it’s interesting to see that they’ve found someone who the model does work for: Exchanges.

Exchanges have been getting more and more aggressive about pursuing alternative revenue streams. They’ve already pushed hard into the corporate services – such as hosting their IR website, distributing quarterly releases, etc. (NASDAQ is a big player here). Now they’re starting to explore corporate access and event management (they already know the corporates). Now, it looks like they’re starting to explore research publishing and distribution. A quote from the article by SGX themselves:

Exchanges the world over are trying to diversify their services and exploring ways to bring more value to their companies.

Let me pose a final question: if a Brokerage provides research coverage as part of their banking services, is it that strange for an Exchange to provide research coverage as part of their listing services?

You can read the press release here:


Also, after we heard a lot about the buy side starting their own corporate access initiative (reported by the WSJ) it seems that some of the firms mentioned are trying to calm the waters. I look at it as the old baseball analogy of ‘trying to steal second with your foot on first’ – there’s a little bit of “yeah, we’re supporting this initiative to bring corporate access in house with our peers, but we also don’t want to be cut out of the sell side corporate access circuit” – the full quote from T Rowe specifically is:

‘Recent press reports have suggested that big investment firms, including T Rowe Price, plan to discontinue the long-standing practice of [using] Wall Street firms for access to companies in which we invest. In fact, T Rowe Price continues to find value in the access to corporate leaders that Wall Street has facilitated over many years.

‘To best meet our investors’ needs and better serve our clients, we are supplementing that practice by joining with other major asset management firms to plan separate corporate access events that will provide a unique and tailored research experience for our company’s investors. As a fundamental investment research firm, in-depth meetings with company management teams continue to be integral to our investment process and to our ability to make informed investment decisions on behalf of our clients.’

You can read the full article here: https://www.irmagazine.com/corporate-access/t-rowe-price-commits-using-banks-corporate-access

Lots of change is underway, and it looks like it’s going to be a busy summer!

In the coming weeks, we’ll continue to share our view on the Capital Markets Fintech, and Technology landscape. We hope to provide you with interesting perspectives and updates on new ways of thinking, new tools, and new approaches as the industry evolves. Please subscribe below to keep up to date.

Blair Livingston
Street Contxt

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Capital Markets Fintech and Technology Trends – June 28, 2019

Even though things might slow down for the summer, there still continues to be lots of interesting trends and themes either emerging or continuing to develop in the markets. There are two interesting ones that I’ve been keeping my eye on the last week or so – asset managers starting to replicate trends from the sell side (especially around tracking distribution) and the big corporate access story covered in the WSJ

The buy side adopts sell side tools for distribution and engagement tracking – one of the biggest trends we’ve seen over the past 6 months is the explosion of interest in distribution tracking and analytics on the buy side. Funds are looking to capture more data on what internal research consumption looks like as they make internal investments, and benchmark it to external providers. Additionally, they are also becoming more intelligent about engaging with and covering their external clients (such as RIAs). Over the last two months, I’ve been in with half a dozen global asset managers who are looking to bring the same tools the sell side uses into their own internal distribution and external sales organization. We’re also seeing this with hedge funds – they are starting to track engagement with monthly and quarterly performance reports, using the data to understand engagement from existing LPs, but also market to new LPs and allocators. Fundamentally all of the innovation in capital markets has largely been on the execution side of the business over the last 15-20 years. Now all market participants are looking to communication as the next big wave of innovation to drive margin and scale.

This technology adoption is well captured in the following article, which I’ll take an excerpt from:

“The system lets the asset manager track whether an investor has opened an e-mail or an attachment from the firm, visited the company’s website, or checked out the asset manager’s website, LinkedIn profile, or Twitter feed.”

Buy side hosting their own corporate access events? The story that has everyone talking this week was the WSJ article on funds jumping into the corporate access space.

“Fidelity Investments, Capital Group, Wellington Management, T. Rowe Price Group Inc. and Norway’s government fund are planning a series of private conferences where their analysts can meet CEOs, according to people familiar with the matter.”

A few of the global asset managers are launching a unified corporate access effort to try and source some of their own meetings. I have a few different thoughts on this – first, any consortium effort (whether sell side or buy side) is always really difficult to get going. It’s classic ‘innovator’s dilemma’: all of these initiatives are secondary priorities to the core business of the firm participating in the consortium, which means they can end up suffering from a lack of support, talent, and financing if not properly prioritized. While there have been a few notable successes, Wall Street is littered with firms backed by one or both sides of the Street who couldn’t get the momentum they needed to break out – building technology is hard. Second, I find it hard to believe that these firms can’t already get almost any meeting that they want (given their size and holdings) so I’m wondering what the goal of this initiative actually is (lowering costs being the clear hope, whether or not that materializes), and whether it creates more problems than it solves. That being said, organizing and hosting a full day conference is a major operational undertaking in and of itself, even if you have easy access to the corporates.


Third, aren’t these firms all competitors? That is going to prove to be a challenge on many levels. Who is going to organize the calendar and resolve conflicts or overbookings? Won’t that be a massive conflict of interest? Normally when that happens, brokerage hosts use the client value and economics as a tiebreaker, especially when there is a high value meeting or company attending (meetings go to the more valuable clients), but how will that work in this case? Additionally, once the calendar is organized, who manages that data? Where does it sit? My guess is there will need to be an arms length organization, because I can’t see any funds being comfortable with the corporate access team at another fund seeing all their calendars, and who’s meeting with who from their organization. These details will prove complicated, and more importantly, they will drive up the cost of the effort, which might end up challenging the main purpose of the initiative (to lower costs)

Ultimately my view is that this just shows the bar is being raised on the sell side to make sure that they are offering differentiated value to either their buy side clients or corporates clients when hosting corporate access related events. Firms need to use their unique position and view to augment the process, and differentiate themselves. This might mean providing the corporate with proactive intelligence around where they should be visiting, and who. It might mean getting smarter about making intelligent recommendations to funds based on past engagement about upcoming corporate meetings. Whatever it is, the sell side needs to figure out how they uniquely can engage and add value to both corporates and clients in the space if they want to stay relevant.


In the coming weeks, we’ll continue to share our view on the Capital Markets Fintech, and Technology landscape. We hope to provide you with interesting perspectives and updates on new ways of thinking, new tools, and new approaches as the industry evolves. Please subscribe below to keep up to date.

Blair Livingston
Street Contxt

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