Capital Markets Fintech and Technology Trends – Aug 20, 2019

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
CEO
Street Contxt


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Capital Markets Fintech and Technology Trends – Aug 9, 2019

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
CEO
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:

https://finance.yahoo.com/news/smartkarma-announces-strategic-investment-sgx-003000064.html

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
CEO
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.

https://www.wsj.com/articles/giant-investors-are-coming-after-one-of-wall-streets-cash-cows-11561555988

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
CEO
Street Contxt


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Capital Markets Fintech and Technology Trends – June 14, 2019

As you may know and appreciate, because of our position in the ecosystem we have a great seat in seeing how technology is impacting and changing the capital markets. We see how it’s changing the sell side – especially around distribution, personalization, research creation, sales, and client coverage. We see how it’s changing the buy side – as it relates to content and product access, broker voting, thesis creation, collaboration, and other pain points. We also see the pain points around asset manager distribution – whether related to IA marketing and sales, or LP prospecting and updates. We also see corporates, PE/VC funds, other software providers, and all other market players. We get a front row seat to observe (and hopefully contribute to) the major changes driving the industry forward. This should give you some interesting perspectives and updates on new ways of thinking, new tools, and new approaches as the industry evolves. With that in mind, let me begin:

What is the future of corporate access? Probably not a marketplace. Joining a crowded space, a new company called InterAxS is the latest entrant to the corporate access market (which already has at least a half dozen players). The approach companies are taking in this space feels very similar to the research market place space – a kind of “build it and they will come.” I’ve talked to a lot of companies in this space (corporate access marketplaces), and almost all of them are struggling from an event liquidity perspective, and those that are actually able to get some event traction then struggle from an economic perspective. It’s a hard business to do on it’s own. It makes me think of Roboadvisors on the investment management side – are they a stand alone product, or a feature of a larger product? Like we’ve seen for Roboadvisors, corporate access also feels like it’s more of a feature. My guess is we’re going to see some consolidation in this space over the next 12 months.
https://www.businesswire.com/news/home/20190523005298/en/InterAxS-Global-Longtime-Corporate-Access-Duo-Shakeup

How to cover private equity clients? One of the biggest continued trends we’ve seen is the emergence of private equity clients as a powerhouse, as more capital looks for private or control deals. Now we’re seeing that the line between hedge funds and PE funds is blurring. Business Insider had a great article on the talent war that is growing, which really captures the essence of their collision course. From the PE firms we’ve been working with, we hear more and more that they want an easy (read: not cumbersome) way to access research and commentary, and also analyst/expert time. They’re willing to pay, but are lower frequency. How this fits into the evolving sales model will be important as this client segment becomes more and more valuable. Additionally, we’re seeing more and more PE funds look to create centralized collaboration platforms, where they can share deals, ideas, commentary, research, and other materials, and also build and manage investment theses. This is done quite primitively right now.
https://www.businessinsider.com/hedge-funds-and-private-equity-battling-over-each-others-talent-2019-6

The Fintech herd is thinning – we’re going to see a lot of consolidation over the next 12 months. MiFID II was a big catalyst for change, or at least, was supposed to be a big catalyst for change. A lot of companies that were started over the last 3-5 years based their core assumptions around the fact that MiFID II would change market structure and behaviours. Perhaps it has, but not anywhere near the degree that people thought it would. Now we’re going to see a lot of consolidation in those companies. I spent a lot of time with research providers – from bulge bracket firms, down to independents, from all over the world. I can tell you that not a single one has ever told me “I’m making a lot of my revenue from [insert marketplace].” As it turns out, in order to get someone to buy something, you usually have to reach out and sell it to them. Recently, Liquidnet announced it purchased Research Exchange 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!)

Liquidnet buys Research Exchange:
https://www.pehub.com/2019/05/liquidnet-buys-rsrchxchange/

Liquidnet buys Prattle:
https://www.financemagnates.com/institutional-forex/technology/institutional-trading-network-liquidnet-acquires-prattle/

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
CEO
Street Contxt


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