Anthony Malakian: As Blockchain Builds, the Buy Side Watches … and Waits

In today’s world, it’s impossible to host a financial technology conference without having at least one panel covering blockchain and distributed-ledger technology. The topic elicits both eye rolls (I’m already so bored of this subject!) and gentle nods (I still don’t really know what this blockchain thing is, but some really smart people seem to be throwing their weight behind it, which means it must be important).

This year’s North American Trading Architecture Summit (NATAS), held last month in Manhattan, was no different. We had a panel dedicated to distributed ledgers and then during our Champagne roundtables at the end of the conference, the blockchain table was totally filled.

Unfortunately, I did not have the opportunity to listen in on the blockchain panel discussion, as I was moderating a fixed-income panel at the same time. I find the latter vastly more interesting than this new, yet heavily hyped, technology. But here’s the thing: Right now there are real problems with real solutions and real questions unfolding in the fixed-income space. We’ve written about them extensively in these pages. My colleague John Brazier wrote a two-part feature on the subject, I wrote a feature on fixed-income exchange-traded funds (ETFs), and we’ve run numerous other articles tackling protocols and electronic trading platforms. Trust me, we’ll be writing a lot about fixed income in the future.

But for this small space, I’m going to dedicate some more opinion to the topic of blockchain, since right now it’s mainly a subject of theory. Once real solutions start being rolled out, more deep analysis pieces can be rolled out, too.

Still a Mystery

Blockchain has a long way to go and for the time being at least, the buy side will sit on the sidelines.

As I stated, I didn’t get to attend the panel discussion and the Champagne roundtables are off-limits to the reporters, because they’re supposed to be “safe zones” for delegates to talk freely about their struggles. But, because I chaired the event and my beard has grown to fairly epic proportions, I’m easily recognizable and numerous attendees came up to me to discuss what they’re hearing. The most interesting comment came from a CIO of a large asset manager, who said that he sat in on the blockchain discussion. When I asked him what he thought, he said: “Well, I didn’t really understand blockchain at all, but after that panel, I think I’m halfway there.”

This was a relief to me. This guy is one of the smarter people in the business, as far as I’m concerned, and even he was a bit lost as to why there’s so much investment being committed to the space. We appear to be in a state of irrational exuberance with blockchain, right now. Every major bank is trying to figure out ways to attach their names to the subject, whether through their innovation labs, incubators, or by throwing their support behind a consortium like R3, which won the most promising startup and the best overall sell-side product categories at this year’s Sell-Side Technology Awards. While R3 doesn’t have a single product, per se, they are working with dozens of banks to help them develop distributed ledgers. Like blockchain, it’s exciting, but it’s early days. 

Still Looking In

The buy side, on the other hand, is still mostly playing a game of wait and see, which is logical. There’s no need to take the lead, when they will simply be users of the technology, rather than the actual providers. Once solutions start emerging, then asset managers can decide if these solutions can be repurposed for fund management-specific needs. But even as the buy side plays a waiting game, any winning solution will eventually have to win the buy side’s support. Take a look at fixed income for proof. There are still liquidity constraints, and, as a result, there are approximately 20 new platforms that have sprung up in the market. Single-dealer platforms are nearing extinction, as the buy side is increasingly throwing its weight behind all-to-all venues.

Blockchain has a long way to go and for the time being at least, the buy side will sit on the sidelines. But that will eventually change, which will introduce new demands for this new sector of innovation.