The Insurgents: Fintechs Are Knocking Off Incumbents

Anthony Malakian says that in just the first two months of 2018, some big headlines are proving just how effective fintechs are at competing with the big players in the capital markets space.

David v Goliath 1

"This is a whole new world that we’re living in compared to the one I first encountered when I joined Waters almost nine years ago. It’s a market that will take a long time to shake out. "

You hear it all the time—fintechs are proving to be immensely disruptive to everyone from banks to asset managers to exchanges to stalwart technology providers.

If you look at the spate of acquisitions in 2018—most notably, Thomson Reuters spinning off its Technology & Risk unit to a consortium led by Blackstone, and Temenos making a play for Fidessa—it’s clear that these deals are, in part, occurring because the legacy giants in the capital markets space are struggling to remain agile enough to answer for changes in the market. The rate of evolution in the technology sector is dizzying and hoary institutions need to reexamine their business practices as a result in order to contend with more nimble fintech firms. How do you battle these firms? With economies of scale.

Even regulators are struggling with how best to oversee these insurgents. In fact, in mid-February, the UK Financial Conduct Authority (FCA) and the US Commodity Futures Trading Commission (CFTC) signed a cooperation agreement that will link the CFTC’s LabCFTC initiative with the FCA’s Project Innovate, allowing for the sharing of information and requests, referrals and mutual support between the two programs.

Quite frankly, the marketplace is rapidly changing. As a bank or as a massive tech company, do you want to go it alone and develop your own blockchain solution, or is it easier to simply invest in a fintech startup and retain some influence in the platform’s development? Do you want to hire the data engineers to build deep-learning systems, or is it easier to sign on a laser-focused fintech startup to handle the heavy lifting of trial and error?

Beating the Giants

Beyond the mergers and regulatory input we’ve seen in 2018, two other announcements have stood out for me that encapsulates this sea change that’s being driven by fintechs.

Last year, the International Swaps and Derivatives Association (Isda) put out a request-for-quote (RFQ) to build a digital version of its Common Domain Model, which the organization hopes will serve as “the bedrock of standards” upon which new technologies can be rolled out. About 15 companies entered proposals and, on February 15, Isda announced that it was going with fintech startup REGnosys to build the platform. 

I spoke with Ian Sloyan, director of market infrastructure and technology at Isda, about the selection, and while he said that he could not divulge the other companies that entered the competiton, he said the group was comprised of large professional service providers to smaller fintechs. 

There are a lot of players in the derivatives standards and operations world, including all of the exchanges and clearinghouses, post-trade giants like IHS Markit, the Depository Trust & Clearing Corp. (DTCC), NEX Group, and software specialists like Murex, Calypso, FIS and ION investment Group. I have no idea if any of those firms were involved in the RFQ process. What I do know is that while REGnosys has prestigious bloodlines—its cofounders are Goldman Sachs alums Lee Labeis and Pierre Lamy—its platform was only launched in the middle of last year. This is a crowded space and this fintech just won what could turn out to be a huge contract from Isda. 

Getting In

The other announcement that jumped out at me was high-frequency trading (HFT) firm Tradeworx’s January decision to spin off its trading business to focus solely on its fintech venture, renaming itself Thesys Group. The company’s subsidiary, Thesys Techonlogies—which was the technology arm of Tradeworx—is building the Consolidated Audit Trail (CAT), an industry-wide database of trade information and had already built the Securities and Exchange Commission’s Market Information Data and Analytics System (Midas). 

Granted, the company originally started out as a tech firm before becoming a trading house, but still let that sink in: One of the largest so-called Flash Boys has made the decision that the real gold lies in the world of fintech rather than building microwave towers that stretch from Chicago to New York. This is a whole new world that we’re living in compared to the one I first encountered when I joined Waters almost nine years ago. It’s a market that will take a long time to shake out. 

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