Waters Wrap: Blockchain is Still Overhyped (And Ion/Broadway Thoughts & the Consulting Boom)

In 2016, Anthony wrote that the blockchain revolution was overhyped—unsurprisingly, his opinions have not changed. He also delves into the Ion-Broadway deal, and looks at new consulting/advisory firms that have recently come to market.

If you’re tired of reading my opinions, perhaps you might enjoy reading the thoughts of the three other editors on WatersTechnology. First up, Wei-Shen Wong thinks about how the battle for supremacy in AI will evolve in the near future, and what the implications of China’s advances in the field might mean for Wall Street technology. Next, Jo Wright says that even if the Gaia-X project fails to get off the ground, it marks a big step in Europe’s effort to achieve digital sovereignty. And finally, Max Bowie finds that between growing pains and automation adulthood, data notifications are going through an awkward adolescence.

If you haven’t tired of these Waters Weekly Wrap columns, then read on.

Blocking the Chain

You know I’m slipping because I missed a chance to shit on blockchain in my last column. Reb Natale says I could’ve been distracted because Mercury was in retrograde last week. I don’t have a clue what that means, but if I can use it as an excuse, Mercury in retrograde has done short-circuited my dumb Virgo brain. Fortunately, I’m the editor of this publication, so I can write about whatever I like and no one can really say anything about it to me.

Anyway, on November 2, Wei-Shen listened in to a virtual event from Hong Kong where Charles Li, CEO of Hong Kong Exchanges and Clearing (HKEx), and Adena Friedman, president and CEO of Nasdaq, talked about an array of topics, including the ultimate hammer-looking-for-a-nail, blockchain.

Friedman said that the potential for blockchain to disrupt the exchange market was “a bit of an overstatement,” and Li agreed. Friedman also hinted at the Australian Securities Exchange (ASX) as a prime example as to why blockchain has been slow to develop in the exchange world. First, a very truncated version of the ASX’s entrance into the world of distributed ledgers: In 2017, the ASX gave the greenlight to replace its equities clearing and settlement platform with a blockchain platform developed by Digital Asset Holdings. The go-live for the revamped platform has been pushed back from 2020 to 2021, then to 2022, and, now, to April 2023.

Got it? Great. So here’s what Friedman had to say: “There are all these offline systems that record all of the information back into the banks’ and asset managers’ systems. You have to bring that full ecosystem along in order for the blockchain to really make that change. That is a long journey, as we’ve seen in Australia. It takes a long time to change from traditional technologies to something new, and at the same time you have to say, ‘Well, what is the benefit that the end-users are getting?’”

Li said that in the capital markets, exchanges need to make sure the entire community gets on board with a dramatic technological shift, and that “you can’t really force everybody to change overnight.”

He also had a pretty badass way of describing trading firms and exchanges: “I used to say that an exchange is like a pack of wolves moving in snowy mountains. The stronger guys [market participants] are at the front, and the exchange is the strong wolf at the very end, because we have to move the slower members along. We can’t just abandon them in the field.”

Listen, I’m not saying that there aren’t use-cases for blockchain, but many in the industry have come to realize that the benefits of this technology have been wildly exaggerated. In October 2016, I wrote a feature headlined, “The Blockchain Revolution Has Been Overhyped”. In 2018, we published a follow-up feature detailing blockchain projects that have sputtered to get off the ground. It’s a topic I’ve continued to hit on. (And, yes, we’re using DLT and blockchain interchangeably…deal with it.)

I’ve never built a blockchain, so it’s important to understand that the reason I’m harsh towards blockchain projects is because I’m talking all the time with bank, asset manager, and exchange technologists who say to me that firms are dumping money into these projects, and now there’s a fear to cut bait, because their jobs could be cut, as well. So they plow ahead.

In a recent episode of the Waters Wavelength Podcast, Bill Murphy, Blackstone’s longtime CTO who left the private-equity firm this past March, had this to say: “It’s a solution searching for a problem. I think we will continue to see lots of noise, but no real results from blockchain. … The only reason you need blockchain is when you have truly anonymous transactions that need to be trusted in a way that can enable that. There aren’t that many of those use cases in the world.”

When you have people like Murphy, Friedman, and Li—and numerous others in this publication and others—putting their names to these opinions, I simply cannot peddle in the blockchain hype machine. With that said, we will have an article with one investment firm that is not only still high on blockchain, but has actually created tools built on blockchain technology that are live and functional. Again, blockchain is just a tool—and in some cases in the capital markets, a useful tool—but its scope is limited. A revolution, it is not. (I look forward to this graph being in an article five years from now after blockchain has become the new internet, thus showing just how pompous I am.)

The Power of Complaint

Back to news from this past week. On the 11th, the UK Competition and Markets Authority (CMA) approved the controversial merger of Ion Investment Group and Broadway Technologies on the proviso that Ion sells Broadway’s fixed-income business, including the underlying software and brand, to a consortium led by Broadway chief executive, Tyler Moeller.

When the deal was initially announced, red flags were raised. Broadway had actually been winning over former clients of Ion, including Barclays and Nomura, prior to the deal. In many ways, Ion’s reputation precedes it. Last year, we wrote about how a group of European and UK banks is considering building its own fixed-income trading software, in a move that could allow members to cut ties with Ion. Similar to the Broadway/fixed-income tie-up, end-users were worried last year after Ion bought Allegro Development, the last major independent provider of commodity trading and risk management (CTRM) software.

And people aren’t worried about Ion just because of the monopoly implications laid out by the CMA, there are also legitimate concerns over the quality of the acquired product after Ion instills its budgetary plans post-acquisition. As Reb Natale laid out in great detail last year, Fidessa experienced an exodus of talent in the year after Ion acquired the trading platform provider, which led to slippage in standards and worries over “ugly” contract negotiations by users.

So here we are: the CMA has stripped Ion of Broadway’s fixed-income component, and everyone should be happy, right? Well, not so fast…and here’s where I’m going to take the side of Ion.

Also in Europe, the European Commission is reviewing the London Stock Exchange Group’s acquisition of Refinitiv. After concerns were raised, the LSEG agreed to sell Borsa Italiana Group to a group led by Euronext so as to quell the concerns of the EC.

It’s important that regulators maintain a fair and competitive marketplace—yes—but could these recent examples of regulatory-driven scale-backs scare off M&A in Europe in the future? What’s the point of going through a time-consuming negotiation/due-diligence process, and then the internal and external distraction that arises after the announcement, if it means that what you initially bought is going to be stripped down to appease market participant concerns?

Maybe I’m a free-market zealot, but throughout time, the universe of trading platform providers has expanded and contracted—it’s the natural order of the market. What has changed today, compared to two decades ago, is that the ability to create and distribute new tools has vastly improved thanks to—WAIT FOR IT!—cloud adoption, API development, and the expansion of open-source tools. (And you thought I wouldn’t mention that thesis this week…sucker!)

In July, the CMA said Ion’s only significant rivals were Broadway and Bloomberg, though AxeTrading, SmartTrade, and TransFicc provided tools in the space. Doesn’t this opportunity present an opportunity for those contenders? And if they can’t fill the void, is it not possible for some savvy engineers, developers, and senior technologists to come together to create something new and improved?

Hell, just a decade ago, it would’ve been incredibly difficult to build a rival to Broadway—much less Ion—in a short period of time, but the barriers to entry are coming down. For example, regardless of what you think of Symphony’s long-term prospects, in a relatively short period of time that company has rapidly expanded thanks to the support of the sell side (we’ll see if the buy side buys in in the future). And the desktop app interoperability community—regular readers of this column knew THAT was coming—are helping banks to create bespoke platforms to fit their specific needs.

I get it, it’s tough to change platforms—but it’s getting easier. To me, even if I may think that Broadway users will not benefit from Ion’s new involvement—that’s just my gut opinion, which is based on the previous experiences of users that we’ve written about—I also feel like Ion got squeezed here just so that the competition regulator can feel like it did its part in the M&A process.

Does the CMA’s decision have a long-term effect, I obviously have no clue? These are just the ramblings of a fintech hack. But I’d be interested to hear your thoughts: [email protected].

It’s Consulting Szn!

Let’s end with some more reckless speculation.

This past week, Jo Wright spoke with Chris Childs, managing director and head of repository and derivatives services at the Depository Trust & Clearing Corporation, and CEO and president of DTCC DerivSERV. The market infrastructure provider announced it was launching a new advisory business in October and, as Jo reports, the DTCC has begun its first client engagement, which is working with an unnamed broker-dealer on building a control function to set standards and measure the accuracy of the firm’s regulatory reporting.

The DTCC decided to enter into the consultancy space because it felt it could provide market participants with insights—for a price!—into post-trade operations, including infrastructure diagnostics, operational model design, and identifying benchmarks.

It makes sense—this is what they specialize in, and every company in the world is under extreme pressure to find new ways to monetize what they specialize in…ain’t nuthin’ wrong with that. What I find interesting is the sheer number of new consulting (or advisory) companies entering into the market in the last year.

Now, this is just anecdotal and I haven’t done any actual research into this—hashtag journalism—but it feels like there are a lot of capital markets tech and market data specific consultancies emerging during the pandemic. Below is a quick list that jumped to my mind as I wrote this. I know I’m missing some, so feel free to hit me up and let me know of other interesting consulting services that have come to market.

  • Flashing back to Fidessa, two former employees of the trading platform provider have entered the consulting space, one creating his own company, the other joining an established company. Both are working with Glue42 in the interop space.
     
  • Veteran analyst Virginie O’Shea has started a new business that focuses—to start—on the ‘soul-destroying’ realm of corporate actions, which is weighed down by inefficiencies, manual processes, and lack of standards.
     
  • Alex Wolcough, former director of technology consultancy Appsbroker Fintech, has set up a new advisory firm, GreenBirch Group, which aims to help financial firms apply cloud computing to managing third-party databases and commercializing proprietary datasets.
     
  • Kees Brooimans and Peter Fruitema, founders of Screen Consultants and the InfoMatch data inventory management software platform, have left TRG Screen to establish MDP (Market Data Professionals) Search, a recruitment agency specializing in sourcing market data experts.
     
  • Chris Petrescu, a former data strategy executive at ExodusPoint and WorldQuant, has set up a data strategy advisory firm to help data startups target their offerings at financial firms, and to help hedge funds implement strategies around data sourcing and management.
     
  • Mike Kirby, a 35-year veteran of the broker-data world, has set up MWK Data Services, a consultancy aimed at helping startup and growth-stage brokerages create licensing structures around the price data generated from their brokerage operations.
     
  • TickSmith and Alqami have partnered to help creators of alternative data monetize their content directly to financial services firms.

The image at the top of the page is Albert Pinkham Ryder’s “The Race Track (Death on a Pale Horse)” courtesy of the Cleveland Museum of Art. 

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