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Fintech Capital Magazine #4


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Fintech Capital Magazine #4

  1. 1. LONDON’S FINTECH LEADERS TALK INVESTORS, START-UPS, COMMUNITIES & NEW FINTECH, TRADING TECHNOLOGY, ETRM/CTRM, BIG DATA AND OUTSOURCING VS INSOURCING INCLUDING FEATURES FROM TOBY BABB, NADIA EDWARDS-DASHTI, ANTONIO CIARLEGLIO, TOM KEMP, ANDREW THOMAS AND ALEX ODWELL GLOBAL LEADERS IN FINANCIAL SERVICES AND COMMODITIES TECHNOLOGY RECRUITMENT EVEN MORE of the Most Innovative Names In FinTech Speak Out! | Xignite | The Real Asset Co | The Financial Services Club | | Innovate Finance | Pharos Global | FixSpec | Panaseer | Lakestar | Bankable | | Wragge Lawrence Graham & Co | Caplin Systems | Nanospeed | eCo | | Digiterre | Artaois Ltd | Factum Ltd | Planlogic | CTRM Force | | Commodity Technology Advisory LLC | OpenLink | DataGenic | Corvil | | Man Investments | Global Reach Partners | ClusterSeven | | ETF Securities (UK) Ltd | Teknometry | Citisoft Plc | X Open Hub | THE FINTECH CAPITAL FOURTH EDITION
  2. 2. +44 (0)113 347 1320 Investment Anlaysis On Demand Anywhere. Anytime.
  3. 3. 3 > E ARE DELIGHTED TO HAVE SHOWCASED OVER a hundred of the leading, most disruptive and exciting brands in UK FinTech in these pages over the last twelve months, all of whom have shared their knowledge and insight in some exceptional articles. It has been a privilege to have helped give an audience to these inspiring thought leaders and we look forward to hearing more from them and many others in the New Year. Our vision on starting The FinTech Capital Magazine was to share with the community exactly why the UK was leading the global FinTech race. We wanted to create a platform to share with our community some of the outstanding thinking from companies and individuals in the growing FinTech scene. Over the last twelve months we are thrilled to have seen so many of the companies that we have featured stretch on to even bigger and better things. LMAX, for example won the prestigious Techtrack 100, Algomi capped an exceptional year winning the “Most Innovative Trading Product/Service” at the Financial News Awards in Trading and Technology, and Fidessa won the “Best Sell-Side Trading System of the Year” at the FOW Awards for Asia. There are too many other winners to name in a single paragraph! Indeed it has seemed that almost all those featured have thrived in 2014 with reports of growth both in profit and headcount, and numerous business wins both home and abroad. Aswelookaheadto2015,thereseemstobeaneverincreasing appetite for UK FinTech and we predict an even stronger Toby Babb Managing Director, Harrington Starr W Welcome to the FOURTH EDITION OF FINTECH CAPITALand the final issue of 2014 the
  4. 4. 4 > surge in businesses situated in the space. The Tier 1 banks are circling and there have been mandates for senior executives to investigate how they can follow in the footsteps of Barclays excellent Techstars programme. One of the big questions that remains is “are Financial Services companies ready for the FinTech revolution?” Indeed one could also ask whether some of the FinTech start-ups are being too innovative and really thinking about how to pitch and gain traction for their product or services. 2014 has seen many companies with outstanding products with clear cost reducing or efficiency gains yet to take off because they are failing to gain the necessary credibility from the banks themselves. Are they really answering a necessary problem? Have they got a clear and efficient pitch? On the other side, are banks still being too conservative? Will that cost them dear as the age of cloud, payments, P2P, crowd funding, social and mobile threatens to eat their dinner? 2015 will need to see an “entente cordiale” between the disruptors and the banks for the whole FinTech movement in the UK to really reach another level. As mentioned in FTC3, the UK has been set up with a genuine trading advantage for FinTech with strong government support, geographical advantage and access to talent, so innovative and entrepreneurial thinking is required. For both parties to fully capitalise on the opportunity, the banks, under ever increasing pressure not to be innovative with mounting pressure around regulation and cost reduction, need to set up opportunities to invest and trust either the products themselves that can make a difference or back the companies who are looking to chance the face of finance with investment. Encouraging moves are starting to happen in this space with C level staff being mandated across the industry to investigate. The results could and should see a genuine boom for both the SME and start-ups in the space but again, the brilliant technologists who are pushing the boundaries will need to be more commercial in their thinking. Often we see great ideas scuppered owing to a technology mind-set failing to translate appropriately to a business one. Technologists have a natural tendency to over complicate and clarity is essential in pitching. Those who are able to marry clear business benefit alongside deep technical credibility (the aforementioned Algomi is a prime example of how well this can work) will undoubtedly be the ones that thrive. The make-up of the founding team therefore becomes so important. This is THE key factor that investors, angels and VCs look at when making their choices on who to back and potential buyers will be thinking precisely the same way. Great product or not, the commercial strength of the team itself will be the best predictor for future success. OURVISIONONSTARTING THE FINTECH CAPITAL MAGAZINE WASTOSHAREWITHTHECOMMUNITY EXACTLYWHYTHEUK WASLEADINGTHEGLOBAL FINTECHRACE
  5. 5. 5 The UK is ready for a FinTech revolution. If the banks continue to recognise the opportunity by becoming slightly less conservative in their thinking and the providers tweak their go to market strategy, we could be about to witness something truly game changing. With this in mind, we are delighted to be involved in the launch of a new communityinFebruary2015.WehaveteamedupwithLondonLovesBusiness. com, The Realization Group, Adaptive Consulting, The Test People and Cake Solutions to launch “The FinTech Influencers.” This will be an exclusive, free, invitation only group who will meet quarterly to debate the key areas to drive and support FinTech change. More details will follow but the goal will be to drive UK Innovation and Growth by connecting the most influential players in start-ups, disruptors, providers and end users, and creating a manifesto for positive change in the industry. Keep an eye on @FTInfluencers on Twitter for further details in the coming weeks. With this level of change afoot, the incredible infrastructure of communities, incubators and accelerators will play a bigger and bigger part. There is government backed Innovate Finance feature in the pages that follow, we have featured both Eddie George’s LondonNewFinance Group and the exceptional work that Erik Van der Kleij and the team are doing with L39 in Canary Wharf in our sister publication “The Trading Technologist”, not to mention the aforementioned Techstars, Tech City et al. These movements are helping connect, educate and promote the brightest and best in the industry and that creates an exceptional grounding for success. An exciting time for UK FinTech. Thanks to all of those who have contributed this year and we are delighted to have seen this publication grow so well throughout the year. We hope that you enjoy the read. Toby Toby Babb Managing Director, Harrington Starr
  6. 6. 6 StephaneDubois–Xignite JanSkoyles–TheRealAssetCo ChrisSkinner–TheFinancialServicesClub ClaireCockerton–InnovateFinance PeterJohn–PharosGlobal ChrisLees–FixSpec NikWhitfield–Panaseer ManuGupta–Lakestar EricMouilleron–Bankable RichardGoold–WraggeLawrenceGraham&Co PatrickMyles–CaplinSystems NadiaEdwards–Dashti–HarringtonStarr C O N T E N T S 0 1 0 0 1 4 0 1 6 0 1 8 0 2 0 0 2 2 0 2 6 0 2 8 0 3 0 0 3 4 0 3 6 0 3 8 INVESTORS, START-UPS, COMMUNITIES & NEW FINTECH009
  7. 7. 7 C O N T E N T S( ) 0 4 4 0 4 6 0 4 9 0 5 2 0 5 6 0 6 0 0 6 2 0 6 4 0 6 6 0 6 8 0 7 1 0 7 4 TRADING TECHNOLOGY ETRM/CTRM SanjayShah–Nanospeed IanGreen–eCo AntonioCiarleglio–HarringtonStarr MartinCheesbrough–Digiterre TomKemp–HarringtonStarr EdwardStock–ArtaoisLtd AndrewdeBray–FactumLtd RichardKidd–Planlogic AndrewThomas–HarringtonStarr LudwigClement–CTRMForce DrGaryM.Vasey&PatrickReames -CommodityTechnologyAdvisory JulianEyre–OpenLink 043 059
  8. 8. 8 C O N T E N T S( ) 0 7 8 0 8 2 0 8 4 0 8 6 0 8 8 0 9 0 0 9 2 0 9 5 0 9 8 1 0 0 1 0 2 BIG DATA OUTSOURCING VS INSOURCING EricFishhaut–DataGenic PeterRobertshaw–Independent VanDiamandakis–Corvil GaryCollier&DennisPilsworth–ManInvestments RichardChunn–GlobalReachPartners RalphBaxter–ClusterSeven ManujSarpal–ETFSecurities(UK)Ltd MickBrant–Teknometry CosmoWisniewski–CitisoftPlc AlexOdwell–HarringtonStarr MalikKhan–XOpenHub 077 094
  9. 9. 9 INVESTORS,START-UPS, COMMUNITIES& NEWFINTECH StephaneDubois–Xignite JanSkoyles–TheRealAssetCo ChrisSkinner–TheFinancialServicesClub ClaireCockerton–InnovateFinance PeterJohn–PharosGlobal ChrisLees–FixSpec NikWhitfield–Panaseer ManuGupta–Lakestar EricMouilleron–Bankable RichardGoold–WraggeLawrenceGraham&Co PatrickMyles–CaplinSystems NadiaEdwards–Dashti–HarringtonStarr
  10. 10. 1 0 > HE SCENE OCCURS AT A SAN FRANCISCO HIPSTER BAR IN LATE 2014. She asks “And what do you do during the day?” He calmly says while tucking his plaid shirt in and rubbing his fully-grown beard “I work in a fintech startup”. “Me too“, she replies giggling. “Are you in payments or digital wealth management?” The story draws a smile. Of course two years ago, few millennials in San Francisco knew what Fintech (e.g. financial technology) was. And now they all see it as their ticket to fame and fortune-via-IPO. Move over social networks and micro-blogging, the next innovation frontier lies at the crossroad of Wall Street and Silicon Valley*. Just in the month of October 2014, Fintech companies in the US have raised more than $1B, including the $75M IPO of valley-veteran Yodlee, the $64M raised by digital wealth management FinTech poster-child Wealthfront or the $150M raised by payment darling Square. The capital flows and the hefty valuations don’t lie: Fintech is on fire. And that fire is not only burning in the US as fintech ecosystems are flaring up in Singapore, London, Frankfurt and Paris and many other technology centers in the world. It was not always like this. If you tried to raise money in fintech during the years that followed the fall of Lehman Brothers, most Venture Capital and Private Equity firms would have gently pushed you out the curb with a polite “We are not investing in fintech right now”. Now money is gushing out of their funds faster than their fledgling startups can spend it and they are briskly updating their web sites to make you believe they were in fintech all along. So what has changed since the doom-days of finance? The first change is economical: The markets are back in the saddle. As a proof, the Dow Industrial has broken its all-time record high 79 times in 2013 and 2014 alone and it closed on October 13, 2014 at its highest value in history. As a rising tide lifts all boats, the bubbling markets have boosted financial services and yanked financial technology in their trail. One thing that stands out in the growth of the markets is the meteoric growth of Exchange Traded Funds (ETFs)—which has exceeded every other asset class since their inception 20 years ago. Assets in ETFs now exceed three trillion dollars. Their inherent ease of use (as they provide the passive investment convenience STEPHANE DUBOIS Xignite W H A T ’ S F U E L L I N G T H E FINTECH FIRE? T
  11. 11. 1 1 > STEPHANE DUBOIS Xignite of mutual funds with the ease of trading previously only found in equities) could certainly explain some of the rebirth in the markets. In any case finance is hot again. God bless America. The second change is technological: It’s been almost 20 years since the Internet revolution began on August 9th, 1995 (the day of the Netscape IPO if you wonder) and technology has matured tremendously in many areas. Those concurrent evolutions have combined to create a cradle of innovation which is fueling the Fintech Fire: ■ The scaling of the public cloud (aka Amazon Web Services) which not only lets startups rev up on a dime but also confers them a significant long term cost structure advantage. ■ The maturing of app development via open source, re-usability and tools which has reduced costs and timelines to hours or days. Imagine holding a weekend-long hackathon in 1992, it just would not have worked. ■ The coming of age of social networking and search engine optimization (SEO) that have automated go to market strategies and slashed customer acquisition costs. With social contacts, adoption can go viral. Virality was not conceivable 10 years ago. It is not even a valid word in my spell-checker. ■ The dawn of APIs (whether used for trading via FIX or for market data consumption as with my company Xignite) which enables true end-to-end automation of processes that used to be complex and human-intensive. 15 years ago—without easy trading, market data, and account funding APIs—digital wealth management companies like Wealthfront, Personal Capital or Betterment could not have existed. These waves are hitting financial service institutions like a high speed train. Most of them have had their heads buried in the sand focused on regulation and cost savings since the days of that infamous Lehman Brothers bankruptcy. Wall Street is now petrified that Silicon Valley is about to eat its lunch and it is scrambling to catch up. But once you see that most large banks still twitch when one whispers the word cloud, you realize that the technology and cost advantage of the fintech revolutionaries is significant indeed. God bless APIs. The third change is social. It has to do with a generational replacement of a population that has grown up with the internet, surrounded by mobile devices, and used to instant gratification and levels of ease-of- use never experienced by humanity before. That generation could not care less about traditional investment and advice models. They would not think twice about banking with Google, Starbucks or Facebook if it were available. They are not worried about security on the Internet and the last thing they want is to have to talk with someone to get anything done. They are ready to use Siri to place a trade and expect an investment account to open and fund instantly. •• “THE MARKETS ARE BACK IN THE SADDLE. AS A PROOF, THE DOW INDUSTRIAL HAS BROKEN ITS ALL-TIME RECORD HIGH 79 TIMES IN 2013 AND 2014 ALONE AND IT CLOSED ON OCTOBER 13, 2014 AT ITS HIGHEST VALUE IN HISTORY.” ••
  12. 12. 1 2 According to a survey conducted by e*Trade, what the majority (72%) of millennials want is a financial advisor like R2-D2— “a copilot with diverse skills who helps you when you need it and offer a variety of tools you can use yourself”. Only 28% of them are looking for a friend like C-3PO, i.e. “a constant companion focused on your money who will always tell you what to do”. If you are betting that Millennials will reverse their habits to that of their parents once they hit 40, you may lose. One may look at the mortgage crisis and think that because of it, financial services will never be the same. But the impact of the financial mortgage crisis is negligible compared to that millennials will have on the industry as they grow up. God bless our children. So what is fueling the Fintech Fire is three deep-seated technological, social and economical transformations that are catalyzing to create an innovation bonanza that is turning the industry upside down. Of the three, only the first one is cyclical. And even if a bear market could put a cold shower on the whole phenomenon, the lasting characteristics of the two other trends allow us to safely predict that financial services and financial technology will never be the same. * Technically a bit north of that since Wall Street is now lined-up with condos and neglected for hip neighborhoods uptown by New York startups and since Silicon Valley has been displaced by San Francisco as the startup capital of the world. STEPHANE DUBOIS Xignite
  13. 13. The Pharos Lighthouse changed the lives of ancient explorers, guiding them to safety. In 2015, Pharos Global Solutions will help to guide the development of Sharia investment. TO FIND OUT MORE:
  14. 14. 1 4 T PRESENT THERE IS A DISPARITY BETWEEN THE EFFICIENCIES offered to us by the internet and the technology used by the banking system. Whilst the majority of us organise, socialise and transact online, it is clear that banks are yet to catch up with this trend. Yes, they offer internet banking but they are failing to spot a growing trend in the way we are starting to use the internet - to disintermediate systems and processes. Step-up the blockchain. Blockchain is arguably the most exciting thing to happen in finance. In fact not only finance but any kind of environment where there is a requirement for information to be stored, shared, protected and traded. For a quick explanation for those of you who are unfamiliar with the term blockchain, it is a protocol for the storage and exchange of value. It acts as a decentralised database that records and verifies all transactions. As we have seen, disintermediation is reaching into all areas of life; Airbnb removes the need for booking agents, removes the need for branding agencies, Oscar is breaking the health insurance market. The blockchain tops them all, it removes the need for third-parties when it comes to trust, verification and transactions. There are many challenges the blockchain offers traditional banking technology, but one that particularly stands out for me is the opportunity it offers the unbanked. THE UNBANKED At the moment traditional banking technology cannot be described as inclusive. Standard Chartered Bank group chief executive Peter Sands recently stated that blockchain technology was a “true computational innovation that could be very powerful in the context of financial inclusion.” Banking, in its current form, requires too much infrastructure and box-ticking in order to make it efficient and affordable for those in remote and developing countries to use it. But they have little choice and this monopoly costs them. JAN SKOYLES The Real Asset Co BLOCKCHAIN O P P O R T U N I T I E S A
  15. 15. 1 5 > The remittance market is currently worth around $436bn, thanks to the 20% - 30% it costs to send and receive money from abroad. Sending currency via the blockchain - whether bitcoin or sovereign currencies (were banks to allow it) is as easy as sending an email. This can be done at virtually zero-cost, within minutes and in a transparent manner. So, with this in mind, the banking system is looking at lost revenues of $436bn. The blockchain also offers a much higher level of security. All transactions are traceable and significantly reduce the risk of fraud and corruption (no, this is not about anonymity). In terms of an individual’s credit-worthiness, the blockchain acts as a substitute. The efforts to open a bank account in terms of ID, location and infrastructure seem enormous when compared to the ease of transacting using the blockchain. Why would an individual looking to grow a business in, say, Uganda, make the effort to go through traditional banking technology? Yes, we have all seen in the media coverage of Silk Road and Mt Gox, bitcoin and blockchain are open to abuse, however this is an opportunity for the banks. As an already (fairly) trusted entity they can leverage the blockchain by partaking in the innovation surrounding it. By doing this they won’t miss out on the most exciting development since the internet. JAN SKOYLES The Real Asset Co •• “BANKING, IN ITS CURRENT FORM, REQUIRES TOO MUCH INFRASTRUCTURE AND BOX-TICKING IN ORDER TO MAKE IT EFFICIENT AND AFFORDABLE FOR THOSE IN REMOTE AND DEVELOPING COUNTRIES TO USE IT. BUT THEY HAVE LITTLE CHOICE AND THIS MONOPOLY COSTS THEM.” ••
  16. 16. 1 6 > N RECENT TIMES, MARKETS HAVE CHANGED FROM FINANCE and technology to finance with technology or, as it is better known, Fintech.  Fintech merges two industries into one and the city that is developing this faster than any other is London. London has many incubators, such as Barclays Bank’s Escalator in East London.  There are also regular meetings and conferences to support start- up fintech firms here, such as Finovate, a two day fashion parade of the hot new firms that takes place here next February. It implies that this is a market ripe for disruption, but what are the numbers?  Is there a real change here, or just an emerging trend of trial (and error). Well, the first numbers that may startle are that over $10 billion has been invested in fintech start-ups since 2009, according to Silicon Valley Bank.  This amount has been spread across over 2,000 start-ups. This makes it one of the top 10 investment areas for funds globally. This analysis is echoed by Accenture, who note that 2013 saw private Fin Tech companies raise nearly $3 billion – more than tripling the $930 million invested globally in Fin Tech in 2008. So there’s a big deal here with finance, money and banking seen as the hot space for change through technology. THAT IS CLEAR. What is even more interesting is that the place where all this development is taking place is … LONDON. Accenture’s analysis of European Fintech data reveals that since 2004, the lion’s share of Europe’s FinTech deals and financing have taken place in UK and primarily London. In 2013, UK and Ireland represented more than half (53%) of Europe’s FinTech deals and more than two-thirds of Europe’s Fintech funding (69%). Having said that, it’s not just London. It’s also Silicon Valley. CHRIS SKINNER The Financial Services Club H O W LONDONis winning the FINTECH WARS I
  17. 17. 1 7 In 2013, nearly one of every three FinTech dollars and one of every five deals went to Silicon Valley-based companies. Europe, meanwhile, accounted for 13% of all Fin Tech funding globally in 2013 and 15% of deals. However as the chart below highlights, London’s five-year growth trajectory in FinTech investments has outpaced Silicon Valley.  With such frenetic activity, banks are waking up to the opportunity to disrupt themselves.  Many of the largest banks are creating corporate venture capital firms.  BBVA, Sberbank, American Express, Citibank, Visa and others have all been very active in the startup space this year.  HSBC’s fund runs at $200 million and Santander’s fintech fund has $100 million in capital. Meanwhile, London has one other key feature that makes it the hottest space for fintech globally and will see Wall Street fall behind over the years.  This X-factor is that London has its technology hub and financial centre side-by-side. The City, Silicon Roundabout and Canary Wharf are all within spitting distance of each other.  New York doesn’t have that advantage as the technology centre is six hours away on the West Coast in Silicon Valley. As America has divided its resources between East and West Coast, does that hamper innovation? Does that constrain their fintech capabilities? Some would say absolutely yes. For example, when we look at where all the fintech dollars are going into start-ups, a third is going into Silicon Valley but $1 in every $6 is going into London, and it is doubling year on year. London has just launched Innovate Finance, a nurturing centre for developing fintech businesses, along with Level 39, the hotspace for fintech innovation and we are seeing a true integration of finance and technology. Do we see that in New York?  No, as all their innovation is over 2,500 miles away in San Francisco. This is a real cause for celebration in London.  As banks become technology companies, having the banks and the financial technology innovators all sitting together is truly going to make London the financial centre of the world for the future. Mr. Skinner is chairman of the Financial Services Club, CEO of Balatro Ltd. and comments on the financial markets through his blog the Finanser. He can be reached at CHRIS SKINNER The Financial Services Club
  18. 18. 1 8 > OMEN HAVE ALWAYS BEEN UNDERREPRESENTED IN THE BANKING and technology sectors. These industries in Britain have given us the luxuries of the modern world, yet they are still old-fashioned with their maledominated hierarchy. From startups to global banks and large technology firms, it is time for every player in this industry to address the serious gender gap problem, take collective action and act now to shape a world with greater gender equality. Diversity campaigns are beginning to make an impact and companies are starting to take notice of the importance of women in the workforce. Lloyds Banking Group, for example, recently announced its plans to ensure 40 per cent of the businesses 5,000 senior staff are female within the next six years. Barclays and Credit Suisse have also begun to offer diversity initiatives as well. Women are considering careers in the sector. According to a recent Randstad financial survey, for the first time in history there are more women applying for financial services jobs than men. The technology sector –with its so-called forward-thinking vision of the future- is stuck in a time warp when it comes to female representation in the workforce. In fact, the industry is grappling with an even bigger gender gap than the banking sector. Google has revealed in its first diversity report that only 30% of its employees are women –surprising for a progressive company. At least it is far better than the average 17% that you find in most tech firms. Another study by the Centre for Economics and Business Research shows how a paucity of skilled staff in the IT sector is causing a 15% drop in output, which could be resolved by balancing the gender gap that permeates the overall industry. How can we address this issue so that we can get the talent we need to sustain these industries, but also to accelerate the growth of the fintech sector– which combines both banking and technology and is playing a crucial role in the future prosperity of our economy? According to the latest figures, the alternative finance sector is now valued at over £1billion, a 90% rise from 2012. Behind this growth is the fintech innovation that is helping to create new services and products that are disrupting traditional ways of banking. CLAIRE COCKERTON Innovate Finance C L O S I N G T H E GENDER GAP IN FINTECH W
  19. 19. 1 9 Being the world’s biggest financial services epicentre, London has taken a lead to support fintech, creating accelerator spaces that bring top talent together with established technology companies and banks to foster the innovation to make finance work for everyone. There’s a lot of money being in invested in the sector as well. Over $1 billion US dollars have been invested into 34,000 tech firms in London this year- and a $200 million sovereign fund from Singapore’s Infocomm Investments has recently been extended to European fintech firms too. What would make this ecosystem better and more exciting is if we had more women involved in the future of fintech. A global movement in addressing the gender gap across the technology industry has been gathering momentum in recent years - with government, corporations and start-ups all keen to change the ratio. Studies repeatedly show that companies with founding female members increase long-term returns, by up to 30% on average. Given the clear commercial benefits, why has this not translated into a change in numbers? The pressing problem to highlight is not just the lack of women in senior positions at tech firms, but it is also that female spearheaded technology success stories are lesser known. The fundamental lack of female Zuckerberg equivalent figures in the media is deterring young girls from entering into the tech industry in the first instance. However, this is all set to change. New female faces are cropping up in London’s booming fintech scene. Last month, chancellor George Osborne launched Innovate Finance at Canary Wharf’s Level 39, a UK trade body association that will support the next generation fintech start-ups that are disrupting traditional forms of finance. If we are to encourage young girls to seriously consider a career in technology, we need to champion the likes of Clare Flynn Levy, former hedge fund manager and current CEO of Essentia Analytics, a platform that leverages behavioural economics to help fund managers examine historical trades and to improve portfolio performance. We need to cast a spotlight on women like Julia Groves, CEO of Trillion Fund, a hugely successful crowdfinancing platform for renewable energy projects. And Jan Skoyles, the CEO of the Real Asset Co, an online platform that offers access to the bullion markets. By increasing the transparency and prominence of women in technology, only then can we create a long and lasting social and cultural shift in acceptance of women in technology. Furthermore, more initiatives are necessary to increase the take up of technical, engineering and computer science studies amongst females. A number of coding clubs focusing on women has sprung up in the past few years with this precise mission. In particular, Alice Bentinck, founder of Code First Girls, provides free coding classes, career talks and hackathons at university campuses across the UK to foster the next generation of female developers. There is also Jess Erickson, founder of Geekettes in Berlin, a community which nurtures support between women in technology, development and leadership. Finally, and perhaps crucially, we need to give women the flexibility they need to balance their careers with other priorities in life. Remote working, part-time hours,moreequalityathome,candosomuchtosupportwomenintheircareers. CLAIRE COCKERTON Innovate Finance
  20. 20. 2 0 > aving worked for the last 20 years for organisations at the forefront of financial technology, when starting Pharos one of my main assumptions was that easy to use, cutting edge technology was enough create a great Fin Tech start- up company. This is only partially true. So what makes a great Fin Tech start-up? Technology? Yes, to a certain extent. But start-ups also need a real business opportunity – the elusive ‘gap’ - and be able to exploit the gap long term to create a profitable, sustainable business. No matter how ground breaking your technology, if you haven’t recognised and researched your opportunity and clearly defined the gap you’re going to fill, you can build great technology but not create a great start-up company. In the current business environment, if you build solutions aimed at crowded legacy markets, with incumbent systems embedded, you’ll come up against serious hurdles. Financial institutions have invested huge sums in their legacy environment. They work - nowhere near as good as your elegant new solution but it takes money and time to unpick current systems to allow yours in and this can be a tough sell! Sure you can do it, you are selling your vision after all but you are making things difficult for yourself and slowing your potential growth. So find your gap in the market and remember, there must be a compelling reason to use your technology. Research where it can be positioned with the least resistance in your target market and how you can present a business case that cannot be ignored. Essentially, translate all the great features of your technology into something that has a real, tangible benefit to your target market’s business. Secondly, partner with your customers. Work together to build intuitive technology that tangibly simplifies your users’ daily tasks. Give users the information they need to make better decisions quickly and more accurately. We started Pharos with two development partners and work closely to solve their business problems. Their knowledge of workflow, analytics and of PETER JOHN Pharos Global W H A T M A K E S A G R E A T FINTECH START-UP? H
  21. 21. 2 1 PETER JOHN Pharos Global business critical reporting requirements is vital to the success of Pharos and provides business feedback on all technology ideas we have. Finally, assemble the strongest team available and ensure you get the tech to business talent mix right. A start-up is essentially a collection of individuals that share the same goals and ambition. The CEO provides the leadership and culture but your team members must share the vision and apply it daily. You must back your team to work independently to deliver shared goals and it is vital you spend as much time with the Head of Sales as with the CTO. And one last thing - don’t forget to make it easy for customers to do business with you. Make sure they can adopt your technology quickly with minimal disruption; have transparent pricing that fits the opportunity; be flexible; and most importantly, offer not just great technology but business transformation that helps your customer’s business to grow. •• “ESSENTIALLY, TRANSLATE ALL THE GREAT FEATURES OF YOUR TECHNOLOGY INTO SOMETHING THAT HAS A REAL, TANGIBLE BENEFIT TO YOUR TARGET MARKET’S BUSINESS.” ••
  22. 22. 2 2 > lmost three years ago I made the decision to start my own company. After 15 years in electronic trading, I felt the frustration I know many share: of being a cog in a slow- moving machine that struggles to innovate. I wanted to make a difference and to relearn what it means to be in business - listening to customers, solving their problems, and building a lasting company. Today FixSpec is a thriving, profitable start-up selling into top tier exchanges, banks and software vendors. It has been an incredible journey and by far the most rewarding (and exhausting) period of my life. Along the way I’ve learnt a huge amount about start-ups - what makes them tick, what makes them different, and how to build a company from the ground up. #1 REVOLUTION NOT EVOLUTION Financial services is full of skewed market shares, with their dominant firms and long tails. Consider trading venues – each asset class has a small handful of markets which dominate and then a sharp drop to smaller, niche players. The pattern repeats for software vendors, market data vendors, asset managers, brokers and so on. There are two implications for FinTech start-ups: (1) you will likely launch as underdog to a bigger, better funded competitor against whom you will always be judged, and (2) you must choose to target either big or small customers. So what do you do? My recommendation is to avoid the common trap of building copy-cat products and attempting to displace the incumbent based on price or functionality. Unfortunately you are likely to be out-gunned by marketing, or fail due to sheer inertia within your prospects. Instead focus on radically changing the value proposition for the buyer; offer a product that can’t be meaningfully compared to the existing players. Sound hard? It is. But done right, you can consistently win against incumbents, even when pitching to the largest prospects. I recommend the book Blue Ocean Strategy for more on this topic. CHRIS LEES FixSpec 5LESSONS FOR START-UP SUCCESS A
  23. 23. 2 3 > CHRIS LEES FixSpec #2 FOLLOW YOUR VISION I’ve noticed that firms with successful products often forget their original vision, focusing instead on running the business day-to-day. The outcome works until the market turns, they start to lose market share and they dispatch senior management to a fancy hotel to dream up a confusing, one-line “mission statement” that should magically turn things around (until it doesn’t). A vision is different from a mission statement; it describes the future state of your company and markets, as opposed to why your company exists today. A good vision is simple, speaks to a known pain point, and your prospects agree with it without needing any sales pitch. It’s vital that start-ups have a clear vision to guide them through the early years of continual testing, refinement and re-positioning. For example, FixSpec’s founding vision is that our industry currently documents, develops and maintains APIs in a very inefficient and error-prone way which must be replaced. We are iteratively building tools which surround better documentation, unlocking the efficiency gains that flow directly from that vision. Your product should deliver your vision rather than be your vision. While your products may change and evolve over time, a good vision doesn’t waver. #3 REJECT THE CORPORATE NORM All too often first-time founders replicate the structures, positioning and even the products of their former employers. Yet entrepreneurs on their second or third start-up rarely copy like this. One of the most rewarding aspects of starting-up is the opportunity to shape a company you want to work for; the culture, the processes and the values. The simple fact is that big-company structures simply don’t work in start-ups, so it is time to break the mould. ■ Do you really need an office, marketing or sales from Day 1? ■ What’s the ROI on that expensive conference stand? ■ Unless you are serious about creating content, do you really need a blog or Twitter? ■ Do you really need external funding? The answers will obviously depend on your business; my advice is simply to question what you are used to. In particular, challenge the received wisdom that says you need external funding and a fancy office in the City to win clients – remember that some big companies started as self-funded ventures in spare bedrooms, garages and dorm rooms. •• “ONE OF THE MOST REWARDING ASPECTS OF STARTING-UP IS THE OPPORTUNITY TO SHAPE A COMPANY YOU WANT TO WORK FOR; THE CULTURE, THE PROCESSES AND THE VALUES. ” ••
  24. 24. 2 4 CHRIS LEES FixSpec #4 SCALE LATER It’s interesting to listen to managers in large firms talk about scale. Typically they imagine going from zero to thousands of clients at warp speed, and then speculate on how many off-shored resources one might need to do that. The reality for start-ups is very different. One ingredient for start-up success is rapid iteration, development and testing of ideas (read The Lean Startup for more). The goal is to shape and tune your product until it really resonates with your target audience at a profitable price point. Only when you reach that position should you scale and promote. Remember the adage “nail it then scale it”. Established firms don’t follow this approach and often waste time and money as a result. Just think about how many big projects or product launches you have seen fail in your career. Bigger companies can afford to absorb such waste, but start-ups can not, so correct timing of promotion and scale is vital. #5 INVEST IN INTERNAL TOOLS Building lean, automated internal processes is vital to keeping headcount low while delivering the rapid change and exceptional customer service that will be the hallmark of the new FinTech generation. There are a wide range of affordable, online productivity and collaboration tools that can eliminate the barriers to superhero productivity. I recommend embracing these tools early and automate quickly. At FixSpec we use tools like JIRA, Zendesk, Tresorit and Hackpad to achieve massive productivity gains, and to share a common understanding of priorities, customer issues and company direction despite being spread over three timezones. We’ve also built our own tools to automate tasks from accounting to QA to SLA tracking; investments which will pay real dividends in our next phase of growth. I have a lot of other tips to share, so if you are serious about starting up then please get in touch and let me know how I can help. Good luck!
  25. 25. 2 6 > ANKS ARE DOING BATTLE AGAINST CYBER CRIMINALS, NATION states and hacktivists in a digital realm which is constantly in flux. These highly agile adversaries are adept at dancing butterfly-like around our defensive measures before administering a highly targeted sting. They operate in the digital ether where the infrastructure and opportunities are continually evolving and anonymity is a given. It’s like playing chess on a board where the size, shape, pieces and rules are constantly morphing, where your adversary gets ten moves to your one, and where if you win you get nothing, but the man across the table stands to become richer than Gates. Most distressingly, you may never know who beat you. In many ways, this is not a fair fight. It is generally accepted by cyber security professionals that cyber risk to financial services organisations is increasing. Fortunately most people aren’t cyber security professionals, but for the layman the news headlines offer a glimpse of the skirmishes occurring in this ever evolving digital battle. There are more threat actors with more capability, more specialisation, committing more targeted attacks in more agile ways. In parallel, there is no doubt that the digital economy offers massive potential upside to financial services firms which are increasingly exploring new markets, devising new digital products, opening new channels and therefore increasing their exposure to would-be attackers. What is for certain is that a failure to take the opportunity offered by the digital economy will alienate customers and further open the door to the FinTech start-up brigade, leading to a downward spiral of market share.  One advantage we can bring to bear in this battle is our ability to spend our budgets on effective security measures. Cyber security investment is creeping up the ladder as an operational cost of doing business. In response to the threat - and increasing budgets - technology companies have been developing a myriad of detection and protection tools – whizz-bang gadgets, some of which deliver value, some whose claims exaggerate capability. So how does a bank decide which to buy? How do you know whether it is more effective to implement a tool or to run a cyber security awareness programme? Where is the hard data to support decision making for operational planning and risk assessment? The reality is that cyber risk is hard to measure as due to the many NIK WHITFIELD Panaseer CYBER CHESSHow can we enable the business to take advantage of the digital economy, whilst protecting its customers and assets from the darker elements that lurk there? B
  26. 26. 2 7 NIK WHITFIELD Panaseer factors involved it is constantly in flux. Unlike most risk calculations, in cyber security we have extremely agile adversaries who are actively trying to execute a business case against us. They will invest commensurate effort and expense in order to realise their return on investment. For these reasons, the Board and security leaders do not have the management information to interpret overall cyber risk exposure, how it is changing and the impact security investment decisions have on it. Previous arguments have concluded that measuring cyber risk is too challenging: the answer will never be ‘right’, the data volumes are too large and disparate, the business context is too complex, and it’s impossible to put a dollar amount on the potential downside of a successful attack. I disagree for two reasons. Firstly, Big Data technologies now exist which allow us to get our arms around ALL of the raw data needed to make informed quantitative assessments of risk. Secondly, just because it is not possible to get a perfect answer certainly does not mean that there is no value in the exercise. We have spent years modelling market and credit risk, but the answers can never be completely accurate. The key to value is to incrementally improve metrics in order to achieve a meaningful ROI – i.e. maximise the effectiveness that your cyber security budget whilst enabling the business to take advantage of the digital opportunity. If we can do this, if we can create fact based cyber risk metrics, we can realise numerous business case in one fell swoop. We can enable new business operations by offering a better understanding of the forecast change in cyber risk profile. We can identify when security budget is insufficient to keep risk within an acceptable appetite. We can benchmark against peers to find areas for improvement. We can run due diligence on suppliers and target acquisitions in days, not months. These use cases and benefits have been enabled by the emergence of Big Data technologies and I expect to see cyber security as an emerging ‘must have’ use case for these platforms. Let’s finish with an example which you will likely have seen in the press. Following an attack which leaked seventy six million consumer records and seven million small business records, Jamie Dimon stated that JP Morgan spends approximately $250M per year on cyber security, and that he expects to double that in the next five years. The first question I find myself asking is “Was that enough money?”.  The second question immediately follows, “How do we answer the first question?”. Without understanding the effectiveness of the budget through quantitative cyber risk metrics, we will never be able to answer that question. Panaseer is developing new technologies, models and processes to devise timely, quantitative cyber risk metrics in order to answer the important questions raised here.
  27. 27. 2 8 VER SINCE THE RECENT FINANCIAL CRISIS OF 2007-2010, there is a renewed interest in technology businesses that attempt to change the way finance operates, both from a consumer and business aspect.  There are many exciting and fast growth segments of Fintech that have attracted the attention of entrepreneurs and investors alike.     For example, the ability to assess risk has become a critical center point.  With new data sources such as social media like Linkedin, mobile location services, etc, there are more markers available by which to evaluate creditworthiness for consumers.  As a consequence, peer to peer platforms and online credit agencies can assess risks with theoretically lower default rates than traditional banks.   New lending platforms are being started constantly that make lending to businesses easier and direct, all because of a better and more tech oriented methodology for risk assessment.  Applications span across credit card refinancing, home loans, business working capital, invoice financing, and on and on.  End clients are often able to save considerable money in financing rates, but more importantly shave off days or weeks in paperwork or process.   The analytics space within Fintech has also gained significant momentum.  Early startups such as Algomi have amplified the amount of data banks that investors have access to, and consequently allow relationships to be far, far more effective.  As a result, the financial service industry is racing to adopt the technology, and gain greater insights.   Building trust will remain the greatest challenge for new Fintech platforms.  While many startups are able to build a loyal early adopter base, catering to the mass will require tremendous PR and marketing efforts to build trust and loyalty.       Traditional banks will see greater pressure to compete for clients, and often will face rapid margin pressure from cheaper online alternatives.  It isn’t inconceivable to imagine a world in 10 to 15 years where the traditional banks transition more into advisors or agents, guiding individuals and businesses to the most optimal platform suited for them – instead of managing everything in-house.  However in the near term, the brand and trust created by large institutions remains strong and will remain pervasive. MANU GUPTA Lakestar THE TOP TRENDS IN FINTECH E
  29. 29. 3 0 > E NEED BANKING, NOT BANKS’ In 1994, Bill Gates predicted the end of traditional banks. Twenty years later, a new wave of companies intends to disrupt financial services and reinvent the banking experience. Baptised ‘FinTech’ for ‘Financial Technology’, these companies operate in the fields of payments, lending, money transfer, data and analytics, and digital currencies. They long for innovative, transparent and inexpensive financial services that banks have failed to offer to their customers. Frustrated with paying high bank fees for international money transfers, Taavet Hinrikus and Kristo Käärmann have reinvented how money is sent abroad. TransferWise, their peer-to-peer service, is spearheading a revolution against banks and promises a ‘clever new way to beat bank fees’. It has become notoriously well known for its belligerent advertising campaigns including a highly successful campaign exposing high bank fees by spreading the words F¥€K, $CAMM€D and DA¥£IGHT ROBB€R¥ across bus stops, tube stations and billboards across London. Internet has changed the way consumers interact with money – making it possible not only to transfer money, but also grant loans or raise funds in one click. While banks have struggled to shift from traditional branches to online services, FinTech companies are born mobile and are ideally positioned to target the new generation of ‘digital natives’. Fidor Bank in Germany is an online and mobile ‘Community Bank’ that offers ‘banking with friends’. ‘Fidor Bankers’ sign-up through Facebook Connect and share saving tips on Twitter. The bank even offers an interest rate based on the number of Likes on their Facebook page. Fidor Bank’s purely online and social media strategy has led to a 20% decrease in their cost of customer acquisition compared to High Street banks. In a recent interview with Bloomberg, Marc Andreessen – co-founder of the $4 billion venture capital firm Andreessen Horowitz – proclaimed that FinTech ‘can reinvent the entire thing’. He predicts that ‘nonbank entities [will] spring up to do the things that banks can’t do’. Will FinTech bypass traditional banks in the future? ERIC MOUILLERON Bankable BANKS ARE DEAD. LONG LIVE THE BANKS! ‘W
  30. 30. 3 1 > ERIC MOUILLERON Bankable BANKS IN CONTROL OF BANKING Despite the banking industry being shaken up by the arrival of non-bank players, it is still dominated by the same few big names that Bill Gates dismissed as ‘dinosaurs’ twenty years ago. The main reason is that the highly regulated banking industry creates high barriers to entry. Therefore, the industry has resisted disruption by new technologies better than other sectors such as books and music. Banks definitely have had a head start due to years of investment in security, compliance and regulation – necessary divisions to which FinTech start- ups struggle to devote significant funds. Besides, banks have deployed huge capital intensive distribution networks through branches making their brands omnipresent. Despite several attempts by anti-bank movements such as Occupy Wall Street to create mechanisms for people to bypass the traditional financial system, the reality is that banks remain in control of banking. Due to anti- money laundering rules and other regulatory concerns, large banks refrain from opening bank accounts for FinTech companies in areas deemed risky such as digital currencies and remittance. If banks holding the accounts of TransferWise locally decided to close them, they could shut down the revolution within a day. Therefore, rather than building a new financial system, FinTech will ride on the rails of the existing one. Not only will they use banks’ reliable infrastructure, but FinTech will also inherently benefit from their investment in security and compliance. By adding a layer of innovation to the existing system, FinTech will save time and capital as well as gain the confidence of their partners and clients. BANKS FOR CORE BANKING FINTECH AT THE EDGE OF BANKING Traditional banks and FinTech will play complementary roles in building the “Bank of the Future”. Banks will remain in place to provide the backbone on which non-bank players could rely on to offer value-added services. FinTech will compete at the edge of banking to accompany and empower their customers in their every-day lives. Specialised players will provide tailor- •• “WHILE BANKS HAVE STRUGGLED TO SHIFT FROM TRADITIONAL BRANCHES TO ONLINE SERVICES, FINTECH COMPANIES ARE BORN MOBILE AND ARE IDEALLY POSITIONED TO TARGET THE NEW GENERATION OF ‘DIGITAL NATIVES’.” ••
  31. 31. 3 2 > made offers for targeted markets and geographies. FinTech is addressing the underserved and revenue generating niche segments such as money transfer, personal financial management or mobile payments, all propelled by the Internet, which has proven to be a lot more cost-effective than branches in reaching the “last mile” customers. For example, in the United States, Simple does not intend to become a bank itself, but to develop a better interface around how modern banking should work. Hence, the online banking service built a layer on top of The Bancorp bank’s infrastructure. Using a similar model, PayTop offers a multi-currency prepaid card in France targeted at frequent travellers and students under Raphaels Bank’s license. Serving niche markets, FinTech companies know their potential clients and are able to monetize Big Data and analytics. For example, by inventing new risk-scoring models, OnDeck has reshaped how loans are granted to SMEs. It evaluates creditworthiness based on business performance analytics – compiling cash flow, credit history, public records, and consumer experiences – rather than just credit history files. To conclude, the banking sector has been affected by the digital revolution over the past twenty years. Although the ‘dinosaur’ banks have undoubtedly evolved, they have not gained the agility of reptiles (yet). To cope with upcoming changes in the financial industry – which, according to the chairman of Lloyds Banking Group, will be more significant ‘in the next 10 years than there has been in the past 200’, - banks will have to innovate or live with razor thin margins. Banks are considering various strategies to keep up with the pace of digital revolution. Firstly, the creation of dedicated internal structures will help spread an innovation culture within and across departments. Traditional banks could also leverage external innovation from start-ups by engaging through incubators and accelerators. Lastly, partnering with FinTech companies will help them to provide value-added services. FinTech companies are ‘enablers’ for banks to acquire digital innovations by adapting new white-label technologies and banks need to start finding some new friends amongst them. ERIC MOUILLERON Bankable
  33. 33. 3 4 > E REGULARLY BEMOAN THE FACT THAT THERE’S NOT ENOUGH venture capital available to support entrepreneurs through the early stages of their companies’ growth cycles. Is that changing? Is finTech changing it?! European VCs are thinner on the ground than their US counterparts but with the rise of new finTech specific accelerators (think Level 39 and TechStars) and the hype generally around the global finTech phenomenon, we are seeing a huge increase in the number of VCs that are focusing on this sector. New finTech funds are being created by the banks and investment managers (such as Orange Growth Capital) but it is particularly interesting to see the more generalist Tech VCs also piling in. When big VC brands such as Sequoia, Accel, Andreessen Horowitz and Battery Ventures start to consistently back a tech sector then the world takes note. Analysis carried out by CB Insights on the investment patterns of 12 of the biggest global VC funds showed more than 300% growth in new monies invested in finTech in 2013 compared back to 2009 levels. And, on our doorstep in Europe, we are seeing even greater levels of growth in finTech investment that the traditional US tech are receiving. The US market remains much larger though and we still have some way to go to begin to consistently match the huge rounds that are achieved in the US (think, for example: Square’s $100m round and Stripe’s $80M round). However, whilst we all applauded the Funding Circle $65m series D round led by Index Ventures, this is a sign of things to come for Europe in general but London specifically. Investors are most actively looking at four segments: lending; personal finance; payments; and bitcoin/blockchain technologies. What is becoming increasingly apparent though is that there are a very large number of “me too” companies seeking investment. These companies are looking at nuanced variations on themes that either exist already or that are being explored by significant numbers of other start-ups. I was reminded recently by Phil Black of True Ventures of the phrase ‘blue ocean investing’, which involves investing in the development of new products or business models in uncontested or new markets. There is a lot of existing activity to disrupt and new demand can be created in a blue ocean. Compare and contrast this to ‘red ocean investing’: investment RICHARD GOOLD Wragge Lawrence Graham & Co FINTECHONOMICSIS INVESTMENT BACK IN FASHION? W
  34. 34. 3 5 RICHARD GOOLD Wragge Lawrence Graham & Co into existing industries where significant competition already exists – not a strong place to invest… FinTech represents a fantastic opportunity for VCs to invest in blue ocean business models – many industries are ripe for disruption (insurance certainly comes to mind) and there are some technologies where we have only just begun to understand how they will be deployed on a mass scale (think bitcoin). Investors often struggle with pure technology risk though (certainly on this side of the Pond) – security, development, IP, reputation and competing technologies can mean that there’s only one technological winner. One thing is for sure though: 2015 is definitely going to be the year of finTech. •• “THE US MARKET REMAINS MUCH L ARGER THOUGH AND WE STILL HAVE SOME WAY TO GO TO BEGIN TO CONSISTENTLY MATCH THE HUGE ROUNDS THAT ARE ACHIEVED IN THE US.” ••
  35. 35. 3 6 > EGIONAL BANKS THAT FIND THEMSELVES IN THE ‘WAIT AND see’ position over mobile trading in 2014 may find the competition has overtaken them if they aren’t careful. Most tier-one banks already give their clients mobile access to real-time pricing and market data, as part of offerings. Some have gone further, allowing their clients to manage orders and execute trades via mobile, but now more and more clients are demanding mobile as an additional channel for trading. Research presented in a new Caplin whitepaper, Trading On The Move, shows that a wide range of users including hedge funds, corporates and wealth management firms are hungry for more trading options. They want mobile apps that provide a real-time view of their trading positions and, increasingly, trade execution, order management and post-trade services. It seems they are not as concerned about security and compliance as the sell side assumed, and in fact are just like the rest of us, whole heartedly ready to embrace mobile, if only the sell side would provide it. The more agile banks have already recognised this as an opportunity to get a head of the pack and capture customer loyalty. Pioneers such as JP Morgan and Citi have demonstrated both the global demand for mobile trading and the feasibility of providing it. Their mobile offerings allow their clients to manage orders and execute trades via mobile, and Goldman Sachs has announced that it will shortly do the same. These banks that have aggressively rolled out mobile execution offerings worldwide have seen rapid adoption with few regulatory issues. But while other tier one banks still ponder, regional banks are fast catching up, with some already offering mobile trading and many more planning it. Until recently, most regional banks were still at the stage of evaluating demand and debating technology, security and compliance issues. But a growing number are now making mobile trading a key part of their e-distribution strategy, viewing it as essential to protect and grow their franchise. In most jurisdictions there are few regulatory constraints on using such services, provided that all transactions are recorded, and those that have gone before have already proved, mobile trading is highly secure if properly implemented. PATRICK MYLES Caplin Systems R Delaying IMPLEMENTATION ANOPTIONFORcapital markets mobile trading is no longer
  36. 36. 3 7 PATRICK MYLES Caplin Systems From a technology standpoint, the barriers to entry are also tumbling down as it is no longer necessary to build, maintain and support multiple mobile apps, since HTML5 has evolved to the point at which it can be used to create a high-quality near universal solution. With firms such as Caplin being able to offer mobile trading solutions as standard products that can be configured and customised, this has greatly reduced the cost of and timescales involved in bringing a mobile trading channel to market. It would appear mobile trading in the capital markets is not about if, but when. •• “WITH FIRMS SUCH AS CAPLIN BEING ABLE TO OFFER MOBILE TRADING SOLUTIONS AS STANDARD PRODUCTS THAT CAN BE CONFIGURED AND CUSTOMISED, THIS HAS GREATLY REDUCED THE COST OF AND TIMESCALES INVOLVED IN BRINGING A MOBILE TRADING CHANNEL TO MARKET.” ••
  37. 37. 3 8 > ECENTLY THE FINANCIAL SERVICE COMMUNITY HAS BEEN faced by numerous regulatory changes that have posed a plethora of challenges to their technology teams to meet the new demands. Where the changes have largely been to improve transparency and reduce risk, many felt that the regulations would negatively impact the true nature of technology and its inherent need to constantly innovate. What has emerged in the past year has been a huge amount of growth in the financial services start-up community, similar growth in the regulatory software vendor space, in data and in telecommunications. Across the technology space there has been vast amounts of innovation in response to regulatory changes. So what may have seemed at first like a problem, the industry has responded by making it into an opportunity for innovation, growth and prosperity. One can’t deny that the challenges have been huge and the impact of the regulation did mean that investment into technology had to change its direction to immediately impact the demands of the impending laws. What we have seen emerge in some firms is that when facing the regulatory changes head on they have allowed steps forward in their technology teams to build more adaptable and transparent platforms for trade. Looking at the question of whether regulation and innovation can coexist we have seen that with the onset of the new regulations, technology teams had to be innovative to ensure they were compliant in their hugely vast and complex technology platforms. Where some people foresaw the demise of prop trading, on the other hand we have seen a massive growth in demand for in house technology teams to build electronic trading systems from scratch in reaction to the broadened use of this type of trading. NADIA EDWARDS- DASHTI Harrington Starr R •• “IN THE ENTIRE HISTORY OF TECHNOLOGY THERE HAVE ALWAYS BEEN PROBLEMS THAT HAVE PROPELLED THE MARKET FORWARD.” •• REGULATION innovation c o e x i s t i n t h e FINTECH COMMUNITY? Can and
  38. 38. 3 9 NADIA EDWARDS- DASHTI Harrington Starr Again where every technology platform in finance had to be checked with a fine tooth comb to see if it was compliant, the technology challenge and therefore innovative response grew. With all the new laws and more set to come, the challenge has increased for technologists working on these trading platforms. New regulatory legislation is presenting more and more significant challenges to the financial services technology community and in turn many senior heads within the industry have decided to innovate entirely outside of their usual norms and start up their own firms in response to some of the challenges regulations have posed to the market. We have only to look at the peer to peer lending firms, the mobile technology forms and the compliance organisations that are cropping up across the industry. We only need to see how TeraExchange have recently performed their first regulated bitcoin swap highlighting how innovation and regulation have coexisted – in this instance the regulators did all they could to ensure a clean, transparent and fair market for everyone. In the entire history of technology there have always been problems that have propelled the market forward from the code breakers of WW2 to Linus sat in his bedroom playing Prince of Persia in the 80s; the industry thrives on a challenge and the recent regulatory impact has allowed for some positive steps forward, and many more to come.
  39. 39. FINOVATEEUROPE.COM “For online personal finance nerds - like your humble correspondent - Finovate is the Super Bowl and World’s Fair rolled into one.” - Mary Pilon, Wall Street Journal The Wallet LONDON • FEB 10 & 11, 2015
  40. 40. The selected companies will showcase their latest ideas to an influential audience that’s shaping up to be Finovate’s largest ever outside the US (well above last year’s sellout crowd of 1,000+). It should be a packed house at the Old Billingsgate Market Hall, and we hope you’ll join us to watch the future of finance unfold live on stage (and don’t forget, because of Harrington Starr’s partnership with Finovate, we’ve got a special discount for you – see below). WITHOUT FURTHER ADO, HERE ARE THE COMPANIES WHO WILL BE DEMOING AT FINOVATEEUROPE 2015: SEVERAL ADDITIONAL PRESENTING COMPANIES WILL BE ANNOUNCED CLOSER TO THE EVENT. Each company will receive just 7 minutes on stage to do live demos of their latest technology (no slides allowed!). The demos will be followed by four hours of networking time each day, giving you a chance to connect with the most interesting minds in European fintech. If you’d like to join us at the event, you can register here. And don’t forget to use our special partner discount code HarringtonStarr20 on the registration page to save 20% on your purchase (on top of the Early-Bird discount). Hope to see you there! FinovateEurope 2015 Demo Companies Announced! On February 10 and 11, 70+ handpicked companies will take the stage at FinovateEurope in London to demo their latest financial and banking technology innovations. ADVICEGAMES AIRE AKAMAI ALPHAPOINT AVOKA BACKBASE BARZAHLEN BENDIGO AND ADELAIDE BANK BIZEQUITY C24 CASHSENTINEL CPB SOFTWARE CREALOGIX DELTA BANK EBANKIT ENCAP SECURITY ERIPPLE EVRY FINANCIAL MEDIA SOLUTIONS FISERV FIVE DEGREES FOBISS IDMISSION INTELLIGENT ENVIRONMENTS INVESTUP INVOICE SHARING ISIGNTHIS IXARIS SYSTEMS LUMINOUS MBANK & I3D MENIGA MOBINO MONEYHUB MYDESQ NOSTRUM GROUP NOVABASE BUSINESS SOLUTIONS ONLINEPAY.COM PHOTOPAY PIREAN QUANTITATIVE CREDIT RESEARCH QUISK REVOLUT SAS GAMES SEDICII SOFORT STRANDS STREETSHARES.COM TAULIA TELENOR BANKA POWERED BY ASSECO TEMENOS TOPICUS TRADERIVER FINANCE TRANSFERTO TRUNOMI VIPERA WIPRO WS INTEGRATION XIGNITE XSOLLA YOYO
  41. 41. 4 3 TRADING TECHNOLOGY SanjayShah–Nanospeed IanGreen–eCo AntonioCiarleglio–HarringtonStarr MartinCheesbrough–Digiterre TomKemp–HarringtonStarr
  42. 42. 4 4 > NCREASING NUMBER OF CAPITAL MARKET REGULATIONS ARE kicking in that financial trading institutions have to comply with or risk paying heavy penalties to the regulators. Regulators, such as the European Securities and Markets Authority (ESMA), the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) in the USA have brought out regulations that have an impact on trading firms. CFTC’s Concept Release on Risk Controls and System Safeguards for Automated Trading, SEC’s 15C3-5 regulation and ESMA’s guidelines on automated trading are forcing trading institutions to have a better look at their pre-trade risk management in particular. However, they are costly to implement in software, adding hundreds of microseconds to every single trade, and reducing competitiveness as a result. So what’s the answer? Do your risk management on an FPGA! Because of the inherent parallelism offered in FPGA architecture, they are able to hugely improve on the latencies offered in equivalent software implementations, decreasing latency by between 50 and 100 times – taking it to nano-seconds. The advances in FPGA technology are such that it is now possible to implement a firm’s credit limits and total aggregate volume limits on an FPGA. As new regulations such as MIFID II kick in and as further regulations are introduced over the next few years, financial institutions will have to implement more and more risk checks. But of course no one wants to pay a linearly increasing latency SANJAY SHAH Nanospeed I •• “WITH EFFECTIVE USE OF SUITABLY RIGOROUS DEVELOPMENT AND TEST ENVIRONMENTS, IT IS NOW POSSIBLE TO SCALE UP THE COMPLEXITY OF WHAT IS TARGETED TO FPGAS RELIABLY.” •• REGULATIONCOMPLIANCE IMPACTLATENCY does not have to
  43. 43. 4 5 SANJAY SHAH Nanospeed penalty. This is why I believe that FPGAs will become central to pre-trade and post-trade risk management: in an FPGA all the checks can be implemented in a massively concurrent way, massively reducing the processing time. Doing 20 pre-trade risk checks for example, would not take much longer than doing 10. However, there is a trade-off to be made in terms of needing more logic real- estate on the FPGA. We are in luck. Just like server CPU technology, FPGAs are getting bigger and faster. For example, the forthcoming Stratix 10 FPGAs from Altera will have up to 10 billion transistors compared to 5 billion in today’s largest Intel Xeon CPUs. With effective use of suitably rigorous development and test environments, it is now possible to scale up the complexity of what is targeted to FPGAs reliably. I believe that FPGA-based pre-trade and post-trade risk management will become commonplace over the next few years. FPGAs offer trading institutions the ability to outsource compliance to current and new regulations effectively and reliably, all this with minimal impact on existing infrastructure. The other benefits: you have a near zero impact on latency and have that competitive edge.
  44. 44. 4 6 > MY FIRST TASK AT THE FIRST job I took in investment banking technology was to read a paper describing a new model for interest rates (Heath Jarrow Morton) and mine it for use in swaption pricing software. It was illustrative of the start of the art at the time: take some maths, create a valuation and risk model, add a GUI and something in the way of booking and portfolio management, and thus render it tradeable. The measure of the value of the maths was the range of products it enabled you to trade. Most of us with those roles eventually moved from small software firms to large banks since they placed a high value on building in-house expertise to offer new products faster than the competition. As markets got more technical – both mathematically and technologically – several of us ended up moving out of IT to run trading books. The dynamic driving that career trajectory ended in 2008. The cause of this is well illustrated by the fact (according to a Wall Street Journal writer interviewed on the BBC World Service) that HSBC has around 25,000 staff working in Compliance and Risk. This solidly shows the two central facts of banking technology in late 2014: (1) the agenda is dominated by regulation, and hence standardisation over innovation; (2) there’s no money left for anything else. This has swept off the table IT investments in trading most complex products, which are now variously illegal, unprofitable or unfashionable. The trading businesses that are left can be divided into: 1. Those from which any spread has long been squeezed out, such as Futures trading; 2. Those over which a cloud of regulatory uncertainty still hangs, such as Spot FX and agency/algo trading; 3. Risky lending (Credit), which is the business regulators want the banks to remain in (and from which almost all banking crises have sprung). The consequence for IT departments is that they can no longer afford to run deep benches of experts maintaining proprietary trading systems. A positive result of this is a broader interest in fintech investments alongside an emerging desire to re-think the process of innovation. Organisationally, it has manifested itself within banks in the tendency towards empowerment of IT Architecture functions (or “horizontals”) whose aim is to rationalise IAN GREEN eCo THE NEW EQUATIONSOf TECH VALUE W
  45. 45. 4 7 > IAN GREEN eCo IT investments across the Product X Region matrix. Historically, these Architecture groups have struggled to gain organisational traction since they lack a natural constituency amongst the parts of the bank that cover its costs. Now, though, they are amongst the least unrealistic of the desperate measures invoked in response to the industry’s desperate times. Naïvely, Architecture groups have the aim of identifying the best stacks of software that a bank possesses, or could easily acquire, and standardising as quickly as possible onto those. This is an obvious approach to cost rationalisation. It is operatively how most Architecture functions at the largest banks construe their task today. While this is sensible, it misses the mark. A far more powerful goal is to re- organise a bank’s software architecture so that as much as possible can be flexibly sourced. This more sophisticated approach to Architecture treats cost reduction as an industry portfolio question. Even if each of the Tier One banks that is spending billions of dollars annually on technology moved onto its own single stack there would still be a massive amount of duplication. Furthermore, opportunities to learn and improve excellence by adopting shared solutions would be lost. To unlock the maximum benefit banks have to migrate away from the practice of developing non-shareable software and establish the habit of successfully integrating software developed elsewhere. The best stacks approach does not achieve this by design nor will it achieve it by happy accident. Exactly where this “software developed elsewhere” might come from is the question of the moment. Some try to bypass it altogether by looking for as a Service solutions in which either the bank’s software deployment footprint (in Software as a Service) or operational footprint (in Business Process as a Service) is significantly reduced. These ostensibly have both the emotional benefit of minimising the collaboration burden and the tangible financial benefit of making the bank smaller. However, they mask but do not avoid the questions of exactly what the software does, exactly how you check and change that and exactly how it interfaces to the software that you don’t outsource. While potentially transformational in some areas, as a Service strategies don’t reduce the centrality of implementation details - and since these become one or two steps removed, the need for transparency can be even greater. •• “A FAR MORE POWERFUL GOAL IS TO RE-ORGANISE A BANK’S SOFTWARE ARCHITECTURE SO THAT AS MUCH AS POSSIBLE CAN BE FLEXIBLY SOURCED.” ••
  46. 46. 4 8 Asalargebankinthequestfor a flexibly sourced ITarchitecture, the alternative software authors of choice might well be other large banks. After all, they are the firms who are also spending the most on banking technology and have thousands of live applications. The cultural shift that is needed for such banks to enjoy constructive discussions along these lines and then transact with the speed and frequency to be mutually relevant will be well understood. Also not to be discounted as “dark pools” of technology supply are the large trading firms. They are notable both for agility and strength of technology, and although they lack the breadth of the banks – which is how they can afford to trade – they are a potentially significant part of the ecosystem. If these are the dark pools, the light pools are the banking software community whose assets are well advertised. Traditionally, the “software vendors” have made their goods available only in closed (binary) form. While this can work, it has historically presented problems of transparency, adaptation and “vendor lock-in” and has lacked the plasticity that large firms need to embrace software successfully as their own. More recently firms such as Paremus, OpenGamma, uTrade and OpenFin who have evolved in the Open Source era look to provide solutions that can be adopted more organically in a complex environment. The optimal business model for realising value from such firms is not yet robustly solved. A flexible sourcing strategy that incorporates the IP of others while simultaneously curating a distilled base of in-house software is tough to pull off. It’s what we do now; it’s the rocket science of our times. IAN GREEN eCo
  47. 47. 4 9 > HE INCREASING REGULATORY PRESSURE ON THE BUY-SIDE combined with the drive towards operational efficiencies and requirements to deliver ‘’Best Execution” have provided a heady cocktail of challenges for leading Buy-Side firms to reassess their data and technology infrastructure. Financial Technology spend is seeing an increase within the buy side, this has impacted on FinTech Vendors who now need to reassess their client base and solutions provided. Although single asset class execution can be processed on independent OMS and EMS systems (Order and Execution Management Systems) the complex search for Alpha across all asset classes is now testing if traditional broker offerings will meet the new challenges ahead. This at a time when businesses are reducing resources and FinTech budgets when their regulatory obligations are reaching an all-time high. Buy-Side firms need to consider investing in independent FinTech vendors, to address the new challenges. Growing demand for fast accurate analytics and risk management increases the need for a seamless integration of work flow processes across the trading cycle, from the Front to the Back Office. Only serious investment in new technology should now be considered. The drive to expand into new markets and asset classes creates further challenges on the regulatory front. From MIFID to Dodd Frank, EMIR to MAD and AIFMD, what appeared to be minor operational details are fast becoming major changes in FinTech requirements and work flow processes. Until now, Buy Side technology has focused entirely on Front Office trading with adaptation of EMS algorithms, smart-order routers and TCA (Transaction Cost Analysis). We are now seeing a growing need for full Front to Back Office collaboration and the fear of non-compliance placing a strong focus on the real need to invest in Back Office technology. Historically OMS and EMS have had different technologies however, now both systems are developing increasingly overlapping functionality. OMS is a complex system and usually imbedded deeply into the Buy Side infrastructure for portfolio construction, attribution, reference data, compliance, risk management, order processing etc. In the meantime, EMS has evolved from a growing need for trade execution efficiency and speed across multiple order types and new destinations. ANTONIO CIARLEGLIO Harrington Starr OMS - TO INFINITYAND BEYOND! T
  48. 48. 5 0 > As Buy Side and Sell Side firms start to consider platform consolidation, it is not a simple decision based on factors such as features, benefits or price, it is a matrix of factors, including charging mode - per seat / user, consulting services, connection fees, technology, data integration, multi-asset class access, to name a few and not forgetting cost of ownership. The strength of OMS is in the depth of functionality, robustness and support, however, the potential for EMS differentiation also lies in added value analytics and enriched data. Even though there are clear market leaders in both OMS and EMS providers, it will be the seamless integration of combining EMS and OMS functionality which will permit the Buy Side leverage real value. Individually an OMS or an EMS cannot offer a one stop solution, but the ability to integrate will be the key differentiating factor. OEMS - THE FUTURE! The Buy Side has always provided challenges and new opportunities to FinTech vendors offering new OMSandEMScapabilities.BuySiderequirementsis constantly moving depending on where and what is traded, trading speed and volatility, how many asset classes and trading strategies. FinTech Vendors can no longer develop technology led products in attempt to be an all to all Buy Side provider, or reduce the capabilities of EMS. Consolidation however of OMS and EMS offers key benefits, for the Buy Side needing to trade multi assets, manage portfolio risk in real-time, ability to customise algorithms, manage execution destinations and using data analytics within the trading process will require complex event processing modelling. The integration of the ‘’best in class’’ OMS and EMS in a cost effective ‘’market led’’ solution will win the battle. Fin Tech Vendors who offer a ‘’real story’’ and provide advanced market led technology combined with a lower cost of ownership will gain a competitive advantage. FROM SELL SIDE TO BUY SIDE Traditional broker relationships are also being redefined due to changes in market structure. Buy Side firms will always rely on a ‘’High’’ and ‘’Low Touch’’ Sell Side services for liquidity, how these services are delivered will undergo transformation. Increasingly Asset Managers will rely on their own resources to develop execution strategies, increase their understanding of how algorithms work and manage their own risk. The resulting Buy Side evolution of ‘’OEMS’’ will leap beyond Sell side applications in providing platform integration, and the addition of decision support tools from pretrade analytics to real-time execution across multiple-asset classes. AI (Artificial Intelligence) must be included to provide shorter term Alpha capture enhancing trading execution strategies. •• “THE STRENGTH OF OMS IS IN THE DEPTH OF FUNCTIONALITY, ROBUSTNESS AND SUPPORT, HOWEVER, THE POTENTIAL FOR EMS DIFFERENTIATION ALSO LIES IN ADDED VALUE ANALYTICS AND ENRICHED DATA.” •• ANTONIO CIARLEGLIO Harrington Starr
  49. 49. 5 1 EMS having dominated in playing a key role as an Independent provider to calculate, deliver and monitor trading algorithms from a variety of providers, the movement to e-trading FX and Fixed Income products is leading to new requirements such as interoperability and collateral management. Additionally the need to monitor risk effectively is moving from traditional risk assessment, for example; growth, leverage or yield to more complex strategies based on credit exposure, volatility and options expiries, OEMS solutions must begin to focus on trade support, trade processing, portfolio management, risk and compliance. PLATFORM EVOLUTION - BUY SIDE Regulatory complexity is increasing and the move to trading across multi asset classes across new markets is creating a real need for different systems to communicate as one, Front to Back and globally. Whether it is London Traders calculating real-time exposure risk in Brazil, to the latest Post-Trade reporting requirements of Compliance, the Buy Side requirements are growing beyond the Single Asset system. And with more trading functionality available to Buy Side firms, combined with dynamic free flow of data throughout the lifecycle of a trade, will facilitate data consistency, accuracy and seamless integration between combined OMS-EMS systems. Institutions will begin to reduce costs and complexity, therefore platform consolidation across multi asset classes and markets will become a natural solution. Although management reporting and accounting aspects of OMS systems will remain beyond the scope of OMS/EMS hybrids, platform consolidation will continue as cost reductions and the use of a single OMS- EMS system increasingly becomes the ‘’Holy Grail’’ for the Buy Side. ANTONIO CIARLEGLIO Harrington Starr
  50. 50. 5 2 > RADING BUSINESSES RELY ON MATHEMATICAL MODELS ACROSS the entire value chain—examples include deriving forward curves; pricing deals and calculating risk sensitivities. This dependency on models brings with it challenges around developing, deploying and using them: ■ Developing and deploying models quickly is key, but often impossible within the framework of existing trading and risk management systems. ■ Access to the right input data is often a big challenge. ■ Models are often compute-intensive, making efficient use of available server resources vital. ■ Separation of data access, presentation and model algorithms is good practice and promotes maintainability and reuse, but it’s often not practical with the technologies used (eg, Excel). ■ Model developers need flexibility to use their preferred technologies (MATLAB, Excel, F#, etc). ■ Lack of version control, security and audit history bring significant operational risk. A typical scenario involves quants developing models for various purposes (eg, optimisation, pricing, risk), often using different technologies (eg, MATLAB, Java, Python, C++). Quants spend a lot of time on routine tasks such as connectivity to data sources, handling security and running models in parallel. These tasks detract from doing the job that adds the most value to the organisation—implementing mathematical models. The infrastructure available to run models is often far from Enterprise Level. Production runs might be performed on a user’s PC and it can be unclear which version of a model produced which result, causing problems with audit and traceability. Modelling platforms can be developed that address these issues. They provide a set of generic, shared services used to support any model-based process. This increases the return on investment of the platform, since it can be reused across the organisation. With an agile approach to MARTIN CHEESBROUGH Digiterre IMPLEMENTING QUANT MODELLING PLATFORMS T
  51. 51. 5 3 > MARTIN CHEESBROUGH Digiterre development, these services are built in short iterations and grouped into releases that allow value to be delivered quickly. A typical modelling platform consists of four major components. Model Management: Provides facilities for storing the models developed by quants with full version control and permissioning. This means that it is easy to control who can update which models and see who has done so in the past. There is never any confusion over which is the latest version of a model. Model management also includes facilities to capture meta data for each model—such as environment prerequisites and the parameters it needs in order to run. Runtime Environment: The environment within which models are executed. This typically makes use of a high performance computing architecture to enable models to be run in parallel over multiple nodes. The runtime environment provides a host container for each model technology supported by the platform—eg, Java, MATLAB or C++. The rest of the architecture can then remain independent of the model technologies in use. Data Federation Services: Provides an abstraction layer on top of the organisation’s data sources. These might include internal databases and external data sources such as Reuters. This decouples the models from these underlying data sources. The Data Federation Services layer determines which data source to access in order to retrieve the data needed by a model. This has advantages in terms of future scalability and flexibility and removes some of the more mundane tasks for the model builders. Model Data Store: This is specifically designed for storing the large volumes of time-series data consumed by and generated by models of this nature. This typically involves manipulating large matrices of data. The Model Data Store is optimised for reading and writing such data and does not impose any specific structure on the data that a model uses. Moving from a starting point with many models running in different environments using different technologies to a single, fully featured modelling platform can require a considerable investment. Attempting to make the leap in a single step is costly and risky. However, the implementation does not have to be tackled in this way. A phased approach to implementation allows the organisation to evolve the solution in-line with business priorities. Such an approach should start by identifying a long term vision for the modelling platform that clearly lays out the objectives. This can then be refined into a prioritised “backlog” of features that will form the roadmap for development. This should be done with the recognition that things will change as the programme unfolds and people use the platform and re-prioritise. From the backlog the initial phase can be scoped. This should focus on a small number of features that will add value but will not take too long to implement. The first phase should focus on one or two models and preferably those that are well understood and for which the source data is readily
  52. 52. 5 4 available. Otherwise there is a risk that the combination of developing new features at the same time as redesigning a complex model and rationalising data sources will cause the project to grind to a halt. Further phases can then add more features, with the backlog being reprioritised at each stage. Releases should be kept to approximately three months duration to maintain momentum. Adopting an agile approach combined with techniques like continuous integration and test driven development shorten the feedback cycle further. This ensures there is constant collaboration between the development team and the business. In summary, a modelling platform is an environment within which model developers can construct complex models based on consolidated enterprise data, test them and release them into production where the results can be used for business decision making. The benefits are: ■ A common interface to data held in multiple repositories to reduce the time and effort spent building models and accessing results. ■ The capability to manage distribution of model executions across servers. ■ History of model execution results and input parameters automatically stored. ■ A scalable solution that evolves with the business, availability of data and expertise within the organisation. ■ Controlled access so only approved models run in production; changes can be tested and authorised and models only run when they should. With this approach model developers are empowered and can focus on where they add value to the organisation. MARTIN CHEESBROUGH Digiterre
  54. 54. 5 6 > VER THE PAST YEAR THERE HAS BEEN A FLURRY OF ACTIVITY AS Banks prepare for the introduction of the Volcker Rule in July 2015, which will mean that they can no longer carry on certain types of Proprietary Trading. The main question that has been asked is what is going to happen to the current teams and traders – are the banks going to find a way to ring fence them or are they going to set up shop on their own? The answer is mixed and there have certainly been examples of both over the last year. One of the most recent news clips has been that RBC has declined to spin out their proprietary trading unit, having looked at investing nearly $1 billion dollars in a hedge fund. However, there have been examples of other firms being formed from within Investment Banks, most high profile of which are nQuants from Barclays and Societe Generale, who are planning on spinning out their proprietary trading team. There has already been considerable rhetoric written about how this will affect market making, with arguments made that it could either be negative or won’t have an impact at all. However there is another question that I think is worth asking, when these new entities start springing up how are they going to affect the technology used and the individuals who use that technology? TOM KEMP Harrington Starr What effect has the Volcker rule had on Proprietary Trading and start up funds? HOWWILLTHIS AFFECTFINTECH? O •• “THE MAIN QUESTION THAT HAS BEEN ASKED IS WHAT IS GOING TO HAPPEN TO THE CURRENT TEAMS AND TRADERS – ARE THE BANKS GOING TO FIND A WAY TO RING FENCE THEM OR ARE THEY GOING TO SET UP SHOP ON THEIR OWN?” ••
  55. 55. 5 7 TOM KEMP Harrington Starr Well for a start these teams within the banks have always had a terrific reputation when it comes to technology and are seen as a shining light in an occasionally stagnant investment banking environment. So now these guys are becoming independent they will have even more freedom to experiment and come up with new and different ways to make the most out of their technology. It’s entirely feasible that we could see a real change in the established market players as these firms no longer become constrained from the institutions that they sit in. It’s also going to increase competition for the best Developers and PhD candidates as Banks and existing Hedge Funds face competition from these new firms. Very talented technology candidates want to work somewhere they can solve the most complex problems and have the freedom to come up with innovative solutions, so these new prop trading firms will be the perfect destination. Moreover once they get their hands on this opportunity and start using automated, systematic and quantitative trading without the previous problems that could be thrown up within an Investment bank, what is going to happen? We’ve already been in a technology arms race for most of the last 10 years, just look at the money spent by HFT Traders on hardware and software, but this could mark another stage of it. By forcing the money outside of investment banks and into the hands of extremely smart people with little regulation then expect the arms race to reach another level.
  57. 57. 5 9 ETRM/CTRM EdwardStock–ArtaoisLtd AndrewdeBray–FactumLtd RichardKidd–Planlogic AndrewThomas–HarringtonStarr LudwigClement–CTRMForce DrGaryM.Vasey&PatrickReames- CommodityTechnologyAdvisory JulianEyre–Openlink
  58. 58. 6 0 > HE QUESTION FOR START-UPS TRADING ENERGY AND commodities is rarely one of “which is the most expensive risk management system available?” For potential new entrants involved in trading, the “ETRM/CTRM system” may well be kept within the bounds of a spreadsheet marking unhedged positions to market (MTM) and then a potential stop loss on these positions. With the basics in place the next steps for most companies is to look at the Value at Risk (VaR) position. I believe this calculation to be widely underused as a passive measurement. Investment into VaR calculations can be made more attractive if the calculations are used as an active measure and driver in the risk policy. PASSIVE VAR Value at Risk (VaR) is the most common form to determine the volatility of the market and the changes expected to a MTM position using either analytical, historic or Monte Carlo simulation. In short terms the measure gives the user an indication to an industry standard 95% confidence of the change in the value of a portfolio the following day. The user should also bear in mind that there are a further 5% of possibilities that may contain so called “fat tail” risk. The use of VaR is used by most companies as a passive tool for risk measurement, driving the controls established as VaR limits. I believe that VaR can also be used as an active measure of market volatility helping to establish the profitability of new markets and establishing the amount of Capital at Risk (CaR) a company may have. INCORPORATING A CORPORATE LIQUIDITY FACTOR One of the issues with VaR is that it looks only at one further day of risk. It has become established that, using a square root of the number of days, VaR can be escalated to show the losses over the same number of days. This is important as we can use this function to take into account inherent risks in portfolios lead by either an inability to hedge quantities unit for unit, (owing to differences between physical positions held and the contract sizes of the financial tools to hedge them) or by incorporating liquidity risk into the calculation. A Corporate Liquidity Factor can be determined to establish the number of days required to unwind positions, depending on the size of market position and market liquidity. Then by using the same square root of number of days calculation, the exposure to the moving market can be more accurately identified. In the case of physical trading it may reflect the time needed EDWARD STOCK Artaois Ltd T Embracing VALUE RISKat