I have been reminded by Chris Murphy, usually in the prelude to introducing the Ediphy Execution-as-a-Service offering to potential partners or clients, that I have 30+ years of financial markets experience! My mind has been cast back to the late 1980’s and the start of those 30 odd years in this industry.
My erstwhile ‘big boss’ at the time, Ossie Grübel, had a reputation for toughness and favoured action over discussion. Each morning he would patrol the CSFB trading floor, at that time above a Mothercare shop facing onto Oxford Street, randomly select a trader and growl a simple question – “Long or Short?” Either answer was acceptable (although not necessarily agreed with!) but to have no view, either way, was not. Ossie expected mental distillation of everything that you knew about the market, as a bond trader, expressed, simply, in one of two short words.
In those days, we occupied a world, as traders, where corporate bond price formation emerged from a phone-based price exchange process, known as ‘knock for knock’, with traders at other banks. Corporate bond issuer data came from several trays of Extel cards housed on a bookshelf next to the Telex machines and Epson dot matrix printers; client inquiry was delivered with impatient yells from salespeople on an adjacent bank of desks; new issues would be priced, in a matter of seconds, by the coffee machine near the Gilts desk; macro, benchmark, commodities and equities market data was served luke-warm on tiny Telerate & Reuters monitors.
In short, traders were then subject to a relatively limited number of inputs that could be assimilated, understood and mentally processed to produce an unequivocal, simplified output - Long or Short.
Roll forward more than 30 years and most would recognise that the reality for traders, on both the buy and sell side, is quite different, with complexity forming as a result of the emergence and proliferation of many new factors. Let’s consider some of those related to technology a little further……
First of all, the context in which financial services firms operate has changed. A friend from university, Pierpaolo Andriani, has produced a large body of work on complexity and innovation within organisations. I would recommend a read of his source material but I hope he will accept my simplification and summary! One aspect he describes is the emergent ‘network economy’, where information is the key currency, and suggests that organisations will become unbundled, smaller, self-organising structures rather than hierarchical and centrally managed as information becomes more obtainable and flows more freely.
I suspect that the internal and external boundaries between the newly created unbundled self-organising structures will serve up opportunities to innovate and improve. If investment banks and asset managers are to successfully participate in the ‘network economy’, create the conditions for innovation and benefit from it, perhaps a new approach is required toward external technology partners, budgetary planning, IT project management and centralised decision making. Resistance to the tide of change needs to be opposed if incumbents base this on a perceived existential threat posed by the democratisation of information.
Experience to date suggests that the financial services sector has made almost no efficiency gains through the use of technology, whereas companies in other sectors have enjoyed significant improvement. An Oliver Wyman study in 2015, ‘Managing Complexity’, clearly makes this point with cross industry examples. The study goes on to suggest, ‘complexity is an unavoidable fact of life for financial firms. They must get better at managing it.’
Furthermore, the study suggests an aggregate position for the entire sector. One suspects that the situation for IBs and asset management companies is worse than this assumed average. The high-water mark for innovation has been achieved in the retail banking sector due to the dramatic disruption caused by the rise of the digital native ‘neobanks’ and rapid adoption of efficiency enhancing technology by the incumbents, leading to the development of the sector’s entire core competency created by what Pierpaolo Andriani may call exaptation and recombinant innovation.
There are some outcomes of complexity that may be seen as desirable but other aspects that are not. Differentiating between the two and achieving the former are difficult challenges facing our industry.
The ability to harness and use increased data in the price formation process or to improve TCA analysis may indeed be desirable but the opportunity cost to allocate the internal resources required to collect, normalise and aggregate the data may be harder to justify within internal IT budgets. We can think of the anticipated promise of MiFID 2 data yet how many firms have harnessed this powerful data set for real benefit. Overlaying this is the need to ensure the traceability of data provenance. Using data to improve customer understanding to ensure better product fit, to improve Alpha or facilitate risk transfer will only be possible and repeatable if this is guaranteed. Decades of ‘bolting-on’ systems in many organisations makes this an extraordinary challenge.
Not only have we seen the advent of electronic distribution channels creating new networks of connectivity but, more recently, we have witnessed proliferation with the creation of, not only D2C networks, but increasingly C2C, D2D and All-to-All connections – considerable choice and fragmentation. Increased connectivity to a wider variety of electronic markets to improve liquidity and execution outcomes is clearly advantageous but how many investment firms have the resources to deploy to manage the complexity of the various connectivity and execution protocols?
Delivering an experience analogous to using Amazon, when completing a transaction by a buyside trader, should be a reasonable expectation if there is to be true meaning in ‘best execution’. A trader should have access to a complete choice of vendor, product and prices, delivered via a single entry point and with standardisation in the transaction experience, regardless of the underlying specific attributes of the vendor, product or market.
The search for scale through acquisition, and desire to provide a ‘follow the sun’ product offering does not bring only good news. Less mentioned outcomes are increased complexity and considerable costs, direct and indirect, associated with the splicing together of fragmented IT systems. A design led, longer term approach is rarely taken. The significant majority of the eye watering global IT budget at a bank I have worked at (I am certain I am not alone in making this observation) went on infrastructure maintenance and system interoperability patching with only a tiny slither of the budget making its way to innovation and new technology investment. Innovation was rarely produced by the IT division but was occasionally delivered by dev/quants employed on trading desks or more often by a small number of specialised external Fintech companies.
Market participants face greater complexity in the 2020’s than they did in the 1980’s but, with improved understanding of the make-up of complexity, the vision to differentiate between its constituent parts and the ability to objectively decide what to tackle internally vs outsourced partnership there is a pathway to future success.
I would like to think that the efforts of Ediphy to remove undesirable complexity from our clients’ world would meet favour with Mr Grübel!
At Ediphy Markets we have connected to multiple data sources to create innovative TCA and liquidity dashboards. Our Execution-as-a-Service provides clients access to multiple fixed income markets without the need to expose the underlying complexity of each trading protocol. Ediphy Analytics provides a bespoke software design and build service to clients seeking to better visualise and generate meaning from their private data.