MarketVoice spotlights 20 companies that typify the current wave of financial technology innovation. All 20 were selected for the Innovators Pavilion at this year's FIA Expo.
n recent years, an explosion of interest and investment in new forms of financial technology has triggered a wave of entrepreneurial energy. People from a wide variety of backgrounds are forming new companies to harness advanced techniques in software engineering, artificial intelligence, data processing and other technologies. Their goal is to create innovative solutions up and down the financial markets value chain, opening up new opportunities for more efficient trading and risk management.
In this article, MarketVoice spotlights 20 companies that typify this wave of financial technology innovation. All 20 were selected for the Innovators Pavilion at this year's FIA Expo by a group of industry professionals and venture capitalists. Some draw on the science of artificial intelligence to improve trade processing or identify rogue traders. Some are developing new ways for buyers and sellers to interact in markets such as foreign exchange, precious metals and Treasury bonds. Others apply big data solutions to help brokers and trading firms manage huge amounts of data more efficiently. Others borrow concepts from the consumer technology world, building match-making algorithms for IT professionals looking for a job and Amazon-style marketplaces for buyers and sellers of financial research.
What these 20 firms have in common is that they were all started in the last five years. Some are already in production and have a substantial list of customers. Others are still in beta mode, preparing to launch in the coming months. All demonstrate the continuing opportunity for new ideas to find a home in the technology infrastructure of the financial markets, and the need for new solutions as client demands and the market landscape change.
Automating Complex Trading Strategies
Automation is already a big part of the trading process in nearly every exchange-traded market, but the pace of innovation has not slowed down. One area of focus is on complex trading strategies that involve more than one instrument
For example, GX2 Systems has developed a spread trading engine that is designed to work in any asset class. The company, which was established in 2013 as a joint venture backed by two proprietary trading firms, has a patented system that finds the optimal price for each leg of an order and then guarantees execution. If the customer decides to execute the order, GX2 takes on the execution risk and fills the order out of its own inventory or the market. "We allow the trader to focus on other aspects of the trade and not worry about the execution risk of each one of the legs," said David Jaberg, the company's president and CEO, who started his career on the floor of the Chicago Board of Trade.
Another example is Cassini Systems, which offers pre-trade analytics for swaps. Cassini’s founders recognized that in today’s swaps markets, traders have to consider new types of costs such as clearing fees and capital requirements before entering a trade. Cassini's product lets traders calculate the total cost of a trade, including margin, fees and collateral, over the entire lifetime of the trade, and then compare that cost to alternatives such as swap futures and Treasury futures. Cassini’s leaders, Liam Huxley and Neil Smith, think their product will be particularly useful for asset managers and corporate treasurers that need to evaluate the all-in costs of hedging risk with a customized swap and whether a less precise hedge using more standardized products might be a better option. Cassini currently is beta testing with two clients and is preparing to go live, and it is also talking with other vendors about plugging its product into their systems.
Equity Options are another area where technology is being applied to solve complex trading problems. For example, Tradelegs, a New York-based company founded in 2010, has developed an analytics platform to optimize trading decisions, parsing millions of possible combinations of puts, calls and underlying securities to determine the best way to obtain the desired exposure. Customers such as hedge funds and investment managers can enter their underlying asset prediction, capital and risk constraints into the company's platform. The platform’s patented technology, which is based on a mathematical tool called "multi-paradigm algorithm hybridization," then examines all possible investment combinations to produce the best strategy to maximize the expected profit while providing downside protection to meet capital and risk constraints.
Another example is EESAT, which had its genesis at MEB Options, an options trading firm based in Chicago. MEB built software to help its clients execute complex orders, and the software worked so well that it was spun out as a stand-alone product. EESAT aggregates pricing data for complex options strategies from seven U.S. options exchanges and presents the data in a single consolidated view. The company has landed several clients, including Bank of America Merrill Lynch, and is busy developing related data feed and analytics products.
Risk Machines and Compliance Engines
Automation is also spreading to the area of compliance and risk management. With the explosion of rules following the passage of Dodd-Frank and other post-crisis reforms, compliance officers are buried under an avalanche of paperwork and trading practices are subject to regulatory scrutiny like never before. To address this problem, companies like Ascent, Decryptex Financial Laboratories and Neurensic have developed systems to automate certain parts of the compliance process.
With the explosion in the use of automated trading, the need to prevent errors is higher than ever. That is where Aesthetic Integration sees an opportunity. The London-based company has an expertise in formal verification, a branch of engineering concerned with making sure that systems perform as designed. One of the company’s founders, Grant Passmore, is an expert in formal verification and a PhD from the University of Edinburgh. He formed the company with Denis Ignatovich, a quantitative trader at Deutsche Bank, after the two men realized that this approach could be applied to the code underlying algorithmic trading systems. Rather than manually reading lines of code or testing for bugs, Aesthetic Integration takes the verification process to a higher level, aiming for the same precision as companies like Intel have with their chip design and manufacturing.
Ascent, which began operating this year, has developed a service to help firms manage the flow of rules coming out of the Commodity Futures Trading Commission. A client answers a list of questions, and the software draws up a to-do list of forms that need to be filed and rules that need to be followed. The Chicago-based company is led by Brian Clark, a lawyer who worked in CME Group's market regulation department for three years and then joined SCB, a commodity broker based in Switzerland, as global head of compliance for its U.S. operations.
Decryptex, a New York-based company founded in 2014, uses algorithms to scan email, telephone conversations and other forms of communication, and then syncs that information with a firm's trading data and investment portfolios to detect insider trading, front-running and other suspicious behavior. The firm was founded by Daniel Cashion, a former portfolio strategist at Moore Capital, and is tailored for hedge funds and investment advisers that need to be prepared for regulatory inquiries into their trading.
Neurensic, a Chicago-based startup, uses machine learning, a branch of artificial intelligence, to scan trading activity and search out patterns that may indicate fraud or market abuse (see "Machine Learning and Spoofing," also in this issue). The company was started by two MIT graduates who used their knowledge of artificial intelligence to build automated trading systems for trading firms. After Dodd-Frank was enacted, they shifted gears and applied their skills to helping firms comply with new rules targeting spoofing and other forms of market abuse.
People from a wide variety of backgrounds are forming new companies to make trading more efficient and manage risk.
New Trading Venues
Another area of innovation is in the development of new ways for buyers and sellers to interact.
For example, Allocated Bullion Solutions sees an opportunity in the markets for physical gold and silver to introduce technologies for trading and settlement that exist in the foreign exchange markets. The Singapore-based company was founded by Seamus Donoghue, a former head of FX forwards and short-term rates trading in the Tokyo office of Bank of America Merrill Lynch. His goal is to replace telephone trading and manual trade processing with an electronic network linking buyers and sellers of precious metals. The company is also introducing better tools for managing trading workflows. In April it formed a link with MarkitServ, the post-trade processing platform operated by Markit, to automate the settlement process.
Global Markets Exchange Group is introducing a new type of futures contract that mimics the economics of an interest rate swap but takes advantage of the lower costs of trading for futures. GMEX, which is based in London, revalues its swap futures daily so that the maturity stays constant, rather than expiring on a set date like conventional futures. Hirander Misra, the company's CEO and the former chief operating officer of Chi-X Europe, believes its first contract, a Euro-denominated swap futures contract, will be especially appealing to swap market participants as Europe moves closer to mandatory central clearing for swaps. To get its new contract off the ground, GMEX partnered with Eurex late last year and launched trading in August via a link with the Eurex platform, giving GMEX access to the large trading community already connected to the exchange and its clearinghouse.
Direct Match is a new marketplace for the trading of U.S. Treasury debt. Outside the dealer-to-dealer market, most Treasuries are traded via phone calls and request for quote platforms. The New York-based company thinks the time is right to introduce an all-to-all central limit order book, creating a venue where all institutions can trade anonymously on a level playing field. The company was founded in 2014 by Jim Greco, a trader and software developer who built electronic trading platforms for Treasuries at Getco and Jefferies, and Galen Simmons, a former rates trader at Jefferies.
Ogg Trading, a New Jersey-based company, is targeting buy side institutions that are frustrated with trading conditions in the foreign exchange market. The company has created a dark pool for banks, hedge funds, asset managers and other institutional players to execute large trades without exposing their orders to the wider marketplace. The new venue is linked with Bloomberg's FXGO, a widely used multibank platform for trading FX. David Ogg, the company's founder, says the approach will protect his customers from the "front-running" of their orders by other market participants. Ogg has a track record of innovation in FX; he founded Hotspot, now one of the biggest FX trading platforms, and spearheaded the development of LavaFX, another FX trading venue.
Tools for Traders
Another area of innovation is in the mechanics of the trading process. Companies like CloudMargin, Duco, Green Key and Metamako are finding strong demand for innovative solutions that bring greater efficiency and better performance to certain parts of the trading process.
CloudMargin, for example, is leveraging the availability of cloud computing to help its clients track margin and collateral requirements for their bilateral and cleared derivatives through a web browser. That is a much less expensive approach than traditional hardware and software solutions, and much more efficient than the manual processes widely used across the industry. The London-based company was founded by a team of collateral management professionals led by Andy Davies. The company also has ties with the futures industry; Richard Berliand, the former global head of futures and options at J.P. Morgan, is an advisor to its board.
Duco is targeting the reconciliation part of the trading process. The company's Duco Cube product uses artificial intelligence to match hundreds of thousands of trades in seconds. Unlike legacy analytics build for a specific business area such as cash reconciliation, Duco's patented technology enables it to match any data in any format for any business purposes. The London-based company was founded in 2010 by Christian Nentwich, a computer science PhD, and has financial backing from Euclid Opportunities, an early stage funding arm of ICAP.
Green Key Technologies focuses on how traders communicate. The Chicago-based company offers an encrypted voice over internet solution that it describes as being like Skype for financial markets. The goal is to replace the specialized telephone systems that sit on trader desktops with software that routes calls over the interenet. The company was founded in 2013 and already has more than 200 customers. In fact, Eagle Seven, a proprietary trading firm, liked the technology so much that in September it bought part of the company. "Green Key has changed the way our traders interact with the marketplace," commented Eagle Seven’s chief executive Chris Lorenzen.
Metamako focuses on making fast traders even faster. The Australian company, which was founded in 2013 by three experts in ultra-low latency hardware and software, specializes in making network switches for proprietary trading firms and other financial services firms. The company says its devices are up to 50 times faster than conventional switches, thanks to an innovative design for which it is seeking patent protection. This year the company introduced two new products that further optimize network performance by incorporating intelligence right into the switches.
New Ways to Share Information
One of the most exciting areas of financial technology innovation is happening in the sharing of information, where a variety of startups are using methods pioneered in other economic sectors to improve the way financial firms gather, store and distribute various kinds of information.
All 20 firms on our list were selected for the Innovators Pavilion at this year’s FIA Expo by industry experts and venture capitalists.
For example, online dating sites such as eHarmony and OkCupid have turned the search for romantic partners into a science. Now Untapt is applying a similar approach to the search for IT engineers. Its founders, Geoff Massam and Ed Donner, used to work in the IT departments of investment banks, and one of their frustrations was the challenge of finding qualified hires. They started the firm with the idea of applying technology to develop better candidate profiles than traditional resumes and match people to jobs more efficiently than headhunters or hiring managers. Launched in February 2013, Untapt says more than 13,000 IT professionals have registered on the platform and 60 companies are using it to search for new employees.
TickSmith is another example. The company’s founders recognized that trading firms and brokerage companies were having trouble coping with the enormous amounts of data being produced by financial markets. They developed a database solution based on Hadoop, an open source software framework for storing data and running applications on clusters of generic hardware. Hadoop is used by companies like Yahoo! and Facebook to manage massive amounts of data and run applications such as search queries. The Montreal-based company has adapted the technology to financial needs and its clients include hedge funds and data providers that use its database to process historical exchange data.
The distribution of financial market research is ripe for disruption, according to the founders of Airex, a New York-based company that is building an online marketplace for buyers and sellers of research. Their target is the “long tail” of buyers who can’t afford or don’t need to install an expensive full-service research platform such as a Bloomberg terminal but are interested in buying selected reports or other types of financial information. Airex has signed up 70 vendors, including big players such as Bloomberg, Dow Jones and Morningstar but also many smaller research shops and specialized data providers that see the potential for reaching a wider audience via the Airex marketplace. Airex also is introducing eBay-style rankings and reviews, tapping the power of the crowd to give users an indication of the quality of the items on offer. And it’s not just research; Airex also supports the sale of financial applications much like the Apple’s online app store.
One of the most innovative companies in this area is Narrative Science, a Chicago-based company that converts data into narratives. Its signature product, a program called Quill, is based on the work of two computer scientists at Northwestern University. They built an artificial intelligence system that could turn baseball statistics into a sports story. The company now holds eight patents and has 13 pending, and it has gone far beyond sports. Companies such as Credit Suisse, Deloitte, Markit and Nuveen Investments use the company’s software to create various types of financial reports, including end-of-day market reports and earnings previews.