FIA holds a showcase for fintech startups each year at the FIA Expo, its annual trade show in Chicago. The startups at the Innovators Pavilion are selected by an independent committee comprised of technology experts, venture capital investors and derivatives industry executives. To qualify, the startups must offer a technology solution that is both innovative and relevant for companies in the listed and cleared derivatives markets.
This year’s committee received more than 45 applications and selected 15 startups. Most of the companies are based in three major financial centers: New York, Chicago, and London. But this year’s group also included firms based in Colorado, Connecticut, New Jersey, Tennessee, Singapore and Vancouver, reflecting the geographic diversity of technological innovation. In some cases, the founders came from banks and brokerages such as ABN Amro, Barclays, Goldman Sachs, HSBC and TD Ameritrade. On the other hand, three of the startups have their roots in the hedge fund industry, and several were launched by people with hands-on experience with cryptocurrencies.
The solutions offered by these 15 companies fall into four broad categories. One set of companies is targeting functional areas such as data analytics and transaction processing. A second group are offering new solutions for trading. A third group is offering new types of products, including futures on trucking freight, indices that track risk premia investment strategies, and financing backed by bitcoin. Lastly, four companies are specializing in regtech, offering new tools for making the compliance process more efficient and reliable.
The Innovators Pavilion is an integral part of FIA’s annual Futures and Options Expo, the cleared derivatives industry’s most widely-attended event. Since its inception in 2015, the pavilion has featured 82 fintech startups that harness innovation and entrepreneurship in financial markets technology.
Five finalists each year are invited to a ‘Meet the Innovators’ pitch contest, where five startups vie for the title of FIA Expo Innovator of the Year. Freightwaves won this year’s award.
The FIA Innovators Pavilion is now in its fourth year and the total number of companies that have participated has reached 70. This year’s group stands out for having four companies involved with cryptocurrencies, far more than in prior years and an indication of the growing interest in this new asset class. Second, many of this year’s Innovators are using their knowledge of industry pain points to target specific real-world problems, rather than aiming for dramatic disruption of existing market structures.
As in past years, the 2018 group includes companies at varying stages of development. Some are very early stage, with bright ideas and interesting technology but only just beginning commercial development. Others are much farther along, with their solutions live and in production at banks, hedge funds and clearinghouses. What they share is a passion for innovation and a determination to deliver new ways of doing business.
Five companies in this year’s cohort are targeting functional areas within banks, hedge funds, exchanges, clearinghouses, and other types of financial services firms. These companies are offering new ways to share data, build software, automate back office functions and apply machine learning to transaction processing.
Datavore Labs aims to make the tools of data science much easier to use. The New York-based company, which was founded in 2014 by two former Goldman Sachs employees, has developed a data science platform that can help analysts perform analytics and create visualizations using large amounts of data from files, APIs or databases without writing code. It uses machine learning to make recommendations for data manipulations and visualizations, clean up data, and detect patterns and outliers.
Genesis Global builds IT solutions for banks, clearinghouses and other firms in the global capital markets. What sets this company apart is that it uses a microservices-based framework to build its solutions. This approach to building software, used by many tech companies and leading banks, leads to faster results than traditional solutions. The company, founded in 2015, uses this framework for solutions such as position keeping systems, order flow analytics, trade allocations, and real-time reconciliation.
iPushPull, a London-based company founded in 2013, already has won a following among trading firms that use its data sharing platform. The company’s platform handles static, live and streaming data with connectors into Excel, databases, and third party platforms such as OpenFin, Slack and Symphony. Trading companies are using its platform to consolidate risk information from different futures and options trading platforms and to monitor the risks that traders are taking in real time.
Sudrania Fund Services is a Chicago-based company specializing in investment accounting and reporting for fund managers. The founders have more than a decade of experience in the fund administration business, and set up their company in 2016 with the idea of leveraging cloud computing and big data to deliver essential back office services via a simple and low-cost browser-based solution. Sudrania is targeting smaller funds, with $1 million to $3 billion in assets under management, and already has 35 customers, including several cryptocurrency funds.
Tookitaki is a Singapore-based company founded in 2014 that is building machine learning solutions for operational processes in finance. One target is reconciliation management; the company uses machine learning techniques to identify patterns in transactions data and then predict where the exceptions are likely to occur. The company also is building solutions for detecting money laundering, another area where massive amounts of data make it difficult for rule-based workflows. The company’s customers include J.P. Morgan, Nomura, OCBC and Société Générale, and earlier this year it began targeting the U.S. market, opening an office in Charlotte, North Carolina and hiring a team of veteran technology executives from IBM and Intel.
The three trading solution providers in this year’s cohort demonstrate the rich variety of innovation in the fintech world, with some focusing on making complex trading strategies more accessible to ordinary investors and others seeking to change the nature of trading itself.
Adroit Trading Technologies is focused on solving the kinds of problems encountered by hedge funds and asset managers when trading over-the-counter products. The founders previously worked at several well-known buyside institutions and they designed their system to be the ideal order management and execution management system for buyside traders of OTC products such as swaps, foreign exchange and Treasury securities. Key features include the ability to aggregate liquidity from multiple types of trading venues and optimize execution across multiple trading protocols. The company says its system not only delivers a dramatic reduction in costs for its buyside customers but also streamlines the execution process and supports the adoption of automated trading.
At the other end of the spectrum is Primal Quant, a Chicago-based company founded in 2016 by an industry veteran with experience in proprietary trading and retail brokerage. His idea is to help retail investors apply the techniques of quantitative investing without needing to have programming skills. His company’s platform, which launched in August, allows investors to build a trading strategy for futures, stocks, foreign exchange and cryptocurrencies and test those strategies against both live and historical data.
The most innovative company in the group is Radar Relay, a peer-to-peer trading platform for Ethereum-based tokens. The Colorado-based company, which has raised more than $10 million from venture capital investors, allows traders to bypass exchanges and trade directly with each other. That eliminates the risk that assets can be stolen from an exchange, a frequent problem in the cryptocurrency world. The company’s platform functions by broadcasting a user’s order, finding a match, and then using a smart contract to complete the transaction and record the information on the blockchain.
Three companies in this year’s cohort have found innovative ways to create new products that leverage the risk management properties of derivatives.
Drawbridge Lending brings together a team of people with years of experience in traditional exchange-traded markets who are now applying their expertise to deliver an innovative service for owners of bitcoin. The Chicago-based company is taking the concept of secured lending and applying it to the cryptocurrency market, linking institutional lenders with borrowers who use bitcoin as collateral. To manage the fluctuations in the value, the company is using bitcoin options as a hedge. That can avoid margin calls when prices suddenly drop — a common problem for other lenders in this space and a classic example of the risk management function of derivatives markets.
Freightwaves is a Tennessee-based company laying the foundation for a new set of futures contracts based on the cost of shipping goods by truck across the U.S. The company has a three-pronged strategy: form a community of users centered around market data and news, develop an analytics “dashboard” to provide more transparency into freight prices, and partner with two well-established institutions to launch its futures contracts in 2019. The contracts will be listed on Nodal Exchange, a U.S. futures exchange, and will track an index provided by DAT Solutions, a leading source of freight transaction data. In effect, the company is supporting a new futures market and giving freight companies and their customers a new way to hedge their costs.
MSR Indices is a small company with a big idea— convert hedge fund trading strategies into indices, allowing investors to use those strategies without the cost and complexities of investing in those funds. The company’s founders came from hedge funds known for alternative investment strategies, and their indices are designed to track risk premia investing, a strategy that has caught on among institutional investors. To achieve the same performance, they use combinations of futures based on equities, fixed income and commodities. In August, MSR signed an agreement with S&P Dow Jones Indices to license their indices and promote them as a benchmark for fund manager performance.
This is always a busy area in the Innovators Pavilion, but in 2018 there was one important difference in focus. For the first time, the Innovators Pavilion featured compliance tools for companies trading cryptocurrencies or creating digital assets, reflecting a broader trend towards the institutionalization of this new asset class.
Chainalysis offers an intelligence solution for financial institutions whose customers are moving into cryptocurrency markets. The company’s software allows institutions to identify suspicious transactions, and investigate fraud, money laundering and other types of misconduct. The company is also working with governments and trading venues to help investigations into illicit activity, for example tracing a bitcoin address used in a ransom note. The company was founded in 2014 by cryptography experts and software developers who say that more visibility into the history of cryptocurrency transactions will build trust in blockchain technology, paving the way for greater use.
iComply Investor Services started off in 2017 as a compliance tool for “initial coin offerings” of new digital assets. These ICOs raised millions of dollars for their backers, but the trend ran into resistance from securities regulators who view ICOs as an unregulated version of a securities offering. iComply helps ICO issuers ensure compliance with various regulations including anti-money laundering rules and know-your-customer rules, during both the initial offering and subsequent secondary trading. The Vancouver-based company is also looking to offer automated compliance solutions and identity verification, and recently hired a top executive from a Thomson Reuters division that provides risk-based intelligence for compliance.
Kaizen Reporting aims to solve a more prosaic problem—the huge increase in reporting required by banking and securities regulators around the world. The London-based company was founded in 2014 by experts on regulatory reporting with experience in government and banking. What sets this company apart is its focus on accuracy; Kaizen combines regulatory expertise and data science to provide quality assurance for regulatory reporting. Its software tests reports, detects errors, tracks where they came from, and sets up a process for banks and other financial institutions to improve the quality of their regulatory reporting. Its initial focus was on reporting requirements set by European laws, but it now covers requirements from regulators in the U.S., Canada, Hong Kong, Singapore and Australia.
Waymark Tech tackles a different issue—how to keep up with the large number of new regulations in nearly every major jurisdiction. To solve this problem, Waymark uses a branch of artificial intelligence called natural language processing to parse the vast number of new regulations. Its software not only tells users what has changed but also provides recommendations for how to respond, scenario analysis to anticipate changes, trend analysis based on what offcials say in their speeches, and comparisons to identify differences in areas such as margin requirements. The London-based company was founded in 2016 and launched its solution in 2018, and was selected by SEI, a service provider to investment managers, to participate in Codify, its RegTech incubator in London.