Significant Technology Disruption Is Coming to Financial Services

By Terry Roche, TABB Group

Originally published on TABB Forum

Fintech barbarians are challenging the culture and status quo throughout the capital markets. And they’re going to transform financial services, whether the incumbents like it or not.

From massive utility projects such as the Consolidated Audit Trail (CAT), to disruptive technologies such as blockchain and machine learning; from the evolving face of data management and analytics, to potential cost-slashing solutions for managing the huge amount of reference data in the industry, technology is reshaping financial services. And new players – fintech barbarians, if you will – are challenging the culture and status quo throughout the industry. TabbFORUM’s MarketTech 2015 conference, on Oct. 21 in New York, focused on major initiatives, trends and innovations in the financial technology sector, and the participants reinforced a single message: Significant technology disruption is coming to the capital markets.

The CAT: Historic Industry Undertaking

Driven by the “Flash Crash” of 2010 and other market-shaking events that made it evident to the regulators that they had insufficient data to reconstruct markets after such seismic events, the CAT is likely to be the largest technology program ever seen by the financial services industry. It is expected that the CAT will collect 60 billion messages a day from more than 2,000 market participants and data providers. The CAT will replace FINRA’s Order Audit Trail System (OATS) and significantly expands the data reporting requirements.

Discussing the initiative were four of the then-six final bidders to build the CAT facility: Mike Beller, Managing Partner, Thesys Technologies, and CEO, Tradeworx; Thomas B. Demchak, Global Capital Market Strategist, Computer Sciences Corporation (which is bidding in a joint venture with AxiomSL); Neil Palmer, CTO, SunGard’s Advanced Technology Business (collaborating with Google Cloud); and Thomas A. Sporkin, Partner, BuckleySandler (which is part of a bidder consortium including J. Streicher Analytics, Hewlett Packard and Booz Allen).

While the panelists debated the optimal architecture to deliver resiliency, security, and scalability, they largely agreed that the cost to build the facility would range from $200 million to $300 million.

Thesys’s Beller commented that, “No off-the-shelf system can handle it in any meaningful way.” But SunGard’s Palmer said the firm’s bid with Google leveraged off-the-shelf Google technology.

We expect final selection of the builder of the CAT data platform to be made in 2016, with full implementation of the CAT by 2021.

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Source: TABB Group, CATNMSplan.com

Reference Data – Reforming a ‘Grudge Expenditure’

Philipe Chambadal, CEO of SmartStream, speaking with TABB Group founder and CEO Larry Tabb, discussed the recently announced reference data facility being built by Goldman Sachs, JP Morgan Chase, Morgan Stanley, and SmartStream. Chambadal claimed that $3 billion to $4 billion in cost savings will be realized by the industry within the first year of operation of the reference data facility.

The financial services industry cannot operate without reference data. The challenge is that the data is constantly changing and requires endless corrections. This is a commoditized, highly manual, non-differentiating task that is performed by all market participants. While the reference data facility could have a tremendous impact within the market, it also could provide the foundation for even more fundamental change, such as a utility back-office service.

‘Speed Limit? We Don’t Need No Stinking Speed Limit’

When discussing low latency, the traditional area of conversation focused on high-speed trading. But the focus is changing. The massive size of data now collected by all financial markets participants, in part for regulatory reporting, requires latency-sensitive solutions for analytics. And the bigger the dataset, the faster the computational regime needed to analyze that data in a timely manner. Asif Alam, Global Business Director, Technology Sector, Thomson Reuters; Andy Brown, CEO, Sand Hill East Ventures; and Peter Giordano, Managing Director, Oppenheimer & Co., discussed this fundamental shift.

To start, the data being collected has changed. While it once comprised only structured data, such as prices and order information, it now has evolved to include unstructured data, such as email, chat conversations, social media and phone transcripts. Thomson Reuters’ Alam said that today’s market-data consumers are more interested than ever before in behavioral finance data and machine learning.

Sand Hill’s Brown predicted that most forms of data eventually are going to be hosted on a cloud platform, because the data architectures with the proper level of security and resource management will be too sophisticated and expensive to be hosted in‑house. Oppenheimer’s Giordano added that the financial services industry perfected low-latency technology and is now applying it in the building of cloud networks. Half a decade ago, he said, it was prohibitively expensive for sell-side firms to obtain really good low-latency analytics; but today the vendors develop this kind of technology much faster for less money.

Although cloud adoption in the financial services industry remains throttled by cybersecurity concerns, the panelists agreed that the cost benefits of cloud technology and the strides being made in cybersecurity point to accelerating and widespread adoption. Moreover, there was a view that public cloud security is getting so good that the private clouds are finding it difficult to compete on that point as well.

Trading Wingtips for Five-Toe Shoes

Corre Elston CTO, Financial Services, Google Cloud Platform, discussed Google’s aspirations within financial services with yours truly. Attired in t-shirt, jeans and five-toe running shoes, Elston joked, “Goldman Sachs really didn’t like my FiveFinger shoes. Google doesn't mind me wearing them.”

The reason why Google Cloud is focused on financial services is simple: It’s an information-intense industry, Elston explained. The financial services industry is striving for cost efficiencies, but it has not been distinguished for its development agility or speed. Technologists on Wall Street have tended to be reactive rather than proactive. “It would take months and quarters to be able to act on an idea,” in a traditional Wall Street IT department, Elston noted. Today, the process must be compressed to days or weeks.

Google already has differentiated infrastructure servers and networking that are hugely powerful, hugely scalable, and available on demand at a very low cost, Elston noted. In each large data center, Google has several hundred security personnel, separate and apart from operations people, and more than 500 engineers work on information security; they have detected and eliminated most recent Internet threats, sharing their efforts with the cloud provider community, he added.

The New Face of Change

The final panel of the day – Larry Leibowitz, CEO, Incapture Technologies; Nancy J. Selph, Director Strategic Operations and Innovation, Deutsche Bank; Mark Smith, CEO, Symbiont.io; and Tim Estes, CEO, Digital Reasoning – explored innovation and disruption. The discussion ranged from enterprise platform technologies and natural language processing, to machine learning, blockchain and how banks are establishing innovation labs to explore it all. A big part of the challenge, according to Deutsche Bank’s Selph, is cultural transformation.

Digital Reasoning’s Estes said the idea of machine learning in financial services started to take shape about 15 years ago. Today, it has developed to the point where Wall Street’s largest firms use it to read hundreds of thousands of emails daily to look for compliance risks. And hedge funds use machine-learning technology to analyze feedback from conversations within the market for information that can be traded on.

The conversation quickly turned to Bitcoin. Recent TABB Group research finds that blockchain, the general ledger technology that underpins Bitcoin, could revolutionize the way the capital markets settle and clear transactions, and blockchain is emerging from behind the shadow of Bitcoin as the go-to investment technology within the capital markets.

Exhibit 2: Blockchain Technology

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Source: TABB Group, “Blockchain Technology: Pushing the Envelope in FinTech”

Incapture’s Liebowitz, whose career has spanned telephone market-making and electronic trading, said the history of technology development in financial services has usually been about cutting costs, and consortiums are a culmination of that thinking. “The perfect end-all use case is everybody has one back office,” he said. “The savings there are gigantic. Those are not 20% savings. Those are 50% saving, 60% savings.”

Today’s fintech barbarians are innovators and disruptors that are challenging the culture and status quo throughout the capital markets. And they are going to transform financial services, whether market participants like it or not.