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Evolution of the new smart broker



James Blackburn

By James Blackburn, Fidessa

It is widely acknowledged that the past couple of years have seen broad structural changes to the world’s financial markets. Less widely accepted is the fact that these changes have resulted in a permanent and profound shift in the role and operating environment of sell-side firms. Success can no longer be guaranteed simply by intermediating between clients and sources of liquidity: a change of approach is needed.James Blackburn

The complexity of the fragmented market structure is central to this required shift in thinking. Navigating a seemingly ever-changing liquidity landscape has become harder and more expensive. An increasing number of smaller and mid-tier brokers are electing to outsource execution to larger firms with all the necessary infrastructure and smart-routing capability. This creates short-term cost savings but also potential long-term risk: disintermediation is a real threat if outsourcing brokers cannot clearly prove the value they are adding.

There’s no escape for research specialists either. Despite early hopes, Commission Sharing Agreements have not produced what was expected: reports suggest that the pool for research-only providers is around five per-cent of the total client commission pot. With so much left to play for, operating and maintaining an effective transactional cash register remains the only viable mechanism to get paid.

Regulation is also driving change. The regulatory agenda has moved beyond increasing competition, fairness and transparency in how various asset classes – especially equities – are traded to encompass a range of other asset classes. It also seeks to reduce systemic market risk in the wake of the global financial crisis. Add to that the fact that regulators are increasingly looking beyond their native jurisdictions, and brokers are swamped with regulatory changes from multiple geographic centres. Where regulations overlap on the same issues, the potential for confusion and cost – though also opportunity – increases.

The final elements contributing to the perfect storm affecting brokers is that (for equities particularly) there is clear evidence that, from their peak in 2009, trading volumes have declined materially and the fiercely competitive environment has served to drive commissions down substantially. This potent mix has had severe implications for many market participants.

Loyalty, like liquidity, has been fragmented. The traditional relationship between buy-side and prime broker has all but disappeared. Buy-sides shop around for broker services and crucially demand more value from each of the firms to which they direct flow. As a result of all this, the volume of ‘free’ business has shrunk considerably, leaving sell-sides battling for a meaningful share of a far smaller pie.

Finding traction in this new business environment presents brokers with a real challenge. One possible approach is to go for scale, although this is not without its own issues and may not be a realistic option for the smaller and mid-tier brokers. For these firms, an alternative approach is to arm themselves with the right tools to exploit opportunities in the new environment, asserting their relevance through the provision of relevant, targeted and intelligent services that add real value to an increasingly discerning client base.

As well as dealing with a multi-market landscape, globalised trading and interconnected regulations, brokers are also faced with a deluge of data at each stage of the trading process. Fundamental and underlying technical data that have previously underpinned successful trading are now commoditised. They are no longer enough to secure optimal trading outcomes nor are they a source of competitive differentiation. The pressure is on to find ways of combining a growing universe of regulated and unregulated data with specific firm-wide intelligence regarding current and historic client activity, and using this to power a more valuable service to clients.

But finding relevant information, then extracting, normalising, translating and storing it in order to make it available in the most appropriate and suitable time period presents a significant operational challenge.

At the pre-trade level it’s all about ‘actionable’ data, embedded in brokers’ daily workflows enabling them to react faster than anyone else to revenue-generating opportunities. For example, on receiving an order, a broker could look at relevant stock holdings among buy-side clients as well as historical information about previous activity, trading patterns or expressions of interest. Done intelligently, this gives the sales trader an actionable list that provides the best chance of optimising the outcome. The tools to transform uncorrelated, raw data into weapons-grade information are critical.

This pre-trade visibility must also extend into the real-time execution process. As more brokers outsource their execution to larger firms, the real value lies in the ability to interpret and analyse the myriad of available execution offerings, in real time and without bias. Firms with the ability to communicate likely execution outcomes to clients in real time and make any changes mid-flight to secure the preferred outcome will be able to demonstrate real value. These real-time intelligent execution services can help turn the regulatory obligation of best execution into competitive edge, and are another way that smaller and mid-tier brokers can demonstrate their new-found relevance.

Post-trade, brokers can extend these principles to provide standardised, accurate and objective analysis of their own trading performance, supplementing the ubiquitous but subjective VWAP, TWAP and Implementation Shortfall measurements. Some firms are taking the concept of TCA further, using this greater internal visibility to better understand their own business. Monitoring and interpreting their own trading performance, and making the necessary adjustments, allow them to identify and improve areas of weakness and better manage cost and revenue dynamics. The same information can also be used to improve service levels through the delivery of better and more timely information, thus allowing brokers to forge deeper and more meaningful client relationships.

When combined, these activities allow for truly intelligent trading: carefully targeted activity that is informed and driven by accurate data and in-depth analysis. It improves profitability and enhances client relationships as efficiently and effectively as possible. But perhaps the real advantage is that it gives firms that choose to go down the outsourced execution route the ability to analyse and interpret the actual performance of the outsourced provider. In doing so, they create the value necessary to avoid disintermediation.

The structural changes in the marketplace have made intelligence the new super power and an ever-increasing premium is placed on ‘smart’ trading. Firms best able to adapt to serve their clients will be the ones that will prosper and grow. Those with the most intelligent tools at their disposal are best positioned to help their clients navigate the transformed landscape and turn the new challenges to both their clients’ and their own advantage.








Investment Roundtable: Live with Jim Bianco



With Q4’s macro picture still looking grim amid the return of exponential coronavirus waves in Europe and the U.S. and Europe, we speak with veteran macroanalysis strategist Jim Bianco, CMT for a data-driven deep-dive into the global economy and financial markets on Sept. 7th at 12pm EDT.

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Key themes:

  • Learn from Jim’s unique combination of quantitative and qualitative analytics which provide an objective view on Rates, Currencies and Commodities to make smart investment decisions
  • Identify important intermarket relationships he is watching with respect to Global Equities
  • Roadmap a global outlook for 2021 in view of socio-political backdrop giving viewers key takeaways and intermarket perspectives on global investing.

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Jim’s robust technical analysis includes a broad look at trends and themes in the markets, market internals, positioning such as the Commitment of Traders (COT), sentiment, and fund flows. Don’t miss out on this exclusive session from one of the investment world’s most insightful thought leaders.

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Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election



Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election 1

By Rupert Thompson, Chief Investment Officer at Kingswood

Equity markets had another choppy week, falling for most of it before recovering some of their losses on Friday and posting further gains this morning.

At their low point last week, global equities were down some 7% from their high in early September. US equities were down close to 10%, hurt by the large weighting to the tech giants which at least initially led the market decline.

The market correction is nothing out of the ordinary with 5-10% declines surprisingly common. Indeed, a set-back was arguably overdue given the size and speed of the market rebound from the low in March.  As to the cause for the latest weakness, it is all too obvious – namely the second wave of infections being seen across the UK and much of Europe and the local lockdowns being imposed as a result.

These will inevitably take their toll on the economic recovery which was always set to slow significantly following an initial strong bounce. Indeed, business confidence fell back in September both here and in Europe with the declines led by the consumer-facing service sector. A further drop looks inevitable in October – fuelled no doubt in the UK by the prospect that the latest restrictions could be in place for as long as six months.

The job support package announced by Rishi Sunak did little to boost confidence. Its aim is to limit the surge in unemployment triggered by the end of the furlough scheme in October. However, the scheme is much less generous than the one it replaces as the government doesn’t want to continue subsidising jobs which are no longer viable longer term.  A rise in the unemployment rate to 8% or so later this year still looks quite likely.

Aside from Covid, for the UK at least, there is of course another major source of uncertainty – namely Brexit. Another round of trade talks start this week and we are rapidly reaching crunch time with a deal needing to be largely finalised by the end of October.

Whether we end up with one or not is still far from clear. That said, the prospects for a deal maybe look rather better than they did a couple of weeks ago when the Government was busy tearing up parts of the Withdrawal Agreement. With significant Covid restrictions quite probably still in place in the new year and the Government already under attack for incompetence, it may not wish to take the flack for inflicting yet more chaos onto the economy.

Markets remain unimpressed. UK equities underperformed their global counterparts by a further 2.7% last week, bringing the cumulative underperformance to an impressive 24% so far this year. The UK weighting in the global equity index has now shrunk to all of 4.0%.

It is not only the UK which faces a few weeks of uncertainty. The US elections are on 3 November. We also have the first of three Presidential debates this Tuesday. Joe Biden’s lead looks far from unassailable, a close result could be contentious and control of Congress is also up for grabs.

All said and done, equity markets look set for a choppy few weeks. Further out, however, we remain more positive – not least because the focus should hopefully switch from the roll-out of new lockdowns to the roll-out of a vaccine.

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What Investors are Looking for in the Next Fintech



What Investors are Looking for in the Next Fintech 2

By Shaun Puckrin, Chief Product Officer, Global Processing Services

Are investors getting pickier when it comes to fintech? It’s hard to say for sure, but there are recent developments that point towards a shift in investor interests.

Firstly, research from Innovate Finance shows that investment in UK fintech dropped by 39% in the first half of 2020, compared to the same period in 2019. In H1 2020, $1.8bn of venture capital was invested in 167 startups compared to H1 2019, when $3bn was invested in 263 startups.

However, it’s worth mentioning that the $1.8bn UK fintech investment earlier this year was still a 22% increase over the second half of 2019, when funding totalled $1.5bn. Therefore, all signs suggest that investors will make significant increases in capital investments during the rest of the year.

Secondly, it appears that the current investor appetite is for more mature, later-stage fintechs: more than half of the $1.8bn went to just five companies: Revolut,, Starling Bank, Onfido and Thought Machine. Perhaps it is the ongoing economic uncertainty surrounding the COVID-19 crisis that is prompting inventors towards perceived “safer bets”, but what we do know for a fact is that early-stage fintechs raised just 8% of the total investments.

Is there a silver lining? The coronavirus crisis has rapidly accelerated the digitisation of financial services, with lockdown restrictions encouraging those previously resistant to engage with digital financial services. The stage is set for fintechs to thrive and deliver offerings that meet shifting consumer demands. To be in with a shot of wooing investors, fintechs will need to demonstrate certain qualities that set them apart from other companies.

So, what are the four things investors are looking for in the next big fintech?

  1. A strong, differentiated proposition

The fintech marketplace is crowded and filled with mature innovators setting a high standard for everyone else. Against this backdrop, “challenging the incumbents” is, unfortunately, no longer a USP.

To really catch the attention of investors, you must be addressing a clear, pressing market need that no one else is tackling. Not just that, your proposition must be easily articulated and backed to the hilt with market research that proves the opportunity is worth pursuing.

Ultimately, investors are going to ask the question: why you? What are you doing that’s unique? What do you have that means you – and only you – can do this? They will also want to know how defendable that proposition is once you’ve built it.  What is your moat? Getting this right means a foot in the door with investors.

  1. A path to profitability or exit

This is an extremely pertinent point, especially given recent news surrounding the financial results for many of the big challenger banks, and how they show the route to profitability for challengers isn’t necessarily straightforward or easy.

In the current environment, an attractive fintech must be able to demonstrate a concrete, long-term plan for the financial viability of the business. There are different paths for investors to make their returns, be it a trade sale or IPO, but the fundamentals of securing a successful outcome are usually the same. By being able to demonstrate how you can plot a course to attract and serve your customers for less than you can monetise them will be at the route of any subsequent valuation, no matter how its outcome is achieved.

Whatever the goal, you need a plan to support your ambitions. You need to demonstrate an understanding that building a scalable and sustainable fintech is likely to require significant capital – you must invest in the right people, partners and technology to make money. Developing competitive services, attracting customers and, crucially, monetising your offerings, requires hard work and the ability to adapt to your customer’s needs.

  1. Strong leadership and core team

Ultimately, securing investment is about building relationships and what often tips the scales is having the right people in the room. This is why a great team is crucial.

A great team means many things: Strong leadership with the vision to build something revolutionary. The skills and expertise to turn that vision into reality. The experience to traverse the pitfalls and opportunities you’ll face. And finally, the ambition and determination to make the business successful no matter what.

Building the right team with the right qualities is often what convinces investors that they’re putting their money in the right place.

  1. The right partnerships

Partnering with the right organisations can give you strategic access to the solutions that will help build and scale your offering. Their expertise and experience are often invaluable; many partners have been in the game for years and may have already solved problems you might be encountering for the first time.

From an investor’s perspective, seeing that you’re working with credible partners and proven tech helps build confidence. It shows that you’re a less risky investment, and that you respect their investment and are going to be using their money to build real value.

Fintech investment is not dead

After this recent blip, we expect the amount of investment into fintech to continue to be significant, at least in relation to other industries. But there’s no avoiding the fact that investors will be looking to stress test potential investments much more than before.

By creating a differentiated proposition, planning a clear route to profitability, building a strong team, and finding the right partners, fintechs will be in with a shot of securing the funding they need to make their grand vision a reality.

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