Earlier this month people managing big money met in Barcelona at the Fixed Income Leaders Summit – and we were also there. Fixed income markets are in the process of radical change, with regulation, innovation and new entrants shaking up the market structure. In an asset class where trades have conventionally occurred bilaterally, the ways in which buy side and sell side traders interact is changing as the search for liquidity continues.
P2P lending platforms emerge to disrupt the space of retail banking, offering attractive interest rates. Disruption seems not to be that easy in a space of institutional fixed income investors. The high degree of regulation and fear of managers who might lose their jobs with uberisation of the fixed income industry might be the reasons of slow changes. The organizers invited a few startups that aim to change this and we interviewed Steve Toland of the London-based FinTech startup TransFICC – the winner of the contest.
What is Transficc? What problem do you solve?
TransFICC is an eTrading technology company providing ‘One API’ for Fixed Income and Derivative markets. There are more than 120 different Execution venues for Bonds, Futures, Swaps and Repos. As trading moves from Voice Execution to Electronic, banks and buy-side firms need to code to the APIs of Execution venues. The problem is that the typical time to code to a new execution venue for a Bank is 3 months, due to the complexity of each venue having different API’s. Moreover many venues have more than one API, commonly separate API’s for market data, orders and post trade confirmation. Our clients code to the TransFICC API and we code to each execution venue’’s API and normalise to a single standard.
Why does this all matter? What benefits will your clients get? Who are they?
Currently our clients are the sell-side banks, who are acutely aware of the impact of upcoming MiFID II regulation and the threat that electronification may pose to their trading franchise. We are also having some interesting discussions with buy-side firms but organisations in this group are yet to buy into the technology need as much as the banks.
The banks face three main problems, to which we provide solutions – Firstly, Fixed Income liquidity is fragmented across many venues but a surprising number of banks can’t access new Execution venues because coding to the API is too long and too expensive. TransFICC resolves this problem by offering a single API to all the venues, enabling a bank or buy-side client to connect, test and trade on a new venue in minutes rather than months. Secondly, individual venues in US Treasury, Swaps, Futures markets update their market data about 5,000 times a second in volatile markets. Many banks and buy-side firms have legacy technology which simply cannot keep up with these message rates. This puts them at a competitive disadvantage to the firms that can. As a solution, TransFICC’s technology is based on Aeron messaging and SBE, which provides maximum throughput, enabling the banks and buy-side to compete on a level footing. And thirdly, MiFID II is driving most venues to update their API’s and most banks and Buy-side firms to move to eTrading. TransFICC’s Single API can assist with some of the requirements of MiFID compliance. For example, timestamp normalisation when executing a large order across multiple Execution venues.
Is the industry really ready for disruption. Your three takeaways from the Barcelona event we both attended?
I don’t think most of the Buy-side are ready for the disruption that MiFID II regulation will cause. Carl James of Pictet said the role of the Buy-side trader will change and Brett Chappell of Nordea gave an excellent presentation on MiFID II, but apart from that most of my Buy-side conversations showed that they are not yet investing in the technology solutions they will need. The Sell-side, who we know much better, understand the problem and are scrambling to meet MiFID II deadline, which is January 2018. Mark Goodman from UBS made an interesting point about banks needing to hold less inventory, and that this is simply market evolution. Having less inventory isn’t exclusive to Fixed Income. The biggest hotel chain (Airbnb) and the biggest taxi firm (Uber) don’t hold inventory either.
What fintech companies do you like?
Twilio who provide all the SMS/messaging infrastructure for Uber. Our business model is similar to theirs. We are normalising all the different Fixed Income and Derivative venue API’s, and Twilio are normalising all the SMS/Telco network API’s. I also like a Capital Markets FinTech called R5FX, which is an electronic venue for emerging market FX. They are doing something new, combining exchange and OTC prices to tackle the problem of a lack on liquidity in emerging markets. Also Ripple who are looking to use blockchain technology for payment services.
What help does TransFICC need?
We are currently testing the API with banks, and we are really happy with our progress. There is a lot of interest in what we are doing and we have commitment from a couple of banks. We have come a long way since we started the company in March this year. We are bootstrapped at the moment, so raising capital is always in mind. Some banks have introduced us to their principal investment arms, but banks can take a long time to make an investment decision. Once we have gone past the testing stage and can say that a bank (or banks) is live we think things will move a little faster.