Times of crisis have always tended to foster innovation and accelerate technological change. When it comes to the futures industry, coronavirus (COVID-19) looks like it will be a similar driver.
Fintech executives believe the pandemic is speeding up a digitalization of trading systems that was already underway, as trading firms adopt more virtual tools that help them cope with the triple threat of high volume, extreme volatility, and the lockdown life.
Fintechs show their value
"The current volume and volatility spike has most definitely made the need for third-party platforms like ours more apparent for a lot of folks, but truth be told things have been moving in this direction for several years now," said Patrick Flannery, CEO of MayStreet, a provider of market data infrastructure that is based in New York.
Margin and collateral management solutions are also in greater demand now, perhaps because people have seen them prove their value in markets that have continued to function through wild extremes.
In the first quarter of 2020, the total number of contracts traded on derivatives exchanges worldwide rose to 11.41 billion, an all-time quarterly record and an increase of 43.2% over the first quarter of 2019. However, despite high volume and volatility, the markets never seized up as in 2008, noted Karl Wyborn, global head of business development for Cloud Margin, a London-headquartered, cloud-based collateral and margin management service. Wyborn ascribes this in part to the availability of margin-monitoring services to smaller firms, which was not yet the case during the financial crisis.
Such tools are useful not only as a way to assess risk but to reduce cost by offering tools that optimize collateral funding costs across an entire portfolio, according to Liam Huxley, founder and CEO of Cassini Systems, a New York and London-based company that provides collateral and margin analytics.
The fallout of coronavirus has not only dislocated markets, to an extent, it also has relocated them. Lockdown has kept traders home, increasing the need for surveillance software that can track their conversations wherever they are. Executives at VoxSmart, a multi-channel trading communication surveillance service, say they are getting more calls to license their real-time communications monitoring tools for mobile phones and messaging services.
VoxSmart solves a problem that many firms now facing in supporting traders' ability to communicate across an ever-growing number of channels without having to choose between annoying a customer and committing a compliance violation. "Why should somebody be in a situation where their client wants to talk to them and they have to say, 'Hey, you can’t use WhatsApp'?" said Adrienne Muir, group chief operating officer at VoxSmart in London.
The newly proven scalability of many of these solutions may also be reassuring to jittery customers. "Even under 'normal' market conditions, the ability to capture, process, store and consume market data is really, really, hard, and the doubling of message traffic – which is essentially what we’ve seen since mid-February – makes it even harder," said Flannery. "Our sole business here at MayStreet is to create systems for dealing with this data deluge, so it’s not a surprise that a slew of market participants from across the spectrum – banks, quantitative investment firms, hedge funds, asset managers, etc. – are turning to specialists like us to help."
Firms with a risk-reduction pitch are getting a better hearing now than they were pre-pandemic, some fintech executives say.
Cassini’s Huxley says that market conditions have made potential customers more receptive to the same risk-management measures they have been advising them to take all along. "Firms are now seeing the need to do what we've always told them we should do," he said.
Waiting for the next surge
Despite an environment that has brought more attention to their businesses, Huxley and other fintech executives face challenges of their own.
"I’m knocking on wood as I say this, but thus far it seems like all of us market plumbers have held up well, which is something that I think we should all be proud of," says Huxley. "That said, withstanding the deluge is not the only challenge we face – there’s also the need to ensure that the data that’s been collected during this period is of the quality it needs to be for people to go back and analyze their trading performance."
The market environment also remains extremely fluid. "Even now, just eight weeks into our lockdown, things are still changing week to week," said VoxSmart’s Muir. "What I saw on week two is quite different to what I saw in week five."