Best financial technology innovation:
Algomi
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Also shortlisted: |
That Euromoney’s financial technology innovation award goes to a non-bank is somewhat telling of how the financial industry is adapting to technology. Algomi’s Honeycomb technology is a perfect example of where outside players are essential in driving innovation in the banking sector. By its very nature the service Honeycomb offers could not be developed by banks, and it is helping bond dealers move to the inevitable broker model that awaits them and bond buyers to deal with the new paradigm of illiquidity.
Honeycomb allows an investor to set up bank facilitated and permissioned access to discreet information on live and historic bond flows. Seventy-five buy-side firms have already signed up since the end of 2014, and chief executive Stu Taylor says 70 more are in the process of joining. On the sell side, 11 banks have agreed to run the software on their servers.
Heat map
Honeycomb allows the asset manager to view banks’ movements around a bond it may be wishing to sell or buy. It shows a heat map for all the dealer banks that allow the asset manager to access their systems. It may show that one bank has traded the requested bonds five days ago. It may show that another has a current axe on the bonds to trade for its own account. When the institutional investor finds a dealer bank’s actions to be in line with what it may be seeking, it can ‘reveal itself’ and open a conversation with that bank. That gives the bank control and a lead to an already interested buyer or seller about other potential sales. For the asset manager it provides accurate data and avoids large market moves caused by its search for a deal.
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Honeycomb provides a real industry solution
Stu Taylor, |
Taylor knows full well that banks are in transition. He was formerly the global head of matched principal trading at UBS. He cofounded Algomi just three years ago. The firm already has 140 employees worldwide.
Honeycomb is a disrupter and an enabler for banks, whose roles are changing from being the simple bond warehouses of before.
“In the past they could take unlimited risk, buying bonds, and collecting the interest rate while waiting for sellers,” says Taylor. Now that banks are geared to take less risk, they must become more like brokers by matching buyers and sellers.
Taylor adds: “We hear about 70% of the risk is washed through, which means that banks need to become good brokers. And that means they need to invest – not in pricing or [straight-through processing] or quantifying risk – but understanding the buyer and seller. It doesn’t even matter if the price is off market, so long as they find a matching buyer and seller. Pricing becomes irrelevant so long as they collect the spread.”
Taylor says banks have dragged their feet in making the transition to the new model. “They are missing that the point now is: Can I get the trade done? Who should I do it with and when?” he says.
Tech venture capitalist Lakestar – backer of Spotify and an early investor in Skype and Facebook – is also an investor in Algomi and has board representation.
“What’s interesting is that Lakestar are not bond experts, but they understand the power of data and information and networks to transform industries,” says Taylor. “So when we are thinking about market positioning and growing the business they won’t tell us how to figure out industry politics but they understand workflow and that devices that feel ‘social networky’ can change things. They also understand the power of data to give your business an edge.”
He uses Airbnb as a parallel to Algomi. “When Airbnb came to market, the quality of the photographs being posted was very poor and there was no way to verify what was being posted. By sending in photographers they were able to validate the data, and make the offering more attractive. The parallel is that the quality of the bond market data is pretty poor and we are upping the game in terms of quality of that data by installing software inside the banks instead of asking them to submit data to us.”
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The second parallel Taylor draws with Airbnb is that the lodgings site brought new content to the market and that has put the old content providers in a quandary. “Firms like Expedia or Kayak that advertised hotels are now having to think about how to advertise rooms, or whether to include Airbnb listings. Likewise with us Thomson Reuters and Bloomberg provide data that banks supply to the market, while we get bank’s private content. It’s a whole new level. You would never see a bank’s trade history on Bloomberg or the allocations that didn’t get filled. The data stays on the bank’s servers.”
Taylor says the solution Honeycomb provides will help banks stay in the game. “They are looking at how to increase volume and repair profitability, and this is one way to solve that. E-trading is efficient but it doesn’t solve that question. Honeycomb provides a real industry solution.”
