The Fintech march into investment banking

One of the readers of the Finanser saw my write-up on asset and wealth management, and asked if I could talk about what’s happening in investment banking.  Answer: yes, I can.

It’s more difficult to see the Fintech stars and unicorns in the investment space however, as it’s more opaque having been disrupted by technology fundamentally over the past twenty years.  The rise of program then algorithmic and now high frequency trading created a strong move to low latency, server farms co-located along with the Exchanges.  The Exchanges themselves were attacked by new Fintech firms like BATS, Chi-X, NASDAQ and more, and these companies are now dominating much of the equities trading areas.  Trading on BATS in the USA now represents 20% of all equities, doubling their market share in just two years by acquiring Direct Edge.  Pretty good for a ten-year old garage Fintech start-up based in Kansas.  Similarly, in Europe, BATS Chi-X trading now exceeds the London Stock Exchange and Euronext, not bad for an eight year old start-up.

Admittedly these guys are owned by institutions – BATS lists GETCO as its largest shareholder. Other owners include Morgan Stanley, Credit Suisse Group AG, Nomura Holdings and Citigroup.   The same with Chi-X that was initially launched under the leadership of Nomura and investments from BNP Paribas, Citadel, Citigroup, Credit Suisse, Fortis, GETCO, Goldman Sachs, Merrill Lynch, Morgan Stanley, Optiver, Société Générale and UBS.  In other words, the low latency high frequency markets are pretty much dominated by players that are owned by the market makers.

But then you do have a large volume of day traders, spread betting, Exchange Traded Funds (ETFs) and Direct Market Access (DMA), that wasn’t there before.  That’s also a Fintech change.  It isn’t what I’d call Fintech itself however, as these are all offshoots of trading structures rather than companies that are creating new business models in the way we see with Betterment and Wealthfront (who got into an argument this week, which I think Wealthfront just lost).

In this area, there are three emerging markets of real Fintech change: social trading strategies, market funding platforms and market data services.

In the area of trading strategies, we saw early innovators like ZuluTrader, eToro and Stocktwits became accepted very quickly as new forms of social trading.  

ZuluTrade is probably the largest global social trading network at the moment, both in terms of numbers of traders and investors. Offers full trade copying (supporting multiple brokers) and social interaction capabilities with free fully functioning demo.

eToro is very much focussed at the novice investors with eToro acting as both broker and social trading network. Much focus is given on education for novice investors with an easy to use interface.

StockTwits is a social communications platform for the financial and investing community that takes tweets and uses them for trading.

Now there are many other social trading systems out there for everything from commodities to equities, although the most popular space appears to be in Foreign Exchange (FX) markets (adapted from Social Trading Guru):

AGEA is an international Forex broker.

Ayondo is a well-established German based social trading network which is rapidly expanding throughout the rest of Europe.

BelforFx is a well-established global Forex, commodities and indices broker.

cMirror was launched in November 2014 by Spotware, allowing any trader to become a strategy provider by broadcasting their trade signals and optionally charging commissions.

Collective2 offers a trading-system platform which allows the tracking and auto-trading of trades from multiple sources.

CopyFX is the social copy trading service of RoboFOREX, an international broker established in 2009 with a focus on providing tools for expert auto robot traders.

copyop has just been launched in 2015 by anyoption, the world’s largest binary trading website.

Darwinex launched in September 2014. This innovative investment platform also lets you invest in other successful traders.

FxPro is a global FX broker.

FxStat started in 2010 allowing traders to analyse their own performance with more than 150 statistical tools, graphs and ratios, and compare this with other traders over the world.

Gallant is a popular Forex broker.

IronFX  is a global FX broker with customers in over 180 countries and support in 45 languages.

MetaQuotes MetaTrader is used by over 600 brokers and banks around the world.

MyDigiTrade was founded in 2010 by a group of independent traders as a platform for mirroring trades made by professional traders, they added the social aspects to allow users to comment and rate the traders/signal providers.

Myfxbook started as a pure trading network where traders can connect their trading accounts to share their live trading signals and interact in their active Forex community forums.

NetoTrade is a Forex broker with a strong customer base in the English, French and Arabic markets.

OptionSmarter is an interesting alternative to the usual FX broker services.

Redwood iFollow binary options broker offers a social element as part of their trading features.

Scutify is a social media aggregator which collates all the talk and chatter on your favourite Stocks, FX pairs and Commodities. 

Share4you is the social trading network for the customers of Forex4you broker.

Signal Trader is a platform that specialises in offering automated mirror trading across a wide range of financial instruments.

SIRIX is an advanced trading station and platform for forex and CFD traders.

Sunbird is another FX broker who added automated trading to their client offering in 2013.

TradeCrowd was set up in 2013 in London, with the aim to bring together first time traders with other recreational and top traders.

Tradency is a financial technology company who’s key trading platform, Mirror Trader, allows traders and strategy developers from around the world to open, close and share their trades.

Tradeo was launched as a social trading community network in 2012 which allowed traders to share their trading activities and get feedback from other traders.

As you can see, the social trading space is very active and dynamic.

There are then a lot companies emerging in the market data area with names like Contix, Finalta, Kensho, Quovo and SumZero high on my lists here.  These companies are all emerging as major providers of insight for trading that adds to the social trading network.

Finally, there are market funding platforms where the crowdfunders firmly sit.  These include Kabbage and Funding Circle, which are the top small business funders in the US and UK respectively, but lots of other interesting financial platforms out there such as: AngelList, BankToTheFuture, CircleUp, CrowdCube, CrowdSupply, EquityNet, Fundable, FundedByMe, FunderHut, Fundly, FundRazr, GoFundMe, Healthfundr, IndieGogo, Innovestment, Invesdor, Kickstarter, Kopernik, Microryza, MicroVentures, Seedrs and Seedups.

It’s an interesting space as it’s creating narrow finance focused seed funding investments and financing for innovation, creativity and new business start-ups.  As mentioned, this market is also getting funding from the large institutional investors too, so it’s more a way of de-risking early round funding than necessarily creating an alternative market to the core equities markets.

All in all, trading strategies, trading analytics and alternative finance are the three big Fintech categories for me in the investment and capital markets space, on top of the low latency, high frequency changes we have seen in the last decade.  It also means that the investment markets are being just as radically changed by Fintech as the retail and commercial bank space, and asset and wealth management space.  We just don’t see it so often because there isn’t yet a big new beast in this space that hasn’t been acquired, funded or integrated by an existing player.  After all, if you look at the Goldman Sachs investment portfolio, you can see why.