Fintech set to sideline prime brokers
Prime brokers’ future competition looks likely to come from financial technology rather than their peers, a panel has heard.
With much of their work now easily and cheaply performed by new technology, investors could soon be bypassing brokers.
And the rise of fintech is expected to significantly affect even the retail space amid pressure to lower costs in the pensions market.
At AsianInvestor’s recent Art of Asset Management forum in Hong Kong, a panel of executives set out the future administration and operations of the funds business.
The panel saw that much of prime brokers’ work, such as client segregation of cash and securities segregation, could now be replicated by technology, especially within the alternatives space.
“If you speak to prime brokers who are switched on and if you ask them who their biggest competitor is and they say Goldman Sachs or Morgan Stanley, they probably don’t understand the market that well,” said Brian Pohli, director of multi-asset strategy group CQS.
“If they turn around and say that it’s financial technology, BNY Mellon or State Street, then they are pretty switched on because that is where the real competition is going to be [through technologies such as data management systems]," Pohli added.
Michael Coleman, director of commodities trading group RCMA Asset Management, agreed, noting that this has already been happening in commodities futures trading, with traders bypassing middlemen such as clearing brokers to trade directly with exchanges.
One example would be the commodities exchange CME, which has been increasingly encouraging traders to bypass their clearing brokers and trade crude oil futures directly on the exchange.
Noting that in-house technology has changed significantly, Coleman pointed out that some of the most significant evolution happened over the past four years, where much of the trades were transacted through voice to direct market access (DMA) platforms.
DMA allows the buyside to execute trades directly with an exchange by borrowing the exchange access from members such as broker-dealers and market makers, with traders benefiting from lower costs.
“Technology has reached a tipping point in a number of markets with DMA having reached a critical mass,” said Coleman. “The only place for voice is some of the derivative contracts that are still traded over-the-counter, such as freight and coal.”
Meanwhile, disruptive technology is also affecting the retail front, with Frederick Laydon, chief operations officer at Principal Global Investors, pointing out Hong Kong’s Mandatory Provident Fund Schemes Authority’s push to lower costs.
“While asset managers certainly felt that squeeze, the tougher nut to crack is the administrative side. Administration is largely human-intensive with lots of paper pushing and visual comparison of signatures and faxes,” said Laydon.
“It’s kind of scary to see what is kind of normal processing, so there has been some consolidation in this space and there needs to be more.”
Indeed, there has been increasing consolidation of late, with Standard Chartered having announced that it is selling its pension business, as reported.
“We have to get a larger process pool going. That will ultimately benefit the investors of the fund, which is all the better because it is a mandatory programme,” said Laydon.