The most exciting phrase to hear in science, the one that heralds new discoveries, is not Eureka!’ (I found it!) but ‘That’s funny …’
- Isaac Asimov, US science fiction novelist & scholar (1920 – 1992)
This year will go down in the history of world financial markets as an era marked by paradox. A time when new markets were being created, developing markets boomed and established players were decimated by a global crisis with its genesis in fiscal indiscipline.
The world today finds itself at an interesting intersection of risks and opportunities which have a promise of a “medician effect” inflection point. The technology centric financial markets are perhaps a microcosm of this phenomenon. The exponential growth in the hedge fund industry challenging long term investment strategies, electric growth of over-the-counter (OTC) exchanges and an increased decoupling of emerging economies are all examples of these intersections.
From a demographic standpoint I envision human society as a network of socio-economic interactions. At the spoke of each such interaction is the financial enterprise. Their role is in identifying risks and opportunities of each interaction and building systems that deliver the promise of the same. This exemplifies the need for continued innovation for bringing about change, achieve repeatable growth and create new markets. With such a need driving enterprises on an on going basis it is not surprising to see that this industry has changed the very structure of its fundamentals to mutate into its core disruptive innovation.
Disruptive Innovation and Financial Markets: A Growth Oriented Change Opportunity
There is a need for change that is growth oriented and continued innovation in financial world is critical to bringing about change, growing successfully and creating new markets. In its application to technologies, processes and business models; disruptive innovation is a form of change that creates a product or a service that disrupts the existing and established approach with a more affordable yet much simpler to use model. Genesis (read birth) is always a new beginning that is best described as a change in the status quo and a result of deliberate intent towards a desired result.
The opportunity for disruptive innovation in financial markets lies in its simplicity and power of rules-based processing. These innovations in the financial markets involve solutions which combine technology, processes and business models which are more affordable and more convenient than the existing alternative. Disruptive innovations are often megatrends; a few of which have revolutionized the financial markets include:
A continuous and unprecedented rate reduction to the tune of 25-30% in the costs of storing, transmitting and processing information – the Internet and killer apps levels the playing field.
Global dominance of specialized functions – conversion of locally dominant institutions providing a wide range of products into globally dominant specialists such as Global Brokerage Houses, Global Credit Card Processors and Custodians – it is now more about intelligence processing.
Automated Exchanges – Technology enabled trade-matching and back-office systems (T+1 settlement systems) that enable faster trade processing; electronic contract executions; and enhanced transparency and market liquidity – the making of a fully armed market maker.
Innovations in the financial markets are change opportunities which can impact everything; from cost equations, pricing structures, distribution / delivery channels, service providers, consumers, market makers to decision makers. Today’s competitive landscape forces enterprises to identify those changes that are examples of or have the potential to become disruptive innovations in financial market arena.
Disruptive Technology – Corporate DNA driving new market paradigms
Technology has played a pivotal role in enabling business and delivering products and services in the form of turnkey models. The time and speed of innovation have led to disruptive technologies that are driving new market paradigms in financial markets worldwide. Technology taking its form as corporate DNA today is bring about changes in the form of changing institutional structures, democratizing markets and new market mechanisms are positively affecting market making, regulation and execution.
However, tech centric financial markets will come face to face with their toughest test this year. In the current global environment, innovation ideas and research and development budgets in corporations are likely to see maximum scrutiny. The outcome of the mortgage led crisis might bring to the table some aggressive guidelines in compliance set in the United States and felt globally. This sets up an environment for frugality; I agree with the statement of Jeff Bezos CEO of Amazon that “frugality drives innovation, just like other constraints do”. A change to this effect is already on the horizon. This year’s Business Week list of the World’s Most Innovative companies is evidence of the same. Tata and Nintendo made their first time appearance, while cash crunched Auto maker GM received kudos for concept electric cars and a renewed focus on design.
Tech Centric financial markets are expected to weather this storm. At a macro level there are multiple examples. Technology centric financial markets have enabled a level playing field, thanks to the aggressive adoption of the latest technologies including Open Source communities. Concepts like collaboration and harnessing of collective intelligence have been an instant success. They are today channels for effective information dissemination and feedback mechanisms for new product development.
Changing the Rules of the Game: Mutually Exhaustive and Brutally Efficient
With income growth moving positively yet remaining volatile across most financial markets sectors, the overlook for technology remains hesitant with institutions choosing innovation centric IT projects that demonstrate considerable cost savings and return on investment. Institutions have realized that technology investment is vital for long-term sustainability and maintaining competitive par.
Outsourced analytics today has a sheer economy of global scale created through the disruptive innovation approach evidenced by the creation of a network of resources which deftly combines local domain expertise and technology to delivery global products and services creating the ultimate and most efficient transaction processing factories in the world. The new market paradigms driven by this approach include the following:
- Availability of exhaustive information through extensive research and data mining at near zero costs for the consumer;
- Enhanced liquidity through efficient and uniform price discovery by emerging execution specialists;
- Introduction of alternate trading networks and routes that relentlessly lower transactional costs; and
- Compliance with regulation through higher degrees of transparency though organized electronic markets
Crystal Ball Gazing: The Creation of a “Flat World”
The derivate benefit of a technology centric financial market is the “flat world” effect they bring to the table. It is fascinating to see how a Chinese citizen living in the US can invest in multiple global markets in local currencies with access to perhaps the same research as an analyst in a financial power house. Closer to home the analogy would probably be the services rendered out of our premier software houses, which once started off as support and back office teams today leading cutting edge product development to drive a company strategic position and competitive edge. In much the same way the wireless phone quickly eclipsed landlines here in India; transparent technology driven and resource markets have the potential leapfrog Western counterparts.
About The Blogger:< br />
The writer works for Karvy Global Services – a knowledge services firm that delivers insight from information. He can be reached at deepak.kuriakose@karvyglobal.com
