Mark Whitcroft, founding partner at Illuminate Financial, said there had been a marked increase in engagement with fintech by asset managers during the last three months as new regulations come into force in Europe at the start of next year.
Illuminate was launched in 2014 to investing in fintech companies that provide a clear solution for capital markets.
Whitcroft said on a panel hosted by BT on MiFID II, the regulations covering financial markets in the European Union from January 2018, that the venture capital firm has seen 1,200 early stage companies. He added: “The biggest regulatory driver is MiFID II. Since the financial crisis the drivers in capital markets are cost, capital, controls and compliance as there is zero tolerance of regulatory failures.”
Mark Whitcroft, Illuminate Financial
He gave the example of MiFID II driving Illuminate’s investment in FeedStock, an intelligent information management platform. FeedStock filters, categorizes and tracks investor research using artificial intelligence software, which can be embedded into clients’ internal systems.
Feedstock helps firms meet one of the requirements of MiFID II, which is to separate payments for research from trading commissions, in order to increase transparency and reduce conflicts of interest. Asset managers can choose to either pay for research out of their own P&L or from research payment accounts, where they have agreed a budget with their clients. The buyside will also have to track their consumption of research and assess its quality.
Whitcroft said: “There is also growing demand for alternative data such as the restaurants with most deliveries on UberEats or satellite imagery.”
Rebecca Healey, head of EMEA market structure and strategy at Liquidnet, said on the panel: “Research is going to a whole new level after MiFID II.”
There have been concerns that MiFID II conflicts with US regulation which does not allow US broker-dealers to receive payments for research. However Healey said the US Securities and Exchange Commission is likely to provide regulatory relief in the form of a no action letter, as otherwise US asset managers will find it harder to win mandates against European fund managers who identify research costs.
Healey added: “The multi-asset nature of MiFID II is resulting in buyside participants looking further afield from transaction cost analysis and rethinking their requirements to meet best execution obligations."
In forthcoming research, Re-engineering Best Execution, Healey spoke with 55 heads of dealing across the globe; 39% of respondents are now reviewing their requirements as a consequence of the dearth of viable fixed income, currency and commodities TCA, opening the door to a new range of analytical products and services for the fixed income dealing desk.
Last month Illuminate invested €2m ($2.25m) in AxeTrading, a platform which aggregates bond liquidity. AxeTrading provides banks, broker-dealers and buyside firms with a complete picture of fixed income liquidity including axes, runs and quotes across electronic venues, messaging platforms and voice channels as well as tools which support best execution and regulatory reporting.
Capital restrictions have led to dealers shrinking their balance sheets, pulling back from market-making and shifting to an agency model where they match both sides of the trade before committing capital. As a result, there has been a rise in the number of electronic bond trading venues and new sources of liquidity have appeared, such as a rise in all-to-all trading, where multiple parties in a network come together – rather than the traditional model of only banks supplying liquidity to the buyside. Nearly half, 48%, of buyside bond traders expect all-to-all trading to grow according to a report from consultancy Greenwich Associates.
Whitcroft said: “We are expecting to see fintech firms partner with established players who have established networks.”
Christian Voigt, senior regulatory adviser at Fidessa, said on the panel that MiFID II provides many new opportunities for providers such as testing of algorithms and transaction cost analysis.
“MiFID II is a catalyst for change and not changing is not an option. January is just the start of the process,” added Voigt.
