Consolidation has notched up in the technology-vendor space, as firms have been squeezed by the trends of lower revenue and higher costs.
Speaking Thursday at the WBR Equities Leaders Summit in Miami, Fidessa Director of Group Strategy Steve Grob said 2018 may not have been a record year, but it was a “standout” year for technology mergers and acquisitions.
He cited transactions such as IBM buying Red Hat and the Blackstone-Thomson Reuters deal that spawned Refinitiv. Earlier in the year and more directly applicable to equities trading desks were State Street-Charles River, SS&C-Eze, and Ion-Fidessa.
Grob explained that the millennial-driven trend toward passive investments have “sucked money out of the front end” of financial service firms, while tighter regulation has raised the bar for most all market participants.
For tech vendors, “there is less money in the pot, and the cost of participating has gone through the roof,” Grob said.
Sell-side brokers and buy-side investment firms have moved to boost efficiency in their operations, a pursuit for which scale and outsourcing can play important roles. But Grob noted that scale alone does not make a firm efficient, and with regard to bringing in a third party, “unless your outsourcing is committed to making your technology more efficient, you’ve just moved the problem,” which would manifest itself in high fees and poor service.
There is a “rebalancing” taking place in the buy-vs.-build debate, Grob said -- larger market participants often built their own tech systems, but this is less the case nowadays amid tighter economics. Important factors firms need to consider here are systems integration, change control, and layering IP.
Regarding the future of the tech-vendor business, “it seems to me that the battleground will be in three areas: convergence, convenience, and data,” Grob said.
Convergence will align with regulators’ desire for all asset classes to be traded in the same way; convenience is about simplifying the user experience similarly to how an iPhone enables one-touch updating of multiple applications simultaneously; and data is about the industry making better use of its troves of data.
“The economics of our industry are completely different,” Grob said. “You need to operate at a lower cost, but you can’t do that without increasing business agility, because that’s how you differentiate.”