February 2016: The Market Will Decide

“If you build it, he will come.” That’s what the imaginary voice says to Iowa farmer Ray Kinsella one evening as he walks through his corn fields in the 1989 movie Field of Dreams.

As it turns out, “he” is “Shoeless” Joe Jackson and he does indeed put in an appearance—along with seven other players banned in the wake of the 1919 Black Sox Scandal—once Kinsella had built a baseball diamond on his farm. But when it comes to third-party vendors building technology for capital markets participants, the “he” or “they will come” sentiment simply doesn’t hold true. Our industry is no respecter of reputation and sentimentality has no place in it. In fact, like so many other markets, the financial services industry has proven to be something of a graveyard for third-party technology firms that tried their hands and struck out in what has become an intensely competitive sector. 

According to an article written by Neil Patel, published in Forbes in January 2015, 90 percent of all startups fail. Yes, technology startups are not for the fainthearted.  

What makes a good technology provider in our industry? To my mind, there are three criteria: It must have an outstanding product, developed expressly to address a need in the marketplace, whose design and functionality is guided by feedback from potential clients and not by what the vendor assumes the market wants; once it has developed such an offering, all its resources must focus on signing clients; and finally, it needs sufficient capital squirrelled away to sustain itself for those two or three long years it takes to break even, not only to pay its employees, but also to assure its clients that it’s in it for the long run. Needless to say, large numbers of startups fall at the first hurdle without even getting to negotiate the other two. 

A startup that appears to have satisfied all three criteria is Algomi, thanks to its Honeycomb offering. I’ve written quite a bit about Algomi in recent months, not because I have a vested interest in the London-based firm, but because I’m impressed by what it has delivered—a much-needed, startlingly simple yet practical answer to one of the corporate bond trading market’s most acute needs: liquidity transparency.

The really clever bit about Algomi is that it focuses exclusively on the part of the market that is broken: aggregating dealers’ corporate bond inventories and delivering that information as a single feed to the buy side. Trades are still executed over the phone, but the market it now more transparent and therefore more liquid thanks to Algomi’s efforts. I only hope that I haven’t just put the mockers on it.