Some FinTech firms push “game-changing” technologies that grab headlines but do not necessarily answer fundamental questions surrounding market inefficiencies.
We are inundated with technological ‘advancements’ that purport to make our lives easier, better, faster, more efficient. But in a rush to digitize our world, we are losing sense of why technology should exist in the first place: to solve problems. In fixed income FinTech, are we sure we are answering the right questions? We need to take things back to ground zero and examine what’s really broken.
There’s a Bug in Your Whiskey
Several months ago, I attended a FinTech meetup in Harvard Square, Cambridge. Though it was supposed to be an all-encompassing discussion on the immediate future of the Boston FinTech scene, it quickly dissolved into a shouting match over the value of bitcoin. That says a lot about the current state of FinTech and the ever-changing focus on The Next Big Thing; but what really caught my attention was the sponsor of the meetup: a “digital whiskey.”
This whiskey was “aged” using high-tech methods that effectively reduced the time-honored ageing process from 12 years down to less than a week. I’m no whiskey sommelier, but I tried some and it tasted like whiskey tastes. Experts like it as well, apparently, so there’s that.
But … why? Whiskey production is steeped in tradition. Fine whiskeys are savored and appreciated because they are aged in time-honored fashion in centuries-old barrels by men wearing kilts in the Scottish Highlands. I’m unaware of any pressing need to make whiskey processing faster for the masses, and I’ve not heard anyone take a sip of a 20-year-old single malt and exclaim, “This is fantastic … if only it had been aged faster.”
We are inundated with technological “advancements” that purport to make our lives easier, better, faster, more efficient. But in a rush to digitize our world, we are losing sense of why technology should exist in the first place: to solve problems.
In fixed income FinTech, are we sure we are answering the right questions? Or, as in the ‘Jeopardy!’ game show, are we coming up with answers then searching for the questions afterwards?
I’ll Take ‘Liquidity’ for $500 Please, Alex
Attend any fixed income conference, and you will hear panelists bemoaning the lack of liquidity in the markets. FinTech firms will put “liquidity” on page two of most sales decks without truly defining the term to the client. They’ve been selling the same story at conferences for years. We now simply accept that liquidity is poor because panelists and tech firms tell us it’s poor. We no longer question the meaning of liquidity; we just nod our heads pensively and say, “Yes, yes, something must be done about the liquidity,” while we take another sip of our conference coffee.
Here’s the problem with that approach: Liquidity is relative, and it’s complex.
JP Morgan’s definition of the term doesn’t compare with a second-tier dealer’s definition. If I have $50m Ford bonds marked at the bid side, am I supposed to assume that “liquidity” would mean I can sell $50m bonds at my mark because there are dealer run quotes at that price? Or is liquidity defined more by my ability to sell $50m bonds in a certain timeframe rather than the price at which those bonds are sold?
2017 was a banner year for bond issuance, with $6.8trn in total global issuance and 55% of that issuance coming from corporates (source: Camilla Hodgson, Business Insider, Dec. 2017). That means investors had almost $3.75 TRILLION dollars of new corporate debt to play with over the course of the year. By any measure, that’s a staggering number. Now, does new issuance define liquidity? Not directly, but it does suggest that funds were better equipped to meet their investment needs through new issue flows than in years prior.
Are we sure we are solving for the right problem?
As with bonuses and capital levels, we are making the mistake of assuming that 2003-2007 liquidity was the norm, and everything since the crisis has been an anomaly. Because of these assumptions, we are in danger of providing answers to the wrong questions.
Let’s Put the Horse Back in Front of the Cart
Filtering out the digital whiskeys of the FinTech world requires that we take things back to ground zero and examine what’s really broken. Perhaps that analysis will make us ask new questions which, in turn, will provide more meaningful answers and solutions.
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