The fintech that wants to make thousands of brokers redundant
COVID-19 probably isn't a good time to work in the interdealer broking industry. While large banks have been criticised for compelling reluctant traders and support staff to come into their offices, many banks are, at least, going with an official line that people don't have to leave home if they don't want to. The approach seems less equivocal in the scrappier interdealer broking sector. Bloomberg reported yesterday that BGC Partners sent staff a memo last month stating that nothing the U.S. government had said prevented them from coming into work, and that: “Driving...and using mass transit are permitted in order to travel to and from our office.”
While brokers weight up the risks of leaving home in the pandemic, it's unlikely to be much consolation that if a U.K.-based fintech gets its way they could soon be absolved of the need to leave home altogether - and of their jobs.
The over the counter (OTC) brokerage business is a "huge problem that needs to be solved", according to one managing director charged with digitally upgrading a leading investment bank. While much of the markets businesses has been automated, OTC brokerage remains heavily human-centric. AiX, a brokerage platform driven by artificial intelligence, intends to change this.
"Interdealer brokers thrive in markets where products are illiquid, or where trades are much bigger than those found on a typical exchange," says Willis Croft, a business development executive at AiX. "Their perfect combination is the two combined. The brokers know the counterparties and they can call around and scope out the potential for a large trade to take place in an illiquid market."
With a significant proportion of traders now working from home, voice calls between traders and brokers have been causing headaches. In a normal situation, traders' calls are made on recorded lines from the trading floor so as to meet regulatory requirements, ensure record-taking and prevent activities like insider dealing. However, many banks have found themselves with insufficient facilities for recording calls on remote cellphones and traders working from home at one asset management firm have been compelled to make notes on calls using pen and paper.
As the COVID-19 lockdowns highlight the banking industry's anachronistic reliance on voice broking, AiX is trying to take humans out of the equation. The firm, which was founded by Jos Evans, a former broker, and whose COO Taylor Cable spent 13 years as a portfolio manager and trader at Moore Capital Management, is developing an AI-powered chatbot that aspires to do everything a human broker can do, and more.
"Our bots can learn when and how traders trade and the technical levels they execute at," says Croft. "They are able to understand the information traders like to see in the mornings and to provide that colour. Our intention is to automate everything and to do it at a fraction of the cost."
For brokers whose services have proven invaluable during recent volatile and sometimes illiquid markets, AiX's saber-rattling may sound like an empty threat. However, even if AiX (which is currently trialling its product after three years of development in the bitcoin market), doesn't succeed in automating brokers out of existence, COVID-19 make it increasingly likely that someone or something will.
Brokers might want to take the threat seriously. "AiX digitizes algorithmic and human OTC liquidity," boasts the company's investor deck. It is "chat platform agnostic" and "full auditable." Once a trade has been matched-off, "it submits the trade details to the clearing house." As banks look to solve the "problem" of monitoring voice broking when people work from home, an automated system will look far more appealing. And interdealer brokers, which spend 75% of their revenues on compensation, look increasingly exposed.
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