Banks as platforms

Zac Townsend‘s post on how Standard Treasury aims to turn banks into platforms is intriguing. There’s certainly no lack of ambition in his goal. But I do wonder if he’s setting himself to tilt against the very nature of both banks and platforms. One of the key phrases in Zac’s post is: “allowing developers to think of banks as platforms”. I’ll just unpack that a little. First, platforms, as explicated in Evans & Hagiu’s excellent Invisible Engines. Platforms are multi-sided markets. One side pays for access to the revenue generating customers that an effective platform aggregates by offering free or cheap access. For example, in gaming, game devs pay licenses to platform (console) owners so they can sell to gamers. The console manufactures sell consoles at or even below cost. In financial trading clients pay Bloomberg for access to information & liquidity, and dealers get access to the platform without paying fees to Bloomberg. Famously, Google and Facebook offer services free to consumers to enable them to sell to advertisers. So if banks are going to spend a load of cash adopting Standard Treasury tech so they can become more like real software platforms, who is going to pay?

Let’s bear in mind that banks are already liquidity platforms. They charge fees for access to the liquidity they provide by aggregating client capital. They disguise fees by making some things “free”, and charging for others when they cross sell. If you attempt to commoditise or aggregate by means of a software platform, they lose the cross sell, and so the margins. They will certainly resist that prospect. So, any software platform that integrates banks with with software services needs to offer the prospect of more margin in existing deal flow, or new deal flow to justify the cost of adoption. Judging by Zac’s post, it looks as if he thinks the new deal flow would come from the underbanked via mobile apps. Will that deal flow justify the cost of implementing Standard Treasury tech? I’m sceptical…

Standard Treasury should also be considering the cost of decommissioning those expensive legacy systems. In banking old and new systems tend to run in parallel until all stakeholders are confident that the new systems supports all legacy system functionality. So new tech that promises cost savings tends to cause a cost spike until the old system really has been put to bed. And, believe me, that can be a lengthy and painful process! I have first hand experience of systems that have resisted retirement for decades…

Invisible Engines

I first read Invisible Engines back in 2007. I still rate it highly now, and I’m pleased to see you can download the whole book as a PDF from the MIT site. It’s topic is the economic and technical aspects of software platforms. Anyone who’s followed the fortunes of IBM, Microsoft, Apple and Sun, and their respective software and hardware platforms should get a lot from this book. I had high expectations when I originally read it, and I wasn’t disappointed. Looking at the download again today, I can see it’s stood the test of time. The book goes well beyond operating systems as platforms and has excellent material on gaming consoles and the three way tension between mobile handsets, their OSes and network operators. It came out in 2006, so pre dates the rise of social software platforms. But the principles it elucidates on multi sided markets and APIs are obviously applicable to Facebook, Google and Twitter. And in the financial sector they apply equally to industry giants like Bloomberg who are a classic multi sided play. Bloomberg as a platform derives revenue from clients paying $1000/month for a terminal. The other sides of its market are dealers contributing quotes and liquidity to Bloomberg as an ECN, and software developers using Bloomberg APIs.

Turing’s Cathedral

So I’m reading Turing’s Cathedral, and hve greatly enjoyed the first couple of chapters. The Guardian’s review prompted me to get a copy. There is a mixture of history and technical theory in theis book, as Spufford pointed out in his review. Dyson is drawing out the connections between the bomb project and early computing development too, which is fascinating. I’m sure I’ll be struck by parallels with the development of financial pricing models as I read. In chapter one Dyson decribes how MANIAC’s memory was built out of 40 cathode ray tubes, each of which could store 1024 bits, giving 40K bits of addressable storage. He then comments: “Since a 10 bit order code, combined with 10 bits specifying a memory address, returned a string of 40 bits, the result was a chain reaction analogous to the two-for-one fission of neutrons within the core of an atomic bomb. All hell broke loose as a result. Random-access memory gave the world of machines access to the powers of numbers – and gave the world of numbers access to the powers of machines.”

Fundamentally, Dyson is describing a mechanism for indirection. As I read his desription I was struck by the parallel with Godel numbering, and how it allows mathematical statements to be turned into numbers, which can then be quantified over by further statements. That opens up the possibility of a self referential statement, which enables Godel to prove the incompleteness theorem.

The Greatest Trade Ever

I’m reading Zuckerman’s Greatest Trade Ever, an accout of how John Paulson’s hedge fund profited from the credit crunch. There’s a lot of anecdotage and general background. But among all that there’s some good detail on implementation. How to implement a view of the markets as a trade is a key question for any trader. Drobny’s House of Money is excellent on this. Zuckerman’s book as some good stuff on why shorting the bonds or equity of home loan origination companies didn’t work, why CDSs on sub prime MBSs didn’t become tradeable til 2005, and why they were the right vehicle for shorting. Also on why using CDSs means negative carry, and why that’s generally a difficult thing for any portfolio. Taleb has some good comments on why his out the money options strategy suffered from the same problem.

Finished Sussex’s LIFFE

Sussex discusses the shift from LIFEE to Eurex for the Bund contract towards the end of the book, but doesn’t offer any special insight. There’s a few comments on the Eurex Flipper too, and how he angered locals on Eurex by kidding money out of them. One could argue that the locals were kidding money out of the ‘real’ market participants. Having worked as a local at times, that’s not Sussex’s point of view. All in all, an enjoyable read, albeit without eureka moments.

Sussex’s LIFFE

In Day One Trader John Sussex recounts being on the floor for the Queen’s visit to LIFFE in 1992. The Queen is greeted with spontaneous applause from the traders – Sussex contrasts the reception with that given to Tory Chancellor Ken Clark, who was met with chants of “who ate all the  pies ?” And shouts of “you fat bastard!”

Day One Trader

At the moment I’m enjoying John Sussex’s career memoir Day One Trader. He stumbled into the City as a 16 year old Essex lad, and ended up on the board of LIFFE. I’m interested in exchange trading, and there’s lots of good anecdotage on how brokers, dealers and locals worked order on the floor. I’m looking forward to Sussex’s account of the late 90s, and the battle with Eurex and the development of LIFFE Connect.

Taleb’s bed

So I’ve taken a look at the excerpts from Taleb’s new book. Now that I’m working for the Greek goddess of heroic endeavours, it’s nice to see some Greek mythology in Taleb’s work. I’ve been a fan since a colleague recommended Fooled by Randomness in 2003. His work has always had a strong epistemological flavour, and he’s done more than most to popularise the work of Karl Popper – the originator of the Black Swan metaphor – which is no bad thing. From Taleb’s new material it appears he’s becoming a full time philosopher, no doubt because he’s achieved financial independence !

One of the aphorism’s Taleb presents in his new material is “the person you are most afraid to contradict is yourself.” The sentiment is not original, and I think better expressed by Emerson: “a foolish consistency is the hobgoblin of narrow minds.”

Or to modernise Emerson’s language: “consistency is the virtue of a narrow mind.”

 

Money Mavericks and Single Dealer Platforms

In Lars Kroijer‘s excellent Money Mavericks he describes executing his first trade after launching his hedge fund, Holte Capital in late 2002. It’s a $50K equity buy order, and his broker says “you do know this is only a 50 grand order, right ?” The broker goes on to suggest that his seniors won’t be happy with him handling such small orders. Lars finds the experience dispiriting, and starts to use his prime broker’s “cheap and electronic direct market access platforms” to execute.

So I guess one driver of single dealer platform flow is brokers at big firms dissing small clients who execute by voice !

Preparing for re-entry

After a delightful month off travelling round Europe with the family, I’m now limbering up for a return to work. I’m very busy with the other half setting up a new venture that she’ll be operating while I’m at work in the City. And I’m enjoying reading Lars Kroijer’s Money Mavericks – an account of starting and running his own hedge fund. The first few chapters offer a great combo of amusing career anecdotage and nuts and bolts info on starting your own business.