From prophets to ‘parasites’

How post-trade vendors went from problem-solvers to ‘rent-seekers’

Today’s financial markets are stuffed to the gills with would-be innovators and disruptors – many of them former bankers with a new passion for moving fast, breaking things and shaving every other day.

There’s a lesson for them all in the sad tale of the vendors that exist to knit the post-trade derivatives market together – messaging, middleware and reconciliation services.

Once, not that long ago, these firms were all trailblazing, rule-breaking, high-fiving problem-solvers. Now, they are part of the furniture. When trying to cut costs in recent years, banks have trained their sights on these services, among others – conversations and relationships have become strained, with banks said to be complaining about what they see as “excessive tolls”. An executive at one new-tech upstart describes the firms collectively as “rent-seeking parasites”.

When that description is put to two former post-trade vendors, their first reaction is to laugh. Both of them remember the good old days, when firms like these were at the cutting edge.

The first says: “I get how that goes. People are asked to solve problems at a certain point of a market’s development and then become the rent-seeking parasite over time – eventually customers resent paying money for it, because the problem has already been solved.”

It’s a poignant reflection not just because he worked at one of these firms, but also because he’s currently trying to build a new one.

“I’m trying to ensure that doesn’t become us – how do you ensure you don’t become a parasite?” he asks.

The second ex-post-trade vendor has some general advice. He thinks the parasites term ignores all the good, synergistic growth that post-trade services have been able to unlock, but adds: “I do think it’s fair to ask ‘What have you done for me lately?’ of any tech provider; and if that provider is not innovating, is not continually trying to drive costs down, then the criticism may be warranted.”

If today’s innovators find themselves in this situation, it will mean they have succeeded: they moved fast, they found something to fix, and people liked their solution.

But lasting success requires stronger foundations, which could be a challenge for some of today’s narrower start-ups – fixing one thing and then collecting a toll won’t be enough to keep your clients happy for long.

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