Markets Technology Awards 2024: Fixes for the ‘forgotten middle’

In 2021, Chris Churchman landed a new job at Goldman Sachs and was casting around for ways to lure clients to the bank’s Marquee platform, its digital platform for institutional clients.

Churchman had previously worked as an exotic foreign exchange derivatives trader, and started thinking about how he made his trading decisions. He realised that on pretty much every trade he had ever done he would first start with a chart, then toggle to Excel – in some cases spending hours analysing the various risk factors. When it came to explaining the trade, he would always go back to a chart to illustrate why it made sense and how it would make money.

“I realised something quite profound. Why not just do it all on a chart – and use that chart as the interface itself? All the variations, all the scenarios, all the back testing,” he says.

After nine months of development, the Marquee team came up with its Visual Structuring tool, initially launched just over a year ago. With a few clicks, Churchman shows how the chart interface can explore the risks and potential profits of a complex trade – in this case, a one-year call option with a six-month window and two knockouts – making it easier for a client to understand.

Why not just do it all on a chart – and use that chart as the interface itself? All the variations, all the scenarios, all the back testing

Chris Churchman, Goldman Sachs

The chart itself can be used to create and amend a wide range of scenarios, with users having the power to edit parameters including market data, implied probabilities, target levels of risk and reward, and upcoming market-moving events. Trades can be back-tested and shared with colleagues.

Churchman argues the tool makes trading derivatives easier, comparing it to the way Amazon’s pre-sale analytics help a customer go from knowing they want to buy Lego to selecting a specific set. In the process, he believes the bank is helping to demystify the market – and, of course, he hopes it will result in Goldman booking more business with a wider range of institutional clients.

“Historically, a lot of these concepts have been really intimidating,” says Churchman. “In order for that market to grow, you need to democratise understanding of these more complex products.”

The 140 submissions to this year’s Markets Technology Awards revealed a number of firms with a similar conviction – each of them trying to increase transparency or knock down operational barriers that still exist for many clients.

“Forgotten middle”

Eric Huttman, founder of MillTechFX, recognises the trend.

“Why is there a wave of democratisation now? Because it's about time,” he says.

When Huttman joined hedge fund Millennium Global as portfolio manager in 2016, he saw the firm was trading a colossal $750 billion of FX per year as part of its investment management activities.

The firm had spent a lot of time and money building up its currency execution capabilities, and was one of the market’s top-tier buy-side participants, but it did not generate any revenue from the sunk costs of this internal function. Separately, Huttman had also noticed there was a large group of middle-market clients who found it difficult to trade in the wholesale FX markets.

He had what he calls a “lightbulb moment”. What if Millennium could sell its execution capabilities – its relationships with counterparty banks – to smaller players that could not access wholesale FX markets? Huttman and the team spent a couple of years developing a platform to do just that, spinning out MillTechFX as a sister company to the hedge fund in 2019.

Why is there a wave of democratisation now? Because it’s about time

Eric Huttman, MillTechFX

“Our objective was to democratise access to the wholesale foreign exchange market for those in the middle who are not trading because they want to – they’re trading because they have to,” says Huttman.

He calls the companies his firm targets the “forgotten middle” – a large cohort of companies that need to trade FX for their day-to-day operations, sometimes racking up orders in the hundreds of millions of dollars per year, but have little interest or edge when doing so.

Huttman says these sorts of clients have traditionally been underserved by banks because financial firms have spent the past two decades focused on providing innovations to the largest institutional clients or the retail sector.

“If I look at the evolution of the markets, it’s basically a barbell,” says Huttman. Large participants have invested a “huge amount of effort” on increasing transparency in the institutional markets, as well as significant innovation at the SME and retail level. Inbetweeners have been neglected.

That seems to be changing, with firms now recognising there is money to made from these smaller clients. Indeed, MillTechFX has grown significantly in the past year, from 30 to 40 clients trading around $45 billion in 2022 to over 130 clients trading more than $160 billion in 2023.

Volatility and open banking

Other vendors also see an opportunity to carve out a lucrative business from a cohort of clients that has traditionally been excluded from trading certain products.

Derivative Path has carved out a niche providing derivatives trading services for regional and community banks, credit unions, financial sponsors and middle-market corporates in the US who typically do not have large in-house teams of quants and financial engineers. The firm was founded in 2013, but has seen the number of clients on its books grow by more than 50% in the past two years.

We’re seeing a larger focus on open banking capabilities, with interconnectivity being a key driver in decision making

Zack Nagelberg, Derivative Path

Zack Nagelberg, co-founder and chief growth officer of the company, says these types of clients have been poorly served by existing tech infrastructure that is geared towards larger players and is often difficult to use. He sees the democratisation trend as a natural reaction.

“For a long time, the vast majority of innovation and tech investment was geared towards the largest market participants, so in some ways it was only a matter of time until the focus moved further down market,” says Nagelberg.

He believes open banking and the return of volatility are helping to increase the focus on these lower-profile market participants that now need access to a wider range of financial products, such as hedging capabilities.

“We’re seeing a larger focus on open banking capabilities, with interconnectivity being a key driver in decision making,” says Nagelberg. “Additionally, some broader trends such as increased market volatility, which has led to increased focus on hedging, a desire to move to automation and out of manual processes, and an expectation of consumer experiences have all increased demand.”

Cloud and transparency

All three of these firms – Goldman, MillTechFX and Derivative Path – are helping provide access to financial markets, but the democratisation theme can be seen in risk analytics as well.

Xavier Bellouard is the founder of ActiveViam, which aims to provide sophisticated risk management tools to smaller financial players.

“Traditionally, [this sort of risk management service] has for a long time been the privilege of very advanced financial services firms. Ones ready to splash out a lot of money, whether by acquiring expensive technology or by building lot of things in house at a very high price,” says Bellouard.

He believes the widespread adoption of cloud computing is helping to democratise markets for middle-market players, giving them access to technology that would previously have been too complex or costly to develop in house, as well as making off-the-shelf tools easier and faster to use.

“With the adoption of the cloud, there is certainly easier access to a number of technologies that would have been too complex and difficult to manage on premises. So in effect it democratises and facilitates access for the smaller players.”

He adds that clients are also helping to drive the change; they have taken note of advances in consumer technology that make all sorts of tasks easier, and are also demanding greater transparency for all parts of their business.

“Getting into new markets and starting new parts of a business has to be supported by the tools that allow you to understand and explain things easily,” says Bellouard. “You have to have an easy view of the current state of the market and all your positions. It is essential to be able to answer the ‘why’ question rapidly.”