Channeling Darwin: Big Firms Tackle Innovation

Steve Grob, director of group strategy at financial technology provider Fidessa, said large firms can be just as innovative as smaller rivals if they borrow from the principles of natural selection to take advantage of their scale and resources.

Grob told Markets Media: “Innovation is a function of resource and effort so larger firms should be better at innovation if they are organised properly. Most large firms have the resources but they are poorly co-ordinated and they need to focus on a smaller number of areas.”

He has written a paper, “Natural Innovation: A theory of innovation for larger firms in financial markets”, inspired by Charles Darwin’s theory of evolution by natural selection. Darwin’s premise was that a random mutation that favours a particular species’ survival is automatically selected and makes it through to the next round of evolution.

“Natural selection is the most creative force and I wrote this paper to see if there were some self-evident truths which could hang together and be implemented around Fidessa,” added Grob.

He said smaller firms have an advantage in being able to develop and deploy products more quickly, more commercial flexibility and that customers are more forgiving of smaller, new suppliers.

Large firms can compete by acquiring newer innovative rivals, but the results have generally been disappointing; by setting up innovation committees, incubators and labs, which can become strangled by bureaucracy while a third approach is to set up a separate investment business to finance new firms, although this indicates a corporate shift into venture capital. The paper argues that larger firms need to play by different rules.

“Innovation doesn’t work if it is done by committee or if it is the responsibility of ad hoc teams and initiatives without a focus,” Grob added. “The fanfare over incubators has waned as innovation needs to be in the DNA of a firm. Everyone needs to be cognizant of innovation and it needs high level executive support.”

Innovation can come from a steady stream of intuitive improvements and can be a function of sheer effort and resource. However large firms need a mechanism to simplify, direct and focus these efforts and repeatedly communicate the set goals to all staff.

For example, a firm might decide to focus on a new asset class, area of workflow or the application of a specific new technology to an existing business line. This should be picked up by the technical, commercial and business thinkers and turned into incremental, innovative – yet directed – evolution. For example, at FIdessa the firm started writing in different programming tools in order to think about problems in new ways. In nature not all species will evolve successfully and similarly, not all business innovations will work.

Grob said: “Measurement is crucial. It is possible to have concrete quantitative goals but they don’t fit into a typical management spreadsheet”

Goals and targets such as “grow sales by x% per quarter” or “reduce operating expenses by y%” work for established business lines but not for innovation. Better goals and targets for innovation are more incremental and need to reviewed more regularly, such as “prove the efficacy of the core business idea to five potential customers” or “build a prototype in a new technical infrastructure.”

Nature is also full of symbiotic relationships where two seemingly diverse species find a way to cooperate to their mutual benefit.

“At Fidessa we learnt that evolution is not precious and it did not matter if ideas did not come from within the firm,” said Grob.” In the fourth quarter we launched a partnership program as our customers told us they would use new technology if it was embedded in the Fidessa workflow.”

The partnership program allows multiple vetted third-party applications to be integrated into Fidessa’s workflow so that innovative new firms can meet the security, scale and resilience requirements in capital markets.

The first partner in this program was OTAS Technologies, which provides a range of market analysis tools in live trading conditions. The OTAS tools sit alongside Fidessa’s Order Performance Monitor. James Blackburn, global head of sell-side equities product marketing at Fidessa, said in a statement: “They provide traders with detailed market micro-structure analysis and the ability to drill down and understand why their orders are trading the way they are, as well as what factors might be influencing them.”

Tom Doris, chief executive of OTAS Technologies, told Markets Media that the firm was launched with idea that incumbent trading platforms would eventually open up to third-party content.

“We had no idea whether that would take two, five or 10 years or whether it would happen in a piecemeal fashion or all at once,” Doris added. “Fidessa saw the logic of doing this and took the risk and the industry is fortunate they are prepared to be a good citizen in developing the ecosystem. They have taken the leap and had the intellectual conviction to anticipate trends.”

Doris said OTAS benefits from tapping into Fidessa’s distribution channel, which is a tremendous potential accelerator, and from Fidessa’s reputation for being reliable and robust.

“Yet they have been willing to take risks and open up their platform,” Doris added. “Other platforms have been more protective and took longer to realise that third-party content will not disenfranchise, but will strengthen their offering. Fidessa made the right move and in the last six months everyone else had been running to catch up.”

OTAS now has partnerships with five trading platforms and expects to have another four by the end of this year. Doris said financial services can learn lessons from other industries where third-party independent developers produce apps demanded by users and OTAS would like to have an API (application program interface) to allow more content providers to easily join their platform.

“We have taken a lot of features from the App Store model such as the need for access to an API, which we might have to build ourselves, and centralised tracking and user entitlements,:” Doris added.

This month Fidessa announced it has signed a partnership agreement with Alpha Omega, which provides FIX-based solutions for affirmation processing through its post-trade service.

Alpha Omega, which is used mainly by the fund managers, can access the sellside through a single conformance to Fidessa’s Affirmation Management Service, to significantly reduce the time taken to on-board customers. The two firms have also agreed to collaborate on other asset classes, including derivatives.

Grob concluded: “Only time will tell if ‘natural innovation’ will prove to be the answer for larger firms, but it does offer an approach that plays to their strengths rather than those of the fintech newcomers.”