Future of Fixed Income Tech: The Allure of Small Steps
A Value Analysis of Technology Opportunities in the Fixed Income Market
Fixed income sell-side players are faced with a long list of potential technology investments. Past technology change in this area has often focused on regulatory reform, legacy system maintenance, and cost cutting. A 2020 Celent report “Transforming Trading in a Converging World,” indicated that this was changing to concentrate more on value creation. Celent research shows that relatively low-cost incremental innovation will achieve the highest risk-weighted value and should dominate value centric technology portfolios.
For nearly a decade leading up to 2022, the low interest rate environment was ideal for business plans that involved heavy spending. Cheap access to funds granted many tech-focused firms the freedom to innovate and fail. With more macroeconomic uncertainty and higher interest rates, this somewhat cavalier approach to spending in the tech industry has changed. Fintechs especially are finding it harder to obtain funding or valuations even close to pre pandemic levels, with the potenitally disastrous results highlighted recently by the deposit flight out of SVB. Although this is an extreme example, a focus on value when making investments is higher than ever as 'nice to have' projects are shelved.
To help guide technology strategy and spend decisions, and using a combination of Celent's industry experience, past and new research, and interviews with head traders, we identify technology investment opportunities likely to return the highest value (see Figure 1 below). Combining this analysis with the proven diversification principle of portfolio theory leads to a value-driven FI technology portfolio that is adaptable to participants’ distinct circumstances.