Sell-Side Innovation is Alive and Well
Earlier this year, industry analyst firm The Tabb Group published a survey in which 47% of asset managers replied that their brokers were not doing anything regarding innovation.
Has market regulation and low volatility driven innovation from the sell side?
Some at Interactive Brokers believe that asset managers may be mistakenly equating size with the ability introduce innovation.
Not all innovative firms need to designate a chief innovation officer, according to Steve Sanders, executive vice president, marketing and product development at Interactive Brokers.
“We do not need to appoint anybody since everyone on the senior team, from our founder and chairman to everybody on the steering committee, are chief innovation officers,” he said. “They are all coming up with new ideas, and we are always testing new things around the world.”
Hedge funds and asset managers should rather look for prime brokers who are willing to help them innovate themselves.
Too many of the largest brokerages have kicked out their smaller clients that do not generate enough revenue and focusing on their biggest clients
“In their mind, why innovate,” said Sanders. “In their minds, they are keeping their biggest customers they do not need to attract new ones because they are throwing the others out the door and there would be no reason to innovate.”
Smaller firms, however, by their nature need to be innovative to compete.
“For us, we had been trying to get into this business for years and started with small to medium sized hedge funds and proprietary traders,” said Sanders. “We are a technology company that happens to be in the brokerage and trading business. It always has been our philosophy to automate everything.”
Most recently, Interactive Brokers automated the sign-up process for necessary FACTA paperwork for clients outside of the US.
“Everybody else hired teams of people to fill out the paperwork or stopped servicing clients overseas,” he added.
One of the most innovative offerings the firm has brought to market is its stock loan and borrow platform.
Instead of clients calling broker after broker to find “hard to borrow” stocks, Interactive Brokers provides clients with a real-time screen displaying inventory and the borrowing rate for the stocks.
“They do not need to call us,” said Sanders. “They can look at it on the screen.”
Although the prime broker launched it approximately five years ago, Sanders is unaware of any competing offering in the market.
“I do not know of anybody, but that does not mean there isn’t somebody out there doing it,” he noted. “But you have to understand most places do not want to make this transparent because they make a lot of money with stock loan and borrow.”
As an increasing number of smaller asset managers and hedge funds find themselves looking for new prime broker relationships, they are going to be forced to do business in new and different ways, Sanders added.
Innovation to get a second breath in the new year.
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