Money is pouring into fintech. In 2014, global investment in financial technology startups spiked to more than $12 billion. That’s three times what it was just a year prior, according to Accenture. There have also been some huge funding wins this year. Most recently, zero-commissions trading app Robinhood announced $50 million round and financial education site NerdWallet attracted $64 million in funds.
Those are big, headline-grabbing numbers. But only using funding as a benchmark can mean focusing too heavily on consumer fintech – and ignoring another large fintech opportunity.
Recently, Business Insider analyzed Goldman Sachs’ business segments and said that it had more engineers and programmers, at 9,000, than Facebook, Twitter or LinkedIn. The headline captured BI’s takeaway: Goldman Sachs is a Tech Company.
But it’s not just Goldman. A booming fintech industry is incubating surrounding exchanges, hedge funds, banks and proprietary trading firms. But startups developing technology for trading and “markets” has been overshadowed by its consumer finance counterpart. They shouldn’t be.
To demonstrate the opportunity in this space, the industry was recently the highlight of a sold-out, half-day event in Chicago. What was abundantly clear is that the trends that dominate technology – big data and networking, social media and app ecosystems – also dominate fintech startups.
That’s because while other industries embrace the “fail fast” mentality, in financial markets and trading, fail fast thrives. The ROI of new innovations is often instantly quantifiable. When Anova Technologies built a laser and microwave infrastructure to carry data over airwaves between Chicago and Aurora, they knew the value of faster data – and so did all the trading firms that relied on being faster than everyone else. Once Anova demonstrated it could send data milliseconds faster, any firm whose competitive edge was speed had to subscribe.
Other startups mine social networks to monitor for fast-breaking news from market influencers. Of the millions of people tweeting about stocks, Social Market Analytics identified a universe of 55,000 influencers, offering its tools to hedge funds and institutions to gauge market sentiment on which to base algorithmic trades.
And then there are companies that are capitalizing on the app ecosystem. OptionsCity Software has launched a platform that is akin to the App Store for the trading world, where third-party developers or trading firms can sell risk management, pricing or analysis tools that plug directly into the trading system.
Those are just a fraction of the companies developing new technologies around market trading and analysis. This area is so ripe that the CME Group launched its own venture capital arm last year, Liquidity Ventures I LLC, to invest $500,000 to $5 million in startups that could help it develop new lines of business. Spanish bank BBVA, Fidelity and Bank of America have all created venture arms for increased investment in technology.
Another reason to look at institutional fintech is that it proves its value very quickly whereas the jury is still out on consumer fintech, which has not yet seen tough times. Robinhood and Wealthfront have exploded, but so too have equity markets. If these consumer-focused companies existed in 2008 and 2009, would they have survived the massive exodus when consumers fled equity markets? How will they perform during the next bear market? At best, the answer is unclear.
Financial markets are active, and banks, hedge funds and traders will need to make money no matter where the S&P 500 trades. Fintech startups in the trading space are still open to disruption, but aren’t subject to individual investors’ emotions. For that reason, this sector deserves closer attention.