Recent economic times have gotten my usually optimistic dad
down. He worries that the economy
is mortally wounded. Everywhere
you turn there’s bad news. Don’t
worry, says I! The heart of the
economy is entrepreneurship, and as the CEO of an entrepreneurial software
company that has entrepreneurial customers, I get to see innovation every day.
Case in point: recently, a customers of ours (PhaseCapital, a Boston-based quantitative investment advisor firm), was interviewed by Waters magazine about their business. PhaseCapital’s CEO, Eric Pritchett described their approach to the arcane world of electronic trading. In his story I saw reminders of good lessons of innovation and entrepreneurship in an industry many outsiders view as troubled and failing.
#1 - Troubled economic times make new business models a source of fresh innovation. In the capital markets, the old school model of trading is based on prime brokers who provide services to the buy side (hedge funds). The service those brokers provided, in Eric’s words, were “flying [buy-side trading clients] around to conferences to meet with CEOs and give them access to analyst reports [for stock trading guidance].” New school buy-side firms are beginning to disintermediate brokers from trading decisions. PhaseCapital is a case in point - they have their own ideas on what to buy and sell. As a result, new school execution brokers like Lime Brokerage “use their commission flow to pay for useful technology resources that [we] would otherwise have to build.” The changing business relationship between the client and execution broker provides business-model innovation: lower-cost, higher value service to buy-side firms who focus on high-frequency trading as a differentiator.
#2 - Reliance on black-box technology can
limit innovation. If everyone uses the same tools,
where do you get your advantage? Pre-built applications, or black boxes are good for business
functions where innovation is limited (such as accounting, HR, etc.). But technology that empowers a firm’s
competitive differentiation can benefit from a white box approach to
technology. A white box is
like using Lego’s to build a unique system. Mr. Pritchett cites StreamBase as an example of getting the
white box approach right by providing the basic
building blocks they needed to build their trading system quickly, but don’t introduce "too
much abstraction” from their differentiated ideas.
#3 - Open source that’s ready for prime time can disrupt. In the capital markets, technology
that drives down the cost of trading can be disruptive. PhaseCapital uses QuickFixJ the open source implementation
FIX (a standard for trading information exchange between banks and clients) for
its trading operations. But being for standards is like being for world peace -- getting
the right standards at the right time (when they’re ready) is where the
rubber meets the road. Eclipse is ready. Open source FIX is ready. Open source
technologies, picked when they’re ripe, can reduce cost and maintain quality,
and be disruptive against firms with older, more expensive infrastructure.
#4 - Decision-making speed can be disruptive. The need for speed is insatiable in the capital markets. A long time ago, most opportunities lasted for minutes. Now, with automated trading, some last for seconds; some last for milliseconds; some last for microseconds. CEP helps firms make decisions while they still matter. Mr. Pritchett described it in technical terms: [Lime and StreamBase] deliver “a strong deployment platform for low-latency trading operations.” Traditional database technology is designed for decisions that take hours, days, or weeks. CEP is designed for decisions that that take seconds, milliseconds, or microseconds. The faster a business moves, the faster it can seize business opportunity.
#5 - Describe your focus in 23 words. It’s easy to say that focus is good. It’s easy to note that lasers (focused
light) are more powerful than light bulbs (defused light). Yet the hardest job I have as a CEO of
an entrepreneurial enterprise is to focus. It’s hard to decide what not
to do. Eric’s description of
PhaseCapital’s organizational uniqueness was razor-sharp, and a great example
of organizational self-awareness: “[Our
strengths are] signaling, opportunity identification, position sizing, risk
process and in realizing the alpha opportunities that we are trying to harvest
through high-frequency trading.” Can you be that clearly focused about your
strengths in 23 words?
#6 - Bet boldly on promising ideas.
PhaseCapital bet boldly on automation. And therefore they bet on an entirely automated
infrastructure, and new technologies that enable automated trading as opposed
to traditional click trading, where traders push the button to buy and
sell. StreamBase and Lime
Brokerage were their bets for technology, and they’re building a complete system,
including algorithmic trading, smart order routing, market data management, for
both equities and foreign exchange.
#7 - Quickly land -– then expand.
PhaseCapital bet boldly, but they didn’t try to build Rome in a
day. Innovators know that you must
set and stick to a vision, but that you have to constantly learn along the
way. Innovation comes
interactively -- instead of taking four years to build it all, they set a quick
target: trade a subset of the S&P500.
They landed that goal. Then
expanded to the next step: the
entire S&P500. Then to foreign
exchange. And so on.
#8 - Entrepreneurs need entrepreneurial partners to succeed. Innovation is a mindset, and
entrepreneurs are more successful when they partner with other firms that get
it. Our customers often tell me they buy our software because our company
thinks like they do. It’s the
little things that make it work -– engineering-to-engineering communication,
direct CEO involvement and sponsorship, creative business deals and contracts. PhaseCapital worked closely with us
because that’s the way we like to work with customers. That shared mindset makes for good
partners.
Even though the pulse of the U.S. economy might be a bit shallow, PhaseCapital proves that the heartbeat of innovation and entrepreneurship is strong.