On April 7, we broke the news that Citi and Bank of America were getting ready to unveil a consortium-driven collateralized loan obligation (CLO) trading platform (Pats self vigorously on back). Sure enough, this past Monday, the banks put out a press release confirming the project. Bloomberg wrote a story about it, but it was just from the POV of Citi and BofA and didn’t have much additional information beyond the press release, which was also kind of thin. And The Trade couldn’t be bothered with doing any actual reporting for its story, rather choosing to rewrite the press release.

Please forgive me for lacking humility, but our story—even though Citi and BofA wouldn’t talk to us ahead of the release, though they did talk to Max Bowie after—is better and has more information than anything that’s out there (Though, to be fair, we didn’t know that the platform will also address syndicated loans and not just CLOs).

Ok, enough navel-gazing … let’s get to it.

Hammer, meet nail

This week, I once again want to talk about distributed ledger technology—aka, DLT—but first, a bit about editorial judgment.

As (I would assume) you already know, WatersTechnology and Risk.net are sibling publications owned by Infopro Digital (and before that, Incisive Media). While 98% of their stories would not be of interest to our readers—and vice versa—every now and again the reporters at Risk hit on tech and data, and how they relate to managing risk and regulation. So it is that this past Tuesday they published a story about how distributed ledger technology could’ve helped prevent the ripple effect that resulted in Archegos Capital Management’s $20 billion default—according to Christopher Giancarlo.

Giancarlo, you might remember, previously led the US Commodity Futures Trading Commission. During his time at the CFTC, the interwebs started referring to him as Crypto Dad because of his advocacy of cryptocurrencies, which are underpinned by distributed ledgers such as blockchain.

Being that he’s the former chairman of a major regulatory body and he likely still has some clout on Wall Street, him saying that DLT could’ve helped to better monitor the risks that stemmed from Archegos’ heavily leveraged bets is worthy of repeating. As such, we also decided to run the story, as Risk and WatersTechnology will cross-publish stories every now and again.

Now, I have opinions and biases, but I truly try and block those out when I decide which stories to chase after (or, in this case, poach). As I’ve written about plenty of times before, I am not a fan of DLT, though there are some instances where the tech might—might—be the best tool for the job. So it is that when I first read the Giancarlo take, my initial reaction was, “Oh great, another example of using DLT to solve all of Wall Street’s woes!” But, because of Giancarlo’s standing in the industry and because the term “Crypto Dad” was in the headline, which made me giggle, we published the story. I figured people would be interested in what he had to say.

On Twitter, though, I noticed someone I respect, Brennan Carley, wrote this about the article: “No, no, no, no!” and proceeded to explain why “DLT could not have provided better monitoring of the risks that led to the Archegos implosion.” Another person I respect, Virginie O’Shea, who has (in my opinion) the best takes on DLT and blockchain, joined in, writing, “I continue to be amazed by how people assume DLT or technology of any type will solve problems without regulation and data standards.”

This is one of those rare times when I absolutely love Twitter. Smart people discussing a subject intelligently, but very succinctly. And I also agree with what they wrote. Additionally, I agree with some of the emails I received after we published that story. So let me present the counterargument to what Giancarlo posited.

The first major issue that I, personally, have is that Giancarlo very much has a dog in this fight. Since leaving the CFTC, he set up a think tank to promote the idea of digitizing the US dollar. Last week, it was also announced that he signed on with Baton Systems as an advisor; Baton is using DLT to solve problems in the post-trade/payments arenas. While Giancarlo is the former head of the CFTC, in my mind, he’s today very much a tech exec with a product to sell.

But, as the Big Lebowski would say, well, you know, that’s just, like, my opinion, man. I’ve never met Giancarlo, so I have no clue as to his inner thoughts on DLT beyond what he says in public, and there’s no reason for me to think that he doesn’t believe what he’s saying. But the way that we just report on what Giancarlo says about DLT reminds me a lot of how media outlets (again, us included) reported on all of Blythe Masters’ thoughts on blockchain a few years ago.

On top of that, here’s what Carley wrote on Twitter (semicolons mark a new tweet): “The market & regulators didn’t lack visibility of Archegos’ positions because of some missing magic technology; The market & regulators didn’t have visibility of Archegos’ positions because Archegos traded OTC swaps, which neither counterparty had an obligation to disclose; Without a mandate to disclose, no bank, asset manager, or family office is going to voluntary expose their positions on ANY ledger for the world to see; On the other hand, if there were a regulatory obligation on either the banks or Archegos to reports those positions, that could be facilitated by any number of industry utilities (my friends at LCH and the DTCC could do it, too); It doesn’t require any distributed technology, just a decent database, a defined set of data/reporting standards, and (most important) a regulatory mandate to report. Let’s stop assuming that technology magically solves these problems.”

This is what O’Shea was saying: DLT or any other piece of technology are just tools, but they can’t solve anything “without regulation and data standards.”

Someone else emailed me (I’ll keep them anonymous, as I always do with private emails), writing this: “It’s a new shiny toy, but you need the right data to get to the right people. The essential issue is NO one prime broker has the consolidated positions of a client. And unless you have the PB’s submit all the data for all the clients into a central reporting mechanism, nothing changes. Obviously, that’s very sensitive data, but there are solutions that can aggregate that and show risk and issues versus the actual positions themselves. S3 Partners has [that type of] solution, sans the DLT mumbo jumbo, for example.”

And still someone else wrote me this: “Blockchain is just basically a (not very good) database,” but if you were going to use a DLT for the purpose of measuring risk exposures for prime brokers, a regulator will still need to define the workflow around who/what/when/where/how to report this information. Additionally, standards need to be defined around how a firm represents a swap and the symbology used (no small feat), and all of those workflows and protocols need to be continuously updated as the market evolves.

Furthermore, someone needs to write the code to update the ledger, “or do we really expect every market participant to become an expert on coding this stuff and having to hire their own IT team to do it?” they say. “The dirty secret of blockchain is that it is only transparent if you are willing to do a lot of work yourself (i.e. you can’t just pick up a blockchain and look at it with a green visor on—you need to write code, and it’s some pretty hairy/cryptographic code, at that). And, finally, someone needs to audit it to make sure it is all correct and not vulnerable to fraud, etcetera.”

This is an important debate because I feel that the DLT proponents have an outsized voice, while the contrarians often feel that they’re shouting into a stiff wind. Have some thoughts of your own? Think I’m misguided? Agree, but think I’m missing something? Hit me up: anthony.malakian@infopro-digital.com.

More consolidation

While we do break news about M&A—most recently with Ion and Dash and List S.p.A, as examples—it’s not a priority for me, as the editor of this publication. Rather, I want us to write the definitive piece about an announced acquisition. What are users worried/happy about? How might this affect the acquired firm’s tech going forward? Are employees of the acquired firm worried? Breaking news is fun, but what’s more important is the context and trends that will result from that piece of breaking news.

So it is that Broadridge raised some eyebrows when it acquired Swedish vendor Itiviti for a whopping $2.5 billion at the end of March. We didn’t break that news, but our Wei-Shen Wong spent the last two weeks talking with a lot of different market participants about the deal, and this story is what I consider to be the definitive story written about that acquisition.

The M&A market (and specifically for the trading technology space) was hot heading into the pandemic, but then Covid-19 forced a global pause on deals. The year ahead and on into 2022, though, should see increased consolidation in the space, especially as there’s a lot of pent-up dry power in the VC world. So perhaps the $2.5 billion price tag shouldn’t have come as such a surprise. Itiviti, after all, has done a good job of establishing itself in the Europe, Middle East, and Africa (Emea) and Asia-Pacific (APac) regions, which should prove beneficial to Broadridge.

But, as Wei-Shen explains, it’s the trading network that Itiviti has built that could be more important to Broadridge, than the front-office trading tools that Itiviti has built and invested in (you may remember them as being a leading Bloomberg Sseoms replacement).

This is the same conversation that we have after every acquisition, but I will keep banging on this drum: The success of this deal will come down to the people. Multiple sources told Shen that Itiviti’s CEO Rob Mackay has done a great job boosting the firm’s profile and prepping it for a successful sale for Nordic Capital. Now that the job is done, some believe he may move on to another venture. For me, that’s worrisome if that’s what pans out.

Others brought up concern about a previous Broadridge acquisition: Paladyne Systems. While Broadridge says that integration went well, the senior managers that built Paladyne are no longer with the company. Are these red flags, or is this just the natural course of acquisitions?

Obviously, it’s too early to tell, but my takeaway is that Broadridge actually has a plan for Itiviti and it’s not to just milk Itiviti as a source of cash flow. As one source said: “[Itiviti is] not selling pure software and seats; it’s actually selling trade volumes through its whole Fix connectivity business. For Broadridge on the asset management side, [the Itiviti deal] is moving them from selling just pure seats to people, to actually getting some variable revenue components depending on transaction volumes. If you provide better service and connections, and if you can increase the trading volumes through these pipes, you make more money—you just need to increase flow. But to do that, you do need to invest in innovation.”

As always, time will tell, but if you think we missed something, please let me know: anthony.malakian@infopro-digital.com.

The image at the top of the page is Robert Charles Dudley’s “The Forge on Deck, Night of August 9th: Preparing the Iron Plating for Capstan,” courtesy of The Met’s open access program.