Financial technology innovation in the world’s biggest wealth management hub

As the world’s leading wealth management and private banking hub, Switzerland is no stranger to innovative financial technology. Every year there is plenty of funding going into the development of technology solutions to help raise the standard of services and operations in the industry. A study released by Lucerne University in March found that 70% of the country’s 382 FinTech companies are working on solutions in the product areas of investment management and banking infrastructure.¹

The presence of global banking giants like Credit Suisse and UBS allows universities and institutes such as ETH Zurich to regularly collaborate with banks and technology companies on research projects. This ensures the abundant supply of computer engineering and data science students who are already familiar with the financial services industry when they graduate. Such talent pool is key to the country’s reputation as a breeding ground for fintech startup ventures. The Lucerne University study placed Zurich and Geneva just second and third on its global FinTech hub ranking, behind Singapore.²

Digitization is an example of technology with widespread implications for how financial services companies operate. It allows firms to identify new ways to serve clients, such as pioneering new relationship management channels that target millennials, and leverage data and technology to drive investment decision-making processes.

Another example, and one that I have witnessed first-hand in my current role at MarketAxess, is how innovation in electronic trading helped transform the fixed income investment and trading workflow for private banks and wealth managers. Here I’ll sum up my observations into three key areas.

Data

The migration of bond trading from phones to electronic venues has led to an explosion of market data volume. While this helps increase price transparency, it also makes identifying the important signals from the pile even more difficult. To address this challenge, some Swiss banks started to use advanced technologies like artificial intelligence to help wealth advisors sort through thousands of data points and make recommendations to clients. 

After clients agree to a high-level investment idea, advisors and product specialists need to identify securities that fit these criteria. Sometimes, they run into another challenge: the selected bonds are not liquid enough or the price does not meet clients’ expectations, rendering the investment idea inexecutable. Combining the availability of high-quality data (covering price and liquidity information) throughout the entire investment decision process and machine learning tools can help address this challenge by narrowing the pool of bonds to those that meet both the required price level and are adequately liquid. 

Efficiency

A unique feature of private banks is that traders often need to deal with a diverse mix of block and smaller retail orders. This is in contrast to their larger asset management peers whose orders are mostly blocks. To improve efficiency, many of them are now adopting full automation for processing orders that do not need human intervention or control, freeing up traders to focus on more complicated transactions that require their skill set, subsequently enhancing the efficiency and performance level of the desk as a whole. 

Today, automation is being successfully used across much foreign exchange and equity trading desks. The pace of adoption for fixed income, given its more complex liquidity structure, has been slower but we expect it to gradually pick up in the future with many Swiss financial firms leading the way.   

Liquidity

Any great investment advice and decision can only generate a return for the client if the trading desk, who is responsible for executing the orders in the market, has access to a trading venue with superior liquidity and price-quality. Electronic trading solutions such as our Request for Quote (RFQ) protocol in combination with Open Trading™ (our “all-to-all” liquidity pool) are helping to solve this problem by allowing more and more buyers and sellers to find one another. 

Without access to a wider liquidity pool and better pricing, execution costs may eat up the clients’ alpha in the form of price premiums. On the other hand, cost savings from better execution prices can help increase their return.

At MarketAxess we have a range of products that can help private banks and wealth managers address these challenges. Through Composite+™, traders can access predictive pricing information that is highly accurate. Combining Composite+ with Liquidity Score allows wealth advisors to narrow their recommendation list to a pool of bonds that are liquid enough to trade and also meet the price level required by clients.

Axess IQ, which I have introduced in detail in a previous article, is a one-stop-trading-shop tailored specifically for the unique needs of private banks’ trading desks to help them manage and automate their order execution workflow and improve execution efficiency. Finally, Open Trading, our electronic “all-to-all” marketplace that lets all market participants trade more efficiently through unrestricted connectivity, provides the venue for traders to source liquidity from a bigger pool of fixed income participants while saving on transaction costs.