In the second part of an interview with Jason Barsema (pictured), co-founder of Halo Investing - the first independent multi-issuer technology platform for structured notes in the United States, he explains how technology is helping to reshape the structured products market, how to differentiate your offering in the platform's space and how the lack of a well-functioning secondary market has hampered the industry's reputation.
Technology has changed many functions and streamlined the communication with clients but more importantly is enabling product providers to have a feedback loop with clients to facilitate their workload in relation to pre-trade, execution and post-trade, according to Barsema.
"We have also created a competitive buying and bidding environment as opposed to promoting a best price approach, and this is generating more flow than we have ever seen so investment banks are willing to compete at a product level and that benefits everybody because strips out the bad outfits," he said. "However, as a platform where we really add value is on the post-trade side which is a big problem in the US as a market because each structured notes comes up as a corporate bond on the custodians. Technology allows to manage data in a more efficient, cleaner and safer way."
Competition in the platform's market has increased notably over the last couple of years which is "good for the market and for players that want to succeed because it validates what we're doing", adding that the winners will be those offering a "much cleaner user experience" and responding "to what people want".
"We believe that user experience is key to be successful," said Barsema. "Our main differentiating factor in the market is that Halo is not a front-end but a front to back solution covering the whole value chain from idea generation to post-trade in an automated way."
Barsema notes that the front-end is important "but these days everybody has got a pricer and that is not something that will give you an edge unless you offer something else such as running analytics through AI or the machine learning (Amazon on steroids), and clients appreciate this kind of tools".
In addition to this, Halo is seeking to change the world on the liquidity side and is investing not only "to own the technology that helps to create a note" but also to facilitate secondary trading before maturity and cover the whole process "from cradle to grave", which will give Halo "a very solid competitive edge", according to Barsema.
"This has been one of the issues structured notes have faced over the years and a reason for the bad press they have," said Barsema, highlighting that liquidity is critical and paramount for an effective market. "The optics and perception around structured notes is that they have no liquidity although this is not true as issuers do buy back notes at a discount and take advantage of those investors that need liquidity. That is why to have a healthy market you need a number of participants and banks have to be willing to make market with each other."
The US structured notes market needs market makers as the firm believes that "a well-functioning secondary market will help with product adoption and will open up opportunities for exponential growth in the market", according to Barsema.
"We are changing the way this is done and we're also providing a new and effective way to trade and clear these products," he said. "Only 1% of structured notes issued in the US market are traded on the secondary market. In the past, market players used to say that nobody wanted it but we always said that this facility was not available."
Halo's focus currently is on structured notes although the firm has declared itself 'wrapper agnostic', according to Barsema.
"We don't have a saying regarding what kind of product is transacted on the platform," he said. "We're not advocating for a particular wrapper but we want to make structured notes a mainstream investment product that is considered alongside any other instrument. From a technology perspective there is scope to open up Halo to other wrappers but we're not at that stage yet."
Barsema believes that technology companies are well-positioned to lead in the platform market for many reasons. "At the end of the day innovators always win, and independence allows you to move quickly and remove any conflict of interests from your activities," Barsema said. "Banks are moving to address the need for connectivity and automation but they are not technology companies and don't think internally as such."
Banks have also a fiduciary obligation to protect themselves and their shareholders, "and it seems a contradiction that competing outfits in the financial markets then sit on the boardroom of a consortium", according to Barsema.
"To create an auto-pricer you need access volatility levels, funding rates, correlation models and it's difficult to believe competing banks are sharing that information with each other," he said, adding that an independent set up provides the most transparent way to transact products.
"We work very close to banks so they have a role to play," said Barsema, pointing that Halo is like Uber where the drivers are the banks and the users are the RIA and broker dealers. "We need drivers and riders, and do not compete with them. We want banks to offer their products through a more efficient set up and transparent process, and we can help them to lower their cost so that investors can benefit from those savings and learn about how products are put together and traded. We think we can grow the market and co-exist with banks."
From an industry perspective, there are still a number of challenges ahead and market players will have to be alert and with the headlights on to make sure they can respond, according to Barsema.
"We think regulation has helped to make the market more transparent and market players to be accountable for what they sell," he said. "We work very closely with regulators to make sure we're completely aligned with disclosure requirements, etc. Their role is sometimes misunderstood because some of the reactive work they do but they are there to make the market safer and more competitive."
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