Established in 1998, Horizon Software has been servicing financial institutions all over the world with technology solutions covering all aspects of the trading business in the listed markets such as delta-one, structured products and options market making & trading. Following the launch of a new version of its trading platform which extends functionality for electronic trading and market making of warrants, callable bull bear contracts (CBBCs -barrier products) and exchange-traded funds (ETFs) aimed at strengthening the firm's profile in Asia-Pacific (Apac), SRP spoke to its chief executive, Sylvain Thieullent (pictured), about Horizon's plans in the structured products market and the challenges ahead to make a difference in an increasingly crowded market.
Why are you expanding to Asia-Pacific?
In Asia you have a core market such as Hong Kong which has a very large listed market comprising warrants, CBBCs (barrier products) and ETFs (Exchange Traded Funds), and also a potentially huge investment public as Chinese investors like to take speculative positions in the market. As the number of investors in structured products increases, the market has provided new opportunities for automation to bring down marketing costs and increase efficiency and transparency. The problem in Asia is that there were no market standards and this was making the issuance and management of structured products unprofitable and unattractive for issuers of these products.
The diversification requested by investors is not as high as in Europe and the US but the operational demands in Asia-Pacific have created the perfect scenario for the introduction of platforms that can provide price discovery around vanilla structures such as equity-linked notes, including knock-out equity linked notes, accumulators/deccumulators, fixed coupon notes, daily range accrual notes, which can be standardised.
Is the fragmentation of the market an issue? What's Horizon's differentiating factor in the market?
As an IT company we can easily adapt and plug into the systems of product issuers and to integrate them and allow the buy-side to connect to the platform. The understanding of the business we are offering to clients is key, and we can leverage our knowledge of the derivatives market to make sure we can maximise our capabilities to increase the connectivity between the buy and sell-sides, and then move on to develop tools to streamline pre- and post-trade services.
What are you bringing to the table in the click 'n trade platform segment?
Our current focus is on developing tools to cover electronic trading and investment risk management, especially around products and trading strategies that have a sophisticated degree of complexity. When it comes to structured products this is an area where we can bring value and efficiency and address issues around the fragmentation of the market, the fall in margins. We want to provide the right tools to develop issuer platforms but we have no stake in the success of the platform as this is something that is the responsibility of the platform provider. We can provide the tools to minimise the risk and operational costs, and to provide a space were the issuer and the distributor can communicate and execute trades. The problem with multi-party platforms is that there are many interests involved and different corporate cultures under one roof, and although margin pressures have pushed some providers to look for this solution, it is still something that other issuers not part of that consortium may see differently.
Having a number of initiatives is good for the market as players can see by themselves what is on offer from the different outlets. This will also help to standardise the market somehow but you have to look at the developments over the last year to realise that some of the projects were flawed from inception (Land project) and other are not getting the traction that was expected (Contineo) because of the politics and conflicts of interest surrounding those partnerships. With this kind of project is very important to define who is in charge of what to avoid problems between the technical and the business side of the platform.
Is the market moving towards a multi-issuer set up?
There is value on those platforms because they provide a one stop shop for distributors, and partnerships are a good way to grow a business which then benefits all parties. However, it is also very important to put into perspective the capabilities of each party as some investment banks have very good structuring capabilities and no distribution, and others can have big distribution networks but not the same expertise in the structuring side of things. Platforms also provide accessibility to the end investor (via brokers/advisers...) and the cheaper cost can be passed on to the end investor. However, the problem - which is sometimes underestimated - is about sharing the P&L. This is something that we see as a significant issue around multi-issuer platform. So unless everybody is getting the same there will be problems, especially if we take into account that investment banks are competitors even if they come together to maximise the value of their business in a particular market. We don't think this model can be exported across markets and is only working in Hong Kong and Singapore because of the peculiarities of these market.
Has this trend changed Horizons' approach to the platform market?
We are approaching this market from a single issuer perspective, as we can provide each issuer with the right tools to address what they are trying to achieve. Then those issuers can leverage their own platform with their distribution capabilities (private banks, etc.) or connect to other multi-issuer platforms. We approach this business with a very clear liability set up. We have all the components to serve both types of platforms and we are open to adapt our offering to market demand, but our strategy is focused on helping issuers of structured products to automate and streamline their front-office processes. There are a number of initiatives going on at the moment and we want to wait and see where the market goes before we change our plan. We want to continue developing our capabilities and offering to make Horizons a unique provider in this segment.
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