Though there are many inefficient industries being reimagined by a new breed of entrepreneur, arguably one of the sectors most in need of some 21st-century reworking is financial services. A future with more accountability, more transparency, greater opportunity, and more social utility is vital for Wall Street, and its associated services, to recover some luster.
Tackling some of these challenges is a range of young companies led by visionaries with inside experience and the entrepreneurial zeal to drive the sort of changes that Michael Lewis documents so well in Flash Boys. Here are the areas they're focusing on:
1. Broker research
It has long been known that investment research has inherent conflicts of interest. How do you remain independent in your view when your firm gets paid to run IPOs and provide advice with mergers, as well as whenever a share gets traded? Just Google Henry Blodget or Frank Quattrone if you have the stomach for how some at Wall Street firms may have behaved in the past.
In spite of efforts by former New York attorney general Eliot Spitzer, who began a crusade against Wall Street analysts, not a lot has changed in the past 10 years. Every quarter, we see a picture confirming this--most companies miraculously slightly outperform the market's expectations (good for short-term stock price movement), and you can throw a blanket over the short- and long-term forecasts of most analysts.
One company looking to correct these biases and get more independent thinking and accurate forecasting is Estimize, run by self-proclaimed accidental entrepreneur and former hedge fund manager Leigh Drogen. The concept is truly innovative. Estimize's financial estimates are anonymous and free to any and all, and anyone can provide his or her opinions--professional, student, or true amateur.
2. Fundamental data
One of the big problems with trying to conduct fundamental analysis of companies comes from the fact that even though we're well into the second decade of the 21st century, company reporting is still very much based on the paper documents that companies are still obliged to publish. The large financial technology firms such as Thomson Reuters, Capital IQ, and Bloomberg continue to start with the paper documents to create their databases of fundamental financial information. And this keeps the cost of this data high and provides a large barrier to entry.
With the advent of the XBRL reporting language, an XML-based standard that was more than 10 years in the making, and with U.S. companies now mandated to publish their results in this machine-readable format, we are finally seeing some innovation in this area. TagniFi, a company run by entrepreneur team Chad Sandstedt and Dave Bettin, is now actively building a new, consistent, transparent, and timely database for U.S. stocks.
3. Spreadsheet analytics
Hot on the heels of Estimize and TagniFi is SpreadCloud, maker of an Excel add-in based tool that allows you to build financial models using a range of data sets in the cloud. Though the concept is not new, it's pretty exciting that the service is free (compared with the thousands of dollars it costs for licenses for a Bloomberg, FactSet, or CapIQ terminal). The cost of access to premium data and tools has been a major roadblock in opening up access to all things Wall Street.
The SpreadCloud business model has data contributors own their clients and give them access based on their license, while SpreadCloud gets paid for running the integration by the contributors, not the end user. This opens up the market for new content contributors to more quickly develop and deliver new content. Historically, getting your data onto a platform like FactSet would be a long and complex process, and would depend on the company seeing your value and assessing if you competed with any part of its business.
4. Corporate finance
Investment bankers make a lot of money introducing people trying to sell their business to people looking to buy or invest. By keeping control over this market, they continue to generate the sort of money that keeps yacht builders and restaurants in the Hamptons busy each summer.
Axial, led by CEO Peter Lehrman, is creating an alternative marketplace that can help address the imbalance. This can potentially mean that your local lawyer and financier can be all the team you need, as you can do all the research yourself. And maybe you won't need to trek to New York City to plead with a bulge bracket firm for expensive help. If you still don't get the concept, Axial is a little like an eBay for people in the business of providing capital and related services to midmarket companies.
What all these companies have in common is a focus on a single area, a differentiated business model, and management teams with expert domain knowledge. That the management teams all started outside of Wall Street seems to be no coincidence. None of them are tackling the big banks and Wall Street players head-on--that would not be the best tactic. They are all far smarter than that.