The investment market is becoming increasingly automated, forcing the leading Wall Street firms to come up with out-of-the-box ways to differentiate.
Taking a page from the software as a service market, JPMorgan Chase has started licensing its trading software to third parties outside of the company. It’s not a new strategy–BlackRock began licensing its risk analytics program Aladdin in the late 1990’s–but it is one that is growing as the industry gets much more competitive and technology plays a bigger role in investing. One only has to look at the advent of robo advisors as one example of how technology can disrupt a traditional market.
JPMorgan Already Has 208 Clients Licensing Its Platform
Dubbed Investment Analytics Platform, JPMorgan’s head of global custody and fund services Teresa Heitsenrether told CNBC in a recent interview that the bank has already signed on 208 large investors and has an additional 42 customers in the pipeline. Those contracts are expected to be inked by the end of this year. The trading program, which is known as Athena after the Greek goddess of wisdom internally, provides investors with the ability to test and run analytics on their own investment strategies. While these type of programs are commonplace in large investment firms, pensions, endowments, and insurance companies don’t have the budgets to spend a ton on technology. After all, they are tasked with investing but also doing it at a low cost. That’s the market JPMorgan is eyeing with the platform. Heitsenrether told CNBC that the bank views the custody business as a growth one and by offering unique services it thinks it can get more of that business. JPMorgan credited its custody business with the company’s ability to generate $3.9 billion in revenue in 2017, which marked a 9% increase year-over-year. Revenue in the business has increased by 11% so far in 2018, according to CNBC figures. While JPMorgan is starting with its trading program, the executive said it could launch other offerings such as risk management for banks, noted CNBC.
Technology Makes Custody Services Cheaper
The move on the part of JPMorgan Chase comes at a time when the financial services industry is embracing technology to automate processes and procedures that have long been the domain of the Wall Street banks. Thanks to technology, custody services are becoming cheaper to offer and as a result, the big banks are focusing on those products and services that rivals can’t easily imitate. They are aiming to become one-stop shops to serve all of a client’s financial needs.
The launch of the trading platform places JPMorgan Chase at odds with MSCI and Bloomberg, two players in the industry that licenses platforms to manage trading and risk among other things. While the New York bank wouldn’t say how much revenue it expects to make from the offering, it is being viewed more as a tool to lure more custody business its way. It’s Chief Executive Jamie Dimon, said in the 2017 annual report that its market share in custody stands at 8% but that he thinks it can “grow significantly” by adding bankers, building better technology and developing more products. “In this business, while you make large initial investments in order to grow when you gain clients, they usually stick with you for a long time,” he wrote at the time.
JPMorgan isn’t alone in licensing out its software to outside parties. In the fall of 2016, Goldman Sachs began licensing its Securities Database software program otherwise known as SecDB, that helped its bankers make money off of ideally timed trades and avoided losses by making costly mistakes. It is reportedly able to calculate 23 billion prices covering nearly three million positions each day. The platform is credited with the investment banking weathering the Great Recession better than its peers. Goldman had long resisted licensing the platform but did an about-face after the recession when new regulation blunted the edge it had over rivals. It now uses the platform to lure more business its way. It’s something JPMorgan and undoubtedly other big investment banks are looking to do more of. – Read more