Spotlight

Financial Technologies does it again

By concentrating on the booming but largely ignored equity and forex trading markets, Financial Technologies is reaping the benefits of a focused strategy, says Srikanth R P

As the Sensex twists and turns, there is one Indian software product vendor that has no reason to be worried. The company, Financial Technologies (FT), is laughing all the way to the bank as foreign institutional investors (FIIs) continue to invest in the Indian equity market. As FT has products that address the entire spectrum of the financial services industry, it is gaining from this boom. The company’s products range from front-office, Internet trading and risk management offerings going to an end-to-end solution that helps stock exchanges and brokers exchange information in a seamless manner. For the record, FIIs pumped $9 billion into the Indian equity market in 2004, up from $7 billion in 2003. This investment is the highest since the country allowed foreign portfolio investments a decade ago. Coupled with the rise in investments and interest in Indian stocks, market players are using technology to minimise risk and improve efficiency.

As of now, more than 500 brokerage houses operating around 25,000 trading terminals are running the company’s solution. The terminals are multi-exchange and multi-segment, letting players offer integrated trading services through one window. Moreover, the choice of trading front-ends can range from desktops to handhelds to PDAs. FT’s clientèle includes ABN Amro Bank, Ahmedabad Stock Exchange, Aviva Life Insurance, Citigroup, Deutsche Securities, IL&FS, Inter-connected Stock Exchange, Kotak Securities, UTI Securities, DSP Merrill Lynch and SBI Capital Markets.

Starting out

Our strategy has been to develop products for emerging markets before they mature Dewang Neralla Director Financial Technologies

Two entrepreneurs, Jignesh Shah and Dewang Neralla, who were part of the IT team at the Bombay Stock Exchange (BSE), conceived the notion of FT. The defining moment came when the BSE decided to award the contract for designing and implementing BOLT (the BSE online trading system) to CMC. The National Stock Exchange had changed the dynamics of the equity trading market by taking the trading terminal to brokers across the country. The duo realised that the old financial services market was due for an overhaul. Software products that addressed the needs of intermediaries had a big market. Shah and Neralla left BSE to start their own venture that would focus on developing products for the financial services industry.

After forming the company in 1995, FT took three years to develop its first product. This was Odin, a front-office solution which let brokers customise their interfaces with stock exchanges and execute market trades from their terminals. While stock exchanges also provided terminals with their own software, these were proprietary and did not allow brokers to customise or set up interfaces with their clients. With Odin, brokers can conduct risk assessment of their clients proactively as the software gives a daily net position of each client according to his or her credit risk. Brokers can appoint any number of dealers or support clients across the country without having to worry about monitoring client positions manually. More than 300 brokers in India bought Odin.

Next, the company capitalised on the Internet trading boom when a dozen online portals popped up overnight. FT created an Internet trading solution that supported online trading between retail clients and brokerage houses. The product was deployed by players such as icicidirect.com, indiainfoline.com and sharekhan.com.

The knack of identifying markets that were on the verge of booming continued with DPM, a product FT developed for depository participants. With the introduction of paperless trading—wherein physical shares were converted into electronic form—there was a huge growth opportunity for depository participants. NSDL is an Indian depository which holds details of the shareholdings of individual stock holders in electronic form. The depository extends its services to investors through intermediaries called depository participants who, as per SEBI regulations, can be organisations involved in the business of providing financial services—banks, brokers, custodians and financial institutions. As the conversion of physical shares into electronic form was made compulsory for trading, every financial institution started applying as a depository participant. Here too the company had a good success rate with client wins like ABN Amro Bank, J&K Bank and Arihant Securities. Explains Neralla, “Our strategy has been to develop products for emerging markets before they mature.” Thus, by moving swiftly, the company sews up big wins before the competition can react. Besides, it avoids fighting for markets that are already saturated.

Straight drive

FT has also been trying to educate the market about new technologies. For instance, to bring the Indian capital market on par with global markets, SEBI has been trying to shorten the settlement cycle by reducing it from a T+5 (clear and settle trade within five days) framework to a T+3 framework. But for this to happen every intermediary involved in the capital market must exchange information in real time. This can happen through a technology framework called Straight Through Processing (STP) that has been mandated by SEBI. As an STP framework permits the electronic capture and processing of transactions from the point-of-order to settlement, orders can be processed, confirmed and settled in a shorter span of time with fewer errors. To achieve this it avoids the manual entry and re-entry of details of the same trade by different market intermediaries and participants. If an order is placed for sale or purchase under STP, all transactions will be done electronically which will help in reducing cost and time.

With the SEBI mandate, the opportunity for a product that provides an STP framework is considerable. In this space, FT has a product called STP-Gate which lets organisations become STP-compliant by providing a seamless interface between fund houses, custodians and brokers. The company has currently more than 200 clients on its platform including ICICI Bank, Kotak Securities, Credit Capital Asset Management and Refco-Sify Securities India. Globally too there is a big market emerging for STP products as regulators in many countries have mandated that the settlement cycle be reduced from T+3 to T+1. Stock exchanges, brokers, clearing agents and other market participants have to clear and settle trades within one day in such a scenario. Analysts expect the global market opportunity to be $20 billion.

Big time

Another emerging opportunity is the foreign exchange trading market where Reuters is the market leader. To take it on, FT developed its own platform called FXDirect, the country’s first indigenously-developed foreign exchange trading platform facilitating inter-bank foreign exchange trading between Indian banks. FT already has 33 banks trading on its platform.

Over $6 billion worth of transactions has taken place on the FXDirect platform since its introduction. The turnover is important for the company as, traditionally, usage of forex-trading platforms is chargeable on a monthly basis. This gives FT a steady revenue stream. Says Neralla, “We have tried to grow the market by charging only $500 per terminal compared to market leader Reuters’ then-existing price of $2,400 per terminal. Reuters has now reduced its price to $600 per terminal.”

Buoyed by its success in the domestic market, FT is now trying to push its product in the international market. Globally, the foreign exchange trading market stands at $1.5 trillion of transactions everyday. Clearly, the opportunity to grow is huge.

The success of Financial Technologies shows that there are big opportunities for Indian product vendors—if only they focus on niches.

srikanth@expresscomputeronline.com