The Top 10 Financial Technology Innovators of the Decade
Dec 07, 1999
URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=14705247
We've all grown comfortable with the technology that we use in financial services each day. So much so that we just about remember life without some of the major innovations of the 90s. But if you just think back 10 years, for just a minute, you'll remember ...
There was no such thing as an ECN-unless you count Instinet, which even Instinet does not. Retail investors couldn't trade stocks through their home PC, as there was no public network to connect them to their broker. Wide area networks, local area networks and fax machines were the novel forms of communication. The idea of a trade-order management system hadn't even been conceived, and portfolio management systems were just being conceptualized. All these new systems fostered the need to link one system to the next--giving birth to middleware-another technology that was nonexistent 10 years ago. And these are just some of the innovations over the past decade.
Choosing the top 10 innovators in financial technology was no easy task. There have been so many major contributors to technology in the financial services arena in the last 10 years. Surely we could have chosen 25 people, or even more.
We didn't choose the Top 10 alone. Each member of the WS&T staff went out to his or her sources and other experts in the industry and asked who they thought was deserving of this title. From the number of votes and through staff discussion, the top 10-in no particular order as this is not a ranking-were selected.
Many other names came up and deserve an honorable mention such as Bernie Weinstein, from ILX, for leveling the playing field in market data by creating an open platform that was more cost effective. Mike Bloomberg, too, was mentioned several times--but the industry agreed that most of his masterminding was actually done in the 1980s. Wit Capital's Andy Klein deserves recognition for introducing the idea of online investment banking, and Thomson ESG's Howard Edelstein, gets a nod for getting the industry to adopt electronic trade confirmation. Bill Lupien, one of the founders of Instinet and, in the 1990s, founder of Optimark, was also a contender. It was a difficult choice, but the WINNERS ARE ...
Rick Adam is a man in charge. Over the years he has been in charge of the Real Time Computing Center at Kennedy Space Center, chief information officer at Baxter Healthcare and then Goldman Sachs. Now Adam is heading up his own technology company, New Era of Networks (NEON). Adam's strong technology background and business sense have led him to become the "visionary" that he is today--giving him the foresight to realize a need for middleware in the financial services arena.
"He certainly knows financial applications and he knows how to manage large departments," says Roy Schulte, research team leader at The Gartner Group. "He has a good feel for his target customer because he used to be one of them." Adam says his technology background, which began at the U.S. Military Academy at West Point, and the subsequent years he spent on Wall Street with Goldman Sachs, led him to the middleware mission. Adam describes middleware as the "glue" that cements the older applications of many financial firms to modern applications such as the Internet.
"The early 90s was a time when Wall Street firms were expanding very rapidly geographically, opening up around the world," explains Adam, describing his realization of the need for middleware. "Each of the regions, of course, has different regulatory requirements, so you had this hodgepodge of gear that you had to put to work with the local regulators and the application software that ran on different data formats with different databases. From a global banking perspective you had to get all this stuff to cooperate with each other."
In 1998 NEON was the largest integration middleware company, says Schulte, with the broker-based middleware industry as a whole taking in $246 million. He expects that total to increase 70% for 1999, reaching $420 million. "Adam recognized that there was a market for message brokers before there really was a term out in public," adds Schulte.
Adam left Goldman in 1993 after writing thousands of programs for its proprietary middleware and setting up the entire worldwide firm on a network-computing model with more than 10,000 workstations. Adam, and a team that included technical architect, and now CTO, Harold Piskiel, left the Street and headed for the mountains where they founded NEON in Englewood, Colo.
These days in his spare time Adam says he has become "a really good taxi driver," shuttling the three youngest of his five children to various sporting events and activities. He is also a private pilot and flies himself back and forth between Colorado and New York every other week to meet with clients and investors. Adam says he chose to keep his research and development team in Colorado because it has an abundance of computer talent and "when you want someone to move it's easy because the quality of life is high and the cost of living is lower."
Adam puts things in perspective after serving as a launch crew officer in the Real Time Computing Center at Kennedy Space Center for Apollo missions 8 through 14 where he had his first glimpse of network computing on a global basis. "I was on Wall Street for the 1987 and 1989 market breaks and no matter how grim it got, my view was always that I've seen stuff that has much bigger stakes than this." (By Cristina McEachern)
Stephanie DiMarco—Portfolio Management for the Masses
When Stephanie DiMarco founded Advent Software in 1983, she chose to develop on the IBM XT-the first PC to contain a hard disk.
Even with its meager 10 megabyte hard disk, DiMarco felt the PC was a breakthrough technology for investment management software.
But DiMarco, a former financial analyst and portfolio manager who worked at Bank of America, understood the money manager's needs.
At the time, there was a dearth of tools available for small investment managers, who mainly used spreadsheets and manual ledgers. The heavy hitters in the business were more expensive service bureaus-Shaw Data and NIDS, that crunched portfolios on IBM mainframes and DEC Vaxes. Advent developed a niche among small money managers because the PC was cheap-for $5,000, they could own the computer.
Still DiMarco fought an uphill battle for the first five years-not only was this company "run by a little girl," as people referred to her, but "we were running on this toy computer," she says, recalling the comments.
Being a woman in Silicon Valley and in the male-dominated investment industry in the 1980s was difficult and it still is, says DiMarco. Nevertheless, DiMarco was unstoppable. "I always try to take the disadvantages and see how you can turn them into advantages."
The advantage, says DiMarco, "was that people didn't take us seriously," adding "we maybe surprised people that are no longer in this business."
One early believer was Buddy Adler, president of Chevy Chase, Md.-based Asset Management Inc., a privately held equity management firm that signed on as a customer in 1984. "I could never have achieved the level of success and growth that I've had in the business without her product," says Adler, who has grown his business catering to high-net-worth individuals from $3 million to $700 million.
It wasn't until the late 1980s, however, "when local area networks (LANs) became popular and widely deployed that all of a sudden the PC with the LAN was the platform of choice," says DiMarco, and that Advent became an "overnight success."
Throughout the 90s, she expanded the company's product line from the original back-office system to include contact management (Qube), trading (Moxy), reconciliation (Rex) and a datawarehouse (Advent Office).
Since going public in 1995, Advent has grown to 600 employees with net revenues of $71.5 million for the nine months ending Sept. 30, a 45% increase over the 1998 period. Today, over 5,400 clients utilize Advent's investment software including investment advisors, brokerage firms, corporations, banks, pension plan sponsors, universities and accounting firms.
"They've just been consistently well managed," remarks Mark Bobseine, partner at Cutter Associates. While Advent dominates the small and medium end of the investment management industry, DiMarco is now trying to crack into the high-end with Geneva-a system that's targeted at the largest global firms, and was developed in conjunction with Goldman Sachs. New customers include Salomon Smith Barney and Wellington Management Company. Bobseine adds, "The jury is still out, on Geneva," noting that at Wellington, "it's far from being live there."
But DiMarco says she'd rather be underestimated than overestimated, and that in the case of Geneva, perception oftentimes lags reality. (By Ivy Schmerken)
Jorg Franke—The Future of Futures
For Dr. Jorg Franke, the launching point for the success of Eurex occurred back in the early 1990s, when exchange officials first came up with the concept to run a global exchange that offered remote access to member firms spread across different geographic locations. "Our most successful strategic thought was the thought of remote membership," says Franke, 58, the current CEO of Eurex. "After seeing that the system works, and that we could have members in remote locations throughout Germany ... we came to the conclusion that if this is fine in Germany, why can't we do this throughout Europe."
Not surprisingly, the remote membership goal of Eurex-the German/Swiss derivatives market formerly dubbed the Deutsche Terminborse (DTB)-was easier to conceptualize than to achieve. But led by Franke, who took over as CEO of the exchange in 1988, the entity then-known as the DTB was officially launched, on time and on budget, in January 1990.
Of course, today, Eurex reigns as the largest futures exchange, volume-wise, in the world. It is perhaps best known for its much-publicized defeat of the London International Financial Futures and Options Exchange (Liffe) in their battle for German Bund market share-a blow that was at least partially responsible for Liffe's decision to drop its open outcry pits in favor of full-time electronic trading. More recently, Eurex finalized a technology partnership deal with the Chicago Board of Trade (CBOT) that primarily calls for the CBOT to dump its Project A system in favor of a Eurex-supplied application programming interface and trading engine.
Franke, who served as a captain in the German military in his youth, has had a place at the head table for all of Eurex's historic events. In fact, dating back to 1984, when he took over as general manager of the Berlin Stock Exchange, Franke has been a central figure in the evolution of electronic trading in both the derivatives and stock markets in Germany.
After making the transition from the Berlin exchange to the DTB, Franke's initial goal was to build remote access to the exchange for German members located outside of the DTB's Frankfurt headquarters. "The idea to have screen-based trading was born in the community here, and it stemmed from a desire to include those firms that do not have an office in Frankfurt. So that, for example, a bank being located in Hamburg or Munich or Dusseldorf could be able to trade directly at the DTB," he says.
In 1994, following a drawn-out battle with European regulatory authorities, the DTB finally got the green light to provide remote access to firms outside of Germany. But after proving its ability to link up non-German members to the exchange, Franke says he realized something was missing. The DTB was signing up more and more foreign members, he says, but those members had "no special benefit" outside of the market's liquidity. At that time, Franke says, the DTB decided to pursue alliances, and the seeds for future partnerships with the Swiss derivatives market and the CBOT were planted.
"There was a discussion among our members, and they asked us if we could provide them with easy and cheap access to other markets," he explains. "And the only chance to do that is to have cooperation with other markets, or, in the final stages, to merge."
Born in a small town in the former East Germany in 1941, Franke believes the derivatives market will consolidate significantly in the near future. "I doubt a little bit that we are strong enough to come to a decision to have one clearing house, one trading platform and one network," he says. "But I'm pretty much convinced that in five years time, we will have only two or three financial centers." (By Robert Sales)
Was it just being at the right place at the right time? Not even close. Till Guldimann has been described as the father of risk technology, a pioneer in the industry and a major contributor for expanding the use of the extreme value theory. His thought leadership regarding the concept of integrating market, credit and liquidity risk is also to his credit. "He's been an outstanding contributor," says Dick Roby, TowerGroup's director of the insurance practice.
In addition to his recent achievements, the name Till Guldimann, now senior v.p. at SunGard Data Systems, is most often associated with RiskMetrics-risk methodologies that were developed by J.P. Morgan and distributed in 1994 to clients free to promote wider use of risk management.
"What people remember most is when we launched RiskMetrics as a free service to the public at large-five years ago ... But all the work that was behind that was done the preceding 10 years at J.P. Morgan," Guldimann says.
At the time, back in 1984, Guldimann, then treasurer of J.P. Morgan's Hong Kong operation, recalls being called back to N.Y. to start what was then called asset liability analysis. "From 1984-1994, all that development happened. It wasn't just me. There were a lot of other people involved. I just happened to be at the right spot at the right time," he humbly confesses.
So he says. But the industry credits the innovation to Guldimann. "He was one of the first people at JPM to embrace the concept of using electronic distribution (of both research documents and data) to external clients (via CompuServe and the Internet), as well as internal users, via a private global wide area network," recounts Serge Suarez, a former colleague who worked on Guldimann's team. "Till has an uncanny ability to recognize the potential of new business opportunities and technologies long before they are obvious to most," he adds.
Guldimann explains that in the early 90s only the top 10-15 banks were developing risk management technologies. As a result, the real innovation was J.P. Morgan's decision to release the RiskMetric's methodology outside of the bank. "A large bank like J.P. Morgan giving methodology out to everyone for free was unheard of," Suarez exclaims.
What compelled Guldimann and J.P. Morgan to give away the data? He says the decision was made soon after a 1993 client conference. Following Guldimann's speech detailing the bank's risk management systems, the bank's clients said they had to have it. "We told them, 'No, you can't have it,' but they insisted, so we had to do something."
As a result, J.P. Morgan decided to go ahead and give the clients its methodology. The distribution was a big part of it, as "this all predates commercial use of the Internet," Suarez recounts. Not only was it the first time a large bank gave away such important proprietary methodologies for free, it was also the first time that a big bank used the Internet, he adds. As far as the impact, Guldimann says, "It was a fabulous success as it opened up a lot of ideas and greatly increased the branding and image of J.P. Morgan. And it was fun." (By Kerry Massaro)
Jim Leman—The Godfather of FIX
Jim Leman?" Chris Morstatt asks quizzically. "The guy who stole all my ideas and made them popular?" This claim was followed by an obvious bellow of laughter, but Morstatt, who worked alongside Leman at Salomon as head of the Financial Information Exchange (FIX) technology group, brings up a good point. Is Jim Leman a visionary-a man who dreamed of a future defined by paperless trading whilst his colleagues were content with the ol' paper and phone-or is he an exceptional door-to-door salesman who persistently hawked some messaging protocol? Well, a little bit of both, but it is his preeminent role in the latter which made the former come true. Surrounded by doubters and naysayers in the early part of the decade, Leman pushed forward with his idea of a messaging protocol that would allow for communication between the buy and sell sides, smoothing out a typically cumbersome process and serving as an integral part of the straight-through processing foundation.
"Ask any of his colleagues or competitors, they will tell you that Jim is a uniquely knowledgeable person," beams Morstatt, on a more serious note. "Nobody knows the business better, front to back, than anyone else you will ever come across."
Morstatt admits that this was no easy task for Leman, who first had some trouble convincing upper management that this was a worthwhile endeavor, and then convincing the buy side. "As a broker/dealer, we could take advantage of FIX because our customers would like it because they could offer it to other broker/dealers, but management was a little hesitant. They wanted to know, why should we do anything that would benefit our competitors?" Leman pushed forward the idea of partnering with Fidelity Investments, who was working on its own technology at the time.
"At the time, institutional access to the NYSE was granted by brokers who gave access to their DOT terminals," Leman recalls. "An institutional customer would have an array of four or five devices on a desk for each broker, and each one had different structures, different screens. It was a Tower of Babel for order delivery."
Working with Fidelity, Leman and his team developed FIX version 1.0 which was piloted in 1993, and then released the first production-ready version, 2.7, in January of 1995. If you're at all concerned that Leman hasn't had much to do of late, stop worrying. Leman hasn't stopped spreading the gospel, fostering the formation of the various FIX Steering Committees around the world.
In a rhetorical wipe of the brow, this constantly busy man mutters, "My wife says she doesn't see me enough." One woman's loss has turned out to be an entire community's gain. We're sorry Mrs. Leman. (By Andrew Rafalaf)
If there's a single person that revolutionized the equity markets in the 1990s, it's Joshua Levine, creator of the Island ECN-a computerized trading system that automatically matches buyers and sellers.
Island is an outgrowth of The Watcher, a front-end trading system into the Nasdaq system that Levine had first created, which provides day traders with direct electronic access into the SOES and SelectNet systems. Island, however, developed in January 1996, is widely considered a more significant innovation.
"This was probably the most influential change in the markets since they did away with fixed-commission rates in the 70s," says Mark Friedfertig, CEO of Broadway Trading, a leading day-trading firm that has used Island since January 1996.
As Friedfertig recalls it, Island started as an internal electronic communications network (ECN), which Friedfertig and others say led to the SEC's order handling rules issued in January 1997. The rules force Nasdaq market makers to post their customers' limit orders in their Nasdaq quote or send the order onto the newly created ECNs.
Acccording to Peter Stern, the Chief Technology Officer of Datek Online, Island is successful because "the Island ECN is just painfully simple, it's painfully fair, there are few rules because it's very straight forward-buyers and sellers meet, a trade is won, end of story," says Stern, who met Levine when both were freshman at Carnegie Mellon University. Levine reportedly left school and headed for Wall Street where he teamed up with Datek Online co-founder, Jeffrey Citron. Noticing that there were "cross markets" going on in Nasdaq-when the price someone is willing to pay to buy stock is higher than the price someone else is offering to sell at-Levine wrote a program to track how many times a day this was happening. "Josh said, this is ridiculous that trades aren't taking place when you have customers that are willing to pay higher to buy than customers willing to sell stock," recalls Friedfertig. "He created a way for customers to trade with other customers as opposed to just trading with market makers," says Friedfertig.
Levine spread the gospel by publishing the Island API (application programming interface) on his own personal Web site, www.josh.com. Today, Island has grown to become the second most popular ECN after Instinet-executing over 100 million shares a day. (Levine himself argues that "Instinet created the ECN trend, not Island. Island just did what Instinet was already doing, only better.")
Island is one of three ECNs that have filed with the SEC for permission to register as an exchange. And, it's currently the only ECN to display its real-time limit order book to the public on its Web site, using a program that Levine wrote called the BookViewer, as well as to reveal its volume statistics.
Levine, now 31, is in charge of the development of all the core systems, which have been written in DOS and Java. Going forward, where Island needs work, he says, is not in its system, but in its communications. "Our challenge in the future is to explain to the investing public how the markets work." (By Ivy Schmerken)
Way back in 1984, Leo Melamed had an idea to write a science-fiction novel about a master computer that controlled five alien planets. Dubbed "The Tenth Planet," the novel's concept triggered an interesting thought in Melamed's mind. "If I could create a master computer that could run five planets, why can't we create one damn electronic system that could run orders," Melamed recalls thinking.
At the time, of course, Melamed was chairman of the Chicago Mercantile Exchange, and had already established himself as something of a visionary in the worldwide futures community. In fact, that same year, in an attempt to protect the Merc's flagship Eurodollars contract from international competition, Melamed fashioned the CME's now famous mutual offset agreement with the Singapore International Monetary Exchange (SIMEX). However, the success of the CME/Simex partnership notwithstanding, Melamed's idea to create an electronic trading system for derivatives trading is what truly solidified his legend in the financial futures realm.
Eventually, Melamed's concept would give birth to Globex, the first automated trading platform for derivatives contracts in the U.S. Today, that platform-which was initially used strictly for after-hours trading and is now called Globex2-is recognized as one of the world's best derivatives trading systems.
"Melamed was pretty much ahead of the curve on electronic trading," says Michael Manning, chief operating officer of Chicago-based FCM Rand Financial Services and a member of the Chicago Board of Trade's board of directors. "Even then, it was obvious that this was a guy with vision. He couldn't have imagined, I don't think, when this electronic trading boom was going to occur, but he wanted the Merc to be ready for it. ... And, there's no question, history has proved him right."
Melamed says his electronic trading idea really began to gain steam in 1986, when he headed up the Merc's strategic planning committee. "In that strategic committee, we came to the conclusion that the attempt to compete internationally through open outcry was like trying to put a finger in a dyke," recalls Melamed. "My view was that you could not trade 24-hours in an open-outcry environment in any efficient manner ... but at the time the idea of a black box solution for trading was like Darth Vader. It was considered the worst evil possible, because it would take away the open outcry business from the floor. And so we had to do this very, very quietly."
In September 1987, after the committee addressed concerns about the future of open-outcry trading, the members of the CME approved Melamed's after-hours electronic trading proposal. In 1992, after five years and at a cost of more than $100 million, Reuters-the vendor the CME commissioned to build the system-rolled out Globex at the Merc.
In 1992, coincidentally, Melamed cut ties with the Merc-after 25 years as chairman-to pursue other interests. He became, and still is, chairman and CEO of Sakura Delsher, a privately owned FCM. He also authored his autobiography and started hatching the plot for "Cousins," his soon-to-be-released sequel to "The Tenth Planet."
In 1997, after a five-year sabbatical from the Merc, Melamed was appointed senior policy advisor to the CME's board. With that position in tow, Melamed-who also serves as the CME's chairman emeritus-helped spearhead of the Globex Alliance. That partnership, which is now comprised of seven exchanges, calls for derivatives markets worldwide to adopt Globex2 as their standard platform. (By Robert Sales)
Seth Merrin—Order Management Guru
If it weren't for Seth Merrin, Preston Ford would still be heading up a respected consulting group rather than running one of the leading order management system companies in the country. "It's pretty simple really," says Ford, president of the Longview Group. "Seth was the pioneer."
Merrin, himself, gave Ford a demo of the Merrin Financial Trading Platform in the late 1980's. It was at that time that Ford, head of a buy-side technology consulting group, realized that this was the future. "It wasn't too long after seeing the original demo with Seth that I realized this was going to be a good industry and that there was room for another player using different technology," he explains. "He spawned Longview's trading system, Landmark. You could give Seth credit for giving birth to Landmark."
Merrin, in fact, spawned an entire revolution, allowing the buy side to electronically submit trades to broker/dealers and to more effectively manage their order flow. "Seth has given tremendous power to the buy side," says Larry Tabb, head of the Investment and Securities Practice at The TowerGroup. "It has changed the balance of power on Wall Street."
Ask Merrin about the early days, what it was like creating an industry, and with a heavy sigh he'll admit that it was no easy task. "While it was a good idea and it caught on eventually, to educate people was a time-consuming process," he says.
Since selling Merrin Financial to ADP-which has since been sold to the order management system vendor The MacGregor Group-Merrin has embarked upon a number of other successful technology ventures. First, he bought a new middleware technology which served as the foundation for VIE Systems, which was recently sold to NEON. More recently, Merrin has spent his time as CEO of Silicon Valley-based Apricus, a healthcare industry technology company. Spending two weeks of each month out on the West Coast, Merrin, a former arbitrage trader, is not someone you'll catch sitting around. He quips, "My golf game isn't that good."
And, although he's "out of the industry," as they say, Merrin says he is looking to come back to financial services with a new data aggregation and publishing technology. The industry that he single-handedly created has taken on a life of its own, but knowing Merrin, he'll just go out and create a whole new one. (By Andrew Rafalaf)
Charles "Chuck" Schwab—Out-of-the-Box
Ask anyone at Charles Schwab & Co. who is solely responsible for transforming the firm from a discount brokerage into the preeminent online firm, and they will offer answers like, "Well, there's no one person," or, "It was really a team effort." Not surprising from the fairly modest firm. But, if you really press them-prod them, annoy them, or even harass them-they'll eventually admit that it was Charles, or Chuck as he is so warmly referred to.
"There is no one person uniquely responsible for it, but if you choose one person-the big push to get into trading on the Internet-it would have to be Chuck Schwab," says David Pottruck, president and co-CEO of the mammoth firm. "There were people worried at the time that there wasn't sufficient encryption over the Net for financial transactions, but there were several smaller firms that started before we did, so Chuck said, deal with it, we can't let them get ahead."
Now, who in their right mind would bet the farm-and what was in 1995 already quite a plantation-on this nascent thing called the Internet? As Larry Tabb, head of Investment and Securities Practice at The TowerGroup, puts it, "he was the first person to cannibalize his own business to realize the power of the Internet and transform a thriving business model."
This wasn't a surprising move by Chuck, not for the many people who know him and have worked with him. With little hesitancy, Vincent Phillips, vice president of the electronic brokerage division of Schwab, asserts, "With Chuck, I don't think it was a gamble. He's a visionary. He started the industry of self-directed investing, and the mutual fund marketplace was a pretty radical idea when it came out. It's classic out-of-the-box thinking, and he just has an incredible finger on the pulse of where the individual investors want to go and what products they want to see."
Phillips tells a story of how the Internet made it to Schwab. Now, both he and Pottruck were quick to note that the firm has been offering online trading-via proprietary desktop applications - since 1985. But, it was in 1995 that the public Internet arrived at Schwab.
"Chuck was hearing that the sales of PCs were surpassing TVs, and AOL was receiving a huge amount of press at the time," Phillips explains. "We designed a simple Web interface, using version 1.0 of the Netscape browser, and we showed it to Dawn Lapore, our CIO. Dawn was so impressed that she insisted we show it to Chuck, who said let's get this done by February."
Now, the technology team didn't get it out to market until March, but it's still impressive considering that the release date was only three months after that first preview. And, that is how it all began, but don't go looking for Chuck. He's off researching the next big thing. (By Andrew Rafalaf)
In the scrappy world of Internet brokerage, where 130 firms are chasing retail investors, with access to IPOs, research and financial planning tools, Datek Online offers virtually none of that. What it does offer is rock-solid equity trading technology-and the man behind that is Peter Stern, Datek Online's 32-year old chief technology officer.
In 1995, Stern joined Datek Securities Corporation
