Never was it more important for small, medium-sized and emerging fund managers to take technology seriously. With management fees under downward pressure, and both regulators and investors squeezing what can be charged to the fund, running every aspect of a small business efficiently can make the difference between success and failure.
Yet it is almost as difficult to find a technology vendor interested in smaller clients as it is to find a prime broker that wants to support a start-up. But Torstone Technology may be just such a firm. It began as a management buy-out (MBO) from the Financial Products division of KBC, the Belgian bank which ran into difficulties during the financial crisis.
Chairman and chief executive Brian Collings led the MBO. A Cambridge maths and computer science graduate, he had joined KBC when it acquired the convertible arbitrage business of hedge fund manager D.E. Shaw in 1999, and later helped the bank to integrate Peel Hunt, the brokerage business acquired by KBC in 2000.
As it happens, in the wake of the financial crisis, Collings also had to help KBC dispose of both the convertible arbitrage business (to Daiwa Capital Markets) and Peel Hunt (via an MBO in 2010). As CTO, Collings then found himself in an unaccustomed position. “My own history is 80 per cent front office and 20 per cent back office,” he says. “There I was, in charge of nothing but the rump middle and back office systems.”
Luckily, he knew both systems inside out, having overseen their development. This was because KBC, like most investment banks, lavished money on the finest vendor systems – Fidessa, Bloomberg, Sophis, Imagine and Front Arena – for its front office trading and investment, while allowing post-trade operations to rely on the once -industry standard but ageing GLOSS platform.
Now owned by Broadridge, even in the early 2000s the GLOSS technology was unable to support the high yield and equity and credit derivatives activities of KBC, or the massive trading volumes of its statistical arbitrage fund. Collings – after scouring the market for something better, but finding nothing suitable – elected to build his own back and middle office and portfolio accounting system, Inferno. This formed the foundation of what is now Torstone Technology.
With no front office activities to support in-house, following the divestments, Collings made the obvious suggestion to the KBC management, and offered to buy the Inferno system. They had ready-made clients, in the sense that KBC, Daiwa Capital Markets and Peel Hunt still relied on the technology. In fact, the earliest priority after buying the technology was to secure fresh multi-year contracts with KBC , Daiwa and Peel Hunt.
The second priority, after the MBO was completed in January 2012, was to secure some genuine new clients for the re-branded Torstone Inferno back office system. Daiwa provided one of the earliest clients, in the unlikely shape of the Myanmar Securities Exchange that the Japanese investment bank had helped to establish back in 1996. It is currently reinventing itself as the Yangon Stock Exchange, and Torstone is expecting to recruit brokers on the exchange as clients as well.
Other third party clients recruited since then are an eclectic mix – United Kingdom broker N+1 Singer, inter-dealer broker GFI (now owned by BGC Partners), institutional trading network Liquidnet, and London-based institutional broker Panmure Gordon – but all share an appetite for trading in high volumes across multiple markets.
“It is important that Torstone emerged from an investment bank,” explains Collings. “In an investment bank, the front office is always going into new markets and asset classes, and we had to work out how to clear and settle trades in them very quickly.” In fact, he boasts that Torstone Inferno is an alternative to outsourcing the back and middle office to a clearing agent such as BNP Paribas Securities Services, Pershing, Société Générale Securities Services and the emergent Accenture-Broadridge combination.
“Our competitors are not just IT vendors, but include outsourcing providers,” explains Collings. “In fact, with our technology, you can re-insource an outsourced back and middle office without increasing headcount. A growing number of firms have reached a tipping point, at which the pressure of regulation is such that they have to upgrade their systems, but the cost is prohibitive. The alternative is to outsource or find a new vendor. We are that new vendor. With us, you can keep your existing operations team together, and do it all in-house.”
While Torstone has so far aimed this proposition mainly at the sell-side, its technology is applicable on the buy-side, where a price point based on self-service ought to appeal to smaller fund managers. It does not threaten managers reliant on their prime brokers. “Torstone has and always will stay out of the front office,” says Collings. “We do the middle and back office only.”
For fund managers, Collings highlights the trade confirmation, corporate actions processing, multi-asset class reporting, portfolio accounting and reconciliation and collateral management functionality of Inferno. “We are very good at consolidating a complex environment,” says Collings. “We consolidate data across the internal silos. We close the gap between the omnibus account of the prime broker or the custodian and the individual accounts of the underlying clients. On collateral management, we can help firms understand what inventory they have, and what they need to pledge or take in, across every portfolio of every fund.”
Torstone is also looking at the wealth management sector, which the leadership of the firm sees as a natural adjunct to its existing strength in retail brokerage. “They are client-facing, and transacting more business on-line, and we can make their operation more efficient,” says Collings. White-labelling the Inferno technology is another axis of growth. Brokerage in Japan, where sell-side back office systems are dominated by the I-STAR system offered by Nomura Research Institute, is also a target market.
But Collings is happy with the present rate of growth – the 22 employees at the time of the MBO in 2012 have now grown to 35 – and points out that existing clients, such as Daiwa and GFI, tend to add more functionality as they get comfortable with the Torstone technology. “We can go into a bigger organization to solve a particular problem, and then expand into other areas,” he says. “We are comfortable with our pace of growth at the moment.”