Inveniam Announces Investment and Partnership with Rialto Markets
Global Trading of Private Market Assets are Built on Ecosystem Partnerships and a Look at How the Rise of ECNs in the ‘90s Forecasts Future Growth of Private Markets
Inveniam just announced an incredibly important development for the private markets industry. To summarize, Inveniam and Rialto have agreed to connect and in doing so, capital formation and price discovery for private companies will never be the same.
As with any developing business ecosystem, it is important to use history as a guide when estimating how things will unfold. As much of our ecosystem is focused on creating fully liquid and functioning digital markets for private companies, it is instructive to see how the more mature and longstanding public markets have evolved with a specific look at the rise of ECNs in the ‘90s.
History in these longstanding markets has taught us two main things:
- One size does not fit all.
- More importantly, is that competition creates a larger market that benefits all competitors. Collaborating with others accelerates the growth of nascent markets and creates a larger market for all to benefit. Incorporating a diverse group of market providers delivers a diverse group of market participants, thereby delivering a robust marketplace.
If I may briefly repeat important data points, in the 10+ years prior to 2019, capital flowing into private assets grew at 4x the pace of public markets. After a down year in 2020, private markets set another record in 2021 in terms of fundraising. As a result, more and more companies are staying private longer or bypassing going public altogether. Regulators took notice. This year, the U.S. Securities and Exchange Commission (SEC) laid out a number of proposals including requirements for registered private funds advisors to distribute quarterly statements to private fund investors with a detailed accounting of all fees and expenses during the reporting period.
The Depository Trust & Clearing Corporation (DTCC) is also taking notice of the sea change in private markets. In 2021, the premier post-trade market infrastructure for the global financial services industry announced a new platform to streamline the issuance, transfer, and servicing of private market securities through digitization.
Meanwhile, JP Morgan is going all-in on private companies with “Project Bloom,” a fintech platform under development designed to match start-ups with investors. Finally, BlackRock is now advising its clients to do away with the 60/40 portfolio in favor of a 50/30/20 portfolio with 20% going into alternative, private market assets.
With hundreds of trillions of dollars in private market assets currently unavailable for trading, alternative trading systems (ATSs) are popping up as another way to deliver private market buyers and sellers purpose-built marketplaces on next-generation technologies, while still maintaining a broker-dealer (BD) status that meets regulatory requirements. This important expansion of regulated exchanges is a step change/evolution in the capital markets. Inveniam, as an operating system for private market data delivering real-time valuation and investor calculations, realizes that this moment needs an ecosystem to support these nascent marketplaces.
With this rise of digital trading for private market assets through ATSs, how will we know the size of this market, who the winners will be, and who will be poised to deliver the best means to facilitate the trading of private market assets? While history is no guarantee of the future, it certainly is a good indicator. When we at Inveniam take a step back to look at a similar trend that happened with the rise of electronic trading for public market assets, the winners were the platforms that chose to connect with others and ended up being ahead of the regulators, while those who failed were wary of connecting as a means to protect their business.
Before the onslaught of electronic trading, to buy a public stock, an investor would reach out to his or her stockbroker who would either call the New York Stock Exchange (NYSE) to match his order; or if it was an over-the-counter (OTC) stock, brokers would call around to different market-makers who would quote different prices to buy or sell. To eliminate the middleman, and to help facilitate greater transparency in prices (which some believed were being rigged by these exchanges), electronic communication networks (ECNs) gained popularity in the late ‘90s.
Among the first ECNs were Instinet, Archipelago, and Island. These companies operated an automated system where client orders are matched without the need to interact with a middleman, such as an exchange market maker, to buy or sell securities. While public exchanges have fixed hours dedicated to trading, ECNs facilitate after-hours trading by usually being open 24 hours. As alternative trading systems, ECNs increase competition with institutional trading systems and have lower execution costs, tighter spreads, and less concentrated markets. At first, stock exchanges weren’t sure if ECNs were going to disrupt them, but when a report came out from Columbia professors showing that collusion and rigging of prices were indeed happening, the end-users started to shift volume towards ECNs.
To compete with the large exchanges and survive, seven of the nine major ECNs felt that connecting to each other was the best way to move forward. In 1999, Archipelago, Bloomberg Tradebook, Brut, Instinet, Island, REDI-Book, and Strike signed a “nonbinding memorandum of intent” to increase access to information such as quotes and trades after hours. The ECNs believed strongly that this would increase transparency in prices and would lead to a fair and efficient market. Archipelago’s CEO Gerald Putnam was particularly vocal about the need for connecting. Bringing in big Wall Street investors, who then became big trading customers, was crucial to Archipelago’s expansion. They accounted for half of Archipelago’s revenue as recently as 2002 and more than a third in 2004. When Instinet put itself up for sale in 2004, Mr. Putnam was quick to combine the two price cutters to sustain the best price for investors.
The other two ECNs — Attain and NexTrade had different mindsets. They believed that connecting and linking up with other ECNs would lead to their demise and felt that their technology was good enough to defeat the others.
However, in 2005, Regulation NMS (Reg NMS) changed everything. The SEC consolidated all rules on the national market system into Reg NMS, which forced the NYSE to go electronic and fostered the growth of competing ECNs and exchanges. The key tenet of Reg NMS was the trade-through rule, which required all participants to respect the best bid and offer wherever it was. This meant that no exchange could execute an order at an inferior price. Because of this, ECNs were forced to connect to ensure the best pricing. The NYSE floor system, which was powered largely by direct human involvement, had difficulty competing against the much faster electronic marketplaces, which many times offered better bids and offers. As a result, Archipelago merged with the NYSE in 2006 to form NYSE Arca, the first all-electronic exchange in the U.S., and is currently the number one venue for the listing and trading of exchange-traded funds (ETFs). Attain and NexTrade, on the other hand, proved to be on the wrong side of Regulation NMS and were bought out that year.
The parallel between today and times went ECNs were state-of-the-art seems obvious. The rise of private market asset trading is starting to accelerate. For the modern ATSs to succeed, connecting with others will be the key to not being left behind, remaining competitive, and staying ahead of new regulations. Connectivity to all will be a great benefit to investors and issuers. Both will be able to trade securities in multiple venues. However, connectivity will be the only way this will work. This is why Inveniam is supporting a variety of players in this ecosystem including the collaboration with Euronext post-Inveniam’s investment in Tokeny, a partnership with Ownera, and strategic relationships being finalized in Latin America, the GCC, India, and Singapore.
Specifically, as it relates to private markets; gathering, filtering, and accessing data is a key ingredient for success. Both issuers seeking capital and investors seeking returns require efficient data for participation. An ecosystem that incorporates a wide range of essential data from market specialists is needed.
Inveniam’s partnership with Rialto incorporates various components of private securities data from digital securities and real-time market data thereby delivering peace of mind for end-users.
Having diverse data flow connected via Ownera and available to market participants enables an efficient data ecosystem. The ability to connect client GPs directly to better data systems, secondary markets for the exchange of alternative assets, and novel forms of primary distribution will transform the role of Fund Administrators.
Digital assets provide even greater efficiency for private securities markets. Integrating Tokeny into the mix adds the digital component to the partnerships. This will allow not only auditable forms of compliance from the security to the investor, but it will also allow real-time surveillance of the underlying assets utilizing Inveniam.io’s patented blockchain technology to deliver full auditability of the data source, computation, proof of process, state of assets, value, and ownership.
The combination of all these players — investment service providers, secondary market systems, data systems, and digital asset providers — creates a unique universe to service the entirety and diversity of the private securities market. This is the future of private markets — where a connection to ADDX in Singapore is a click away from new exchanges in Brazil, UAE, and India, as well as Rialto and Euronext.
Thank you for reading through our market thesis, and know this, we are just getting going. Comments and feedback on these developments are welcomed.
For parties interested in how they can leverage Rialto and Inveniam for capital formation and price discovery objectives, please contact:
Patrick O’Meara, Chairman & CEO, Inveniam