As the capital markets rebuild in the wake of the economic crisis, small, independent vendors are reportedly struggling to sign deals with Wall Street firms, which are noticeably weary of entering into multimillion-dollar partnerships with technology companies that could go out of business or may be acquired by a larger company in the near future. Senior Editor Melanie Rodier spoke with Larry Tabb, founder and CEO of New York-based research and advisory firm TABB Group, about how the credit crisis is changing the vendor landscape. While large vendors have the edge right now, he says, smaller, innovative providers will make a comeback.
WS&T: Has vendor risk become a bigger concern for Wall Street companies as the industry emerges from the financial crisis?
Tabb: There's no question that vendor risk is top of mind for most firms these days. When you go into a downturn, you have to be worried about the solvency of your vendors. What tends to happen is that in a downturn or in a nasty market, firms generally pick more-stable, larger vendors to align with because they know they have cash on the balance sheet, they will be there, they're public entities and they can better survive a challenging market.
The last thing you want to do as an institution is, first of all, pay a vendor a significant amount of money -- and it's not just the money you pay the vendor; it's also the money that you're investing into integrating [the solution], changing your workflow and redefining your platform -- and then all of a sudden have the vendor go out of business. And especially now, with the credit crisis, it's harder for firms to borrow money, it's harder to get private equity or venture guys to underwrite, it's harder to get strategic partners to write checks for these guys. So it's a much more difficult environment for vendors, and that benefits the bigger players.
That said, when things start getting better, the opposite actually happens: The smaller vendors tend to be more on the cutting edge. They have more interesting ideas, they're not wedded to legacy technologies, they are generally doing more interesting stuff, because you, as a "garage vendor" -- two girls, a guy and a dog -- aren't going to try and write a core back-office platform; you're going to work on something that nobody else has done that will tend to be more cutting-edge. And when the market starts moving back up, and the firms are trying to figure out, "OK, what's the next thing I need, and how do I competitively differentiate my offering?" chances are the bigger vendors aren't going to have the same types of products these garage guys are going to have. So when they move into a more aggressive market share-taking environment where they really want to be on the cutting edge, you're going to see much more adoption of these smaller guys' [technology], and that's when they grow.
WS&T: Which types of vendors are under the most scrutiny from Wall Street firms?
Tabb: It's all vendors. Most vendors that firms are going with when the times are difficult tend to be more stable. Now, if the organizations need to go in a specific direction, where the larger guys aren't there, they'll absolutely use smaller guys. We're seeing that to a certain extent with the high-frequency [trading] side -- the larger players just haven't been as aggressive in getting their products out as the small garage guys. So we still see growth in that area for the smaller vendors.
But now we are starting to see the bigger guys start looking at that segment and start to acquire products or build out products in those areas. So the battle is going to get more challenging in the low-latency space because the bigger guys are moving in. And one of those acquisitions you just saw, ... with Sybase buying Aleri and Coral8, that's squarely in the low-latency space as well. And we'll see other moves like that in the near future.
WS&T: What changes will we see in the vendor landscape in coming months? Are we going to see any other acquisitions like the Aleri-Sybase deal?
Tabb: Absolutely. Right now, the sun, moon and stars are aligned for more acquisitions. We're seeing that the banks are now feeling like they're making money, they're a little bit more on sound footing. And the cost of capital is cheap, mostly because the Federal Reserve is keeping short-term interest rates near zero. So there's capital sloshing around. The banks don't feel like they're going to go out of business tomorrow.
And you're going to see the private equity guys absolutely become more aggressive at making acquisitions. Pearson made an announcement that they're looking to try and sell off Interactive Data, and I think we'll see a number of either spin-offs or recombinations or products going private or acquisitions occur, probably in the next six months.
WS&T: What are some of your predictions for 2010 for the financial services industry?
Tabb: I think we're going to start to see IT spending tick back up. To a certain extent firms have clamped down on their bonuses, and they've got more cash to spend. Institutions have also realized they're going to exist into the future, so they're not as negative and are starting to look at how they're going to position themselves in the future and what investments they need to make.
But it's not going to be a whole-hog back to the party. What's really hanging over the market to a certain extent is regulation. There are a lot of pending regulations out there, and we're unaware what the impact is going to be. The SEC has banned flash trading and is looking at dark pools and trying to figure out how they should work, and they're banning naked access. But that said, the SEC has a concept release out that basically reviews the last 15 years of market structure improvements and whether those improvements were really good or not. So we're not quite sure what's going to come out of that. ...
And then you've got what's coming out of Congress with the financial services bills. The House has passed its side, which is pretty extensive. But the Senate is still figuring out what it needs to do. And they need to be reconciled. And we're not really sure what's going to happen there. Certainly there will be some stuff on derivatives. There might be a new financial services retail organization to OK retail financial products; there are systemic risk regulators -- there's all sorts of stuff that's going to come out of that. ... So I think firms are tactically investing in infrastructure to get to the next level, but there's so much overhang in the market in terms of uncertainty that the IT spigot isn't fully opened.