Edison's Managing Partner Chris Sugden recently joined host, Jennifer Rogers, on Yahoo! Finance’s market wrap show, “The Final Round,” on February 6th, following a volatile trading day that finished with the Dow rebounding 567 points, or 2.3%. The gains came one day after the index saw its biggest-ever daily point plunge.
Chris shared his views about the market’s sharp swings, how financial technology played a role, and where to look next in Fintech. Here’s a condensed summary.
On the stock market selloff:
Market structure generally worked yesterday. There were a couple of things that didn’t [like the Credit Suisse VIX fund]. If you don’t have active investors there to hold up the market, you’ve got a problem. We’ve designed these securities to do exactly what we want them to do, until they don’t. Everyone needs the active managers when they need them, and you can’t just dial 9-1-1.
What you saw yesterday was the market makers backing away, trying to figure out where the bottom was actually in some of the different ETFs. You saw the algos themselves working. The problem is the other side of the market wasn’t there to buy— they were starting to look for liquidity.
On bringing back active investing:
We’re in a 3.0 sort of market structure...we’re in the third generation of robots making the trades, where you’ve got both the buy side and the sell side both participating. Before you only had one side of the market all technology...It’s been two or three years of traders saying, ‘Dump it in the ETFs.’ I think that’s a signal to an event like yesterday. Do we have three or four of these selloffs that finally get people to say, ‘Hey wait, this active, this fee thing, isn’t so bad after all?’
On IPOs and exits:
I would’ve liked to have seen over the last 12 months several more IPOs of the so-called unicorn class...from a Fintech perspective, we’ve got a handful of companies that are in either lending or wealth management or other areas that I think would’ve been IPO candidates for the next six to 12 months, But you’ve got today people saying, ‘We need to wait and see. Is this a volatile market we’re in?’”
The VIX has been flat for two or three years—the perfect market conditions for IPOs is flat volatility. And yet, we didn’t have these companies coming public...So frankly, what we’re seeing is the rise of these giant growth funds, the rise in these giant private equity funds coming to the market, and replacing where these IPOs used to stand in.
As for exits, there’s no big names coming tomorrow...There’s a ton of money in the private markets. And in the LP world, folks are looking at alternatives as a way to gain alpha in their portfolio. So here we are, with more private money to keep these companies private longer.
On where to look next in Fintech:
Financial services is re-bundling. With lending, wealth management, credit monitoring.
How do you look at your personal finances—five apps on the phone? Is that what you want? You want one app, one piece of technology to do it all. The millennials, the younger generation, are mobile only, not just mobile first. There are few companies that will have that story, and will be pretty compelling to investors, to me and to my firm.
Security has been a space that we thought was going to sort of ‘boom and bust’ or ‘boom and settle’ for a long time. But now you’ve got state actors, you’ve got rogue actors, you’ve got terrorist acts. The security space is here. You have a sort of new generation of spend, if you will, or innovation in the security space.
We’re early days in alternative data, such as data from social (Twitter, Wikipedia), which is being used in trading, making calls. No one‘s really figured out, or cracked the code on how to use alternative data, but that’s going to come in the next few years.
There’s real value [in Blockchain]. I think a lot of enterprise applications are coming. We’re early days in supply chain, logistics, insurance. Blockchain in terms of transactions and trust on each side—that’s actually real technology that I think we can get behind.
Click here for more of Chris' perspective on fintech and investing.