Garry Jones, the CEO of NovaFori, says the company is focused on digital transformation. He has spent most of his career working in the derivatives markets and applied technology, but now is creating auction platforms for clients such as Christie’s and overlaying them with data science.
He hopes to use that data science to boost revenues and optimize costs as well as to improve distribution. When a market that has been analog becomes digital immediately, there is “an explosion of connectivity and clients that is just fantastic,” he said.
He spoke with John Lothian at FIA Boca 2022 about how the company is working with auctions and other alternative assets, as well as the drama at the LME…and the growth that will happen in the physical markets such as scrap metal and agricultural products.
“There’s a lot of talk about crypto,” he said, “some successful, some not. But really markets for actual physical goods, like scrap metal and ag products, OTC markets will become more digital.”
“I think the real challenge in markets now is to look at alternative assets that can move out of being largely OTC to create centralized marketplaces,” he said – for example digital assets and carbon credits.
“The technology is there, so the investment is less than it used to be. Everything is on the cloud these days,” Jones said. “Everything that happens now, both post-trade and pre-trade, can be categorized and algorithms can look at the behavior.”
NovaFori works on carbon credits, working with CIX, which does carbon trading out of Singapore. The idea was to create an auction platform for verifiable carbon credits and create marketplaces for those instruments, Jones said. “We are trying to digitize a market that’s still in its infancy.”
NovaFori also works with Lloyds of London rebalancing re-insurance portfolios, but its biggest work has been done with the auction house Christie’s. Before the pandemic Christie’s did less than 10% of its business online, and now it’s around 60% online, Jones said.
Jones has launched many markets in his past, with Liffe, BrokerTec and the London Metal Exchange (LME), and he said when you’re starting a new market you have to look at your own internal work, you have to talk to your technology suppliers and vendors, and you have to talk to your clients and build the market for what they need, and you have to make sure they’re ready. That often is the hardest piece, he said. But getting the initial liquidity is the key.
Jones was the CEO of the London Metal Exchange from September 30, 2013 until January 23, 2017, and he talked about the recent incident on March 8, when LME canceled trading in nickel after prices doubled in one day after a short squeeze by the Chinese steel manufacturer Tsingshan.
“Whenever you close a market and you cancel trades and you perhaps favor some market participants over others, that’s a problem,” Jones said.
Getting the confidence back in the market for tradable assets is going to be very difficult, he added.
He noted that Tsingshan, the company that made the biggest short in the LME’s nickel market, is also one of the biggest nickel producers, “and they are sitting on a lot of nickel stock, so people think they were taking a big short, but actually they own a lot of nickel. Some of it might not be of the grade necessary to deliver into the LME contract, but nonetheless it has tremendous value. I think that’s why the banks are funding their margin calls, because they know they might be hedged to some extent, and that’s not generally understood.”
Jones said the bigger risk for LME is losing its benchmark status. “It has its basis in the physical market, and the ring provides a price discovery mechanism,” Jones said. There has been a general trend towards closing the ring. But if the LME loses the benchmark status, that will be the biggest threat to their business in the medium term, he said.
When it comes to cryptocurrency, Jones is “not a fan in terms of blindly saying crypto will be the future,” although he does think there will be some applications for it. Similarly with blockchain, he said, “Blockchain has some great applications, but in other areas it’s a solution in search of a problem.”