The financial sector has been feeling the squeeze over the past few years. Lower trading volume, sustained low volatility and added expense from new regulations have combined to create a precarious situation for independent service vendors serving the listed derivatives space, and has led to a wave of consolidation among its players.
One such vendor is Orc Group, a Stockholm-based provider of trading, execution, risk, compliance and other software solutions for the derivatives market. The company, which was purchased in 2012 by Nordic Capital and subsequently taken private, has used the private equity structure to its advantage while it weathers the storm. According to chief operating officer Troels Philip Jensen, the consolidation trend will eventually subside, but only the most strategic-thinking firms will survive and thrive.
“All participants in the industry are suffering – the exchanges, the vendors and the traders” says Jensen, who points out that the space became much smaller, but the number of vendors did not change. He says the consolidation will continue for a couple more years, with more merger and acquisitions, but it also may be case that some firms simply do not survive.
In this regard, firms like Orc, which is under the private equity umbrella, have a bit of breathing room to wait out the storm, and maybe even make a few strategic acquisitions along the way.
So what’s next? He sees integration among asset classes as a driver of growth for front office sell-side vendors, much as we have seen on the buy-side and in the back office.
“You can believe in luck,” says Jensen, “but luck is not a strategy. Luck is that the market picks up again and everything gets good again, but I don’t think that is likely. I think we are seeing a new normal.”