Innovation Dilemma

When you think of the securities and investments industry, of what do you think? Operational efficiency? Definitely. Bleeding-edge technology? You bet. Innovation? Well, not so much.

That's not to say the industry is devoid of innovation. But, in discussions with the leaders of various industries, more often than not I'm met with a blank stare when I mention innovation. One reason innovation isn't as much of a priority on Wall Street as it is in, say, aerospace, is that truly innovative investment products are only unique for a very short period of time.

Once the cat is out of the bag on Wall Street, competitors will copy your "innovative" product quickly - thus negating your competitive advantage. In other industries it can take years to design and manufacture products. For instance, when Airbus finally rolled out its A380 SuperJumbo 500-plus-seat airliner earlier this year, it had been in development for years. And - get this - the A380 won't carry its first passengers until sometime in 2006. Although Airbus isn't releasing the exact blueprints of the airliner, it has been very public about how it has been designed. Can you imagine any firm in the securities industry tipping its hand about a new product offering and then waiting 12 months to actually offer it to customers? I think not.

That said, innovation does exist on Wall Street. Take Liquidnet, for example. Five years ago, it altered the structure of the market by offering buy-side institutions an anonymous place to find liquidity, and, at the time, its founder appeared on this magazine's cover (September 2000). Today, Liquidnet's founder, Seth Merrin, is looking to shake things up once again (see cover story, "Streaming Liquidity," page 34). Liquidnet's new product aims to bring streaming retail-size liquidity into its system. Merrin's goal not only is to increase liquidity, but also to fix a U.S. equity market that, Merrin feels, is incorrectly tilted toward the retail market's small orders.

Will Merrin and Liquidnet succeed? Given Merrin's impressive track record (Merrin Financial and its OMS come to mind), it's probably foolish to bet against him. Trade volume on Liquidnet jumped significantly as soon as the new product became available. Ultimately, time will tell. And, as far as innovation goes, it's only a matter of time before Liquidnet's competitors offer similar "innovative" products that increase the liquidity in their own systems. What's your take on Liquidnet's new gamble? Write to me at [email protected].

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