A Sneaky Secret About The Fin Tech Ecosystem in Chicago

There are different ways to build startup ecosystems.   One way is obvious.  Brute strength. Have some people with good ideas and other people that want to fund them.  That has been Chicago’s path.  It’s a linear path.  The other path is not so obvious and uses network effects.

Chicago is starting to walk down the network effect path.

I was at the Barchart conference last week.  I saw a lot of people I knew, and quite a few I didn’t.  What was interesting to me is how many old floor traders and experienced Fin-tech executives were there.  A lot of people look at the floor as a giant mosh pit.  You can’t expect them to understand what was going on underneath the covers there.

Good Floor traders were:

  • Entrepreneurial
  • Good judges of character
  • Risk Takers/Risk Managers
  • Strategic
  • Able to take in a lot of disparate information and turn it into meaningful action
  • Knew what to do with losers

The floor had tremendous network effects.  It was a gigantic economic engine.  The city lost that when it went away.  However, there are still quite a few floor traders and former executives around.

At the Barchart conference, I learned of an effort that could bring gigantic network effects to the local fin tech community.  When CME Group went electronic, it built a data center out in Aurora.  It was cutting edge.  Strategically, CME decided it didn’t want to be in the data center business.  Part of the reason was the threat of a transaction tax by the Illinois Democrats.  The other part was real estate isn’t their core business.  They sold the data center to Cyrus One.  Cyrus one is building significant architecture and structure into that data center.  They are more than doubling the size of it.  A lot of it is already sold.

Meh, it’s just a data center you might think.  But, you’d be wrong.  Techcrunch has an article on how your next computer could be in a data center.  Here is the summary from that article where they illustrate how online gaming is changing because of data centers and cloud:

When you run a game on your Shadow instance, your laptop fan remains silent because not much is happening on your local computer. It’s one of the most telling examples of outsourcing compute-intensive tasks. These companies will have to make sure they have a rock-solid privacy policy and security system.

CPUs, GPUs and SSDs are still going to get better over time. These innovations will mostly benefit cloud companies so that they can provide better servers.

Conversely, infrastructure is going to become increasingly important as LTE and constrained fiber-optics internet connections won’t cut it anymore. You’ll want gigabit connections on all your devices. And then, it’ll feel like you’re living in the future.

Finance has huge amounts of data, just like gaming.

Let’s think about the cloud and data centers for a second.  Data originates in the cloud these days.  It wants to stay in the cloud.  Data sets and techniques are up in the cloud, but old systems cannot use them.  The financial tech space is littered with old systems.  We aren’t talking about Gigabytes anymore, we are talking about Petabytes.  Massive data sets that can only be manipulated in the cloud.

Fortunately, the SEC, CFTC, and FINRA all are starting to come around and tell their constituents that cloud is okay.  That’s big because they and their constituents were all concerned about safety before.  Regulators are being forced to embrace the cloud because they need data and that’s where the data is being generated.

If you think about certain fin tech applications, like blockchain, they will contain gigantic data sets.  Most of the early fin tech focused blockchain companies I have seen don’t embrace the “distributed” governance model highlighted in early blockchain literature.  They look more like the old CME membership model.

The trading floor may be gone, but Chicago is home to the high-frequency trading industry. All the firms have hired incredible talent.  They come from computer science, computer engineering, physicists, and other high-demand specialties.  Those people are starting to look around and see they can create companies that solve big problems.

Cyrus One sees an opportunity with the Aurora, IL data center that cannot be duplicated anywhere else.  Chicago is the only place in the world they can do this.  They can’t duplicate it in New York, London or Hong Kong.

They are creating a financial extranet.  They see global software defined networks (SDNs) attacking financial extranets.  A data center can cut costs by 50%.  Proximity is going to allow edge computing or microregions with more small purpose-built cloud applications.  The talent is here. That’s a game changer for Chicago with network effects.

 

By the way, if you want to learn more about security and Fin Tech, sign up and come to this event.