Machine learning and artificial intelligence to get massive VC boost – FX automation generation nearing?

The cost of operating a retail FX brokerage has been a major concern for many executives over recent years, and during the course of 2016, many methods of automating specific practices and operational aspects are now under development and consideration.

This month, the ability to  be able to assign R&D budget to such automation gains further ground as Israeli venture capital firm Pitango has launched an early-stage fund with $175 million under management, that will be used to invest in companies at seed level and upwards.

Aside from various ‘trendy’ sectors such as life sciences, the new fund will specialize in interesting technological innovation such as Internet of Things, enterprise infrastructure and artificial intelligence.

The new fund joins Pitango’s first Growth Fund, which focuses on late-stage companies and which was released last year.

The introduction of the new fund brings Pitango’s recent capital raising to a total of $400 million in both funds, taking its total assets under management to $2 billion.

Pitango Venture Capital 7’s first investment is in Graphcore, a developer and manufacturer of an intelligent processing unit for machine learning, as part of a $32 million investment round, with Bosch VC, Foundation Capital, Amadeus Capital Partners, Samsung’s investment arm and other leading technology companies.

Why is this interesting?

Pitango’s ability to fund firms which develop artificial intelligence and machine learning for the FX industry may well be of great importance. The company is very au fait with the FX industry, having participated in several investments and merger & acquisition activity in the electronic trading business.

An example of this was the acquisition by Chicago based listed derivatives giant IntercontinentalExchange (ICE)’s acquisition of SuperDerivatives in September 2014, the North American giant being attracted to the data and analytics service that SuperDerivatives provides for the OTC industry. SuperDerivatives was the subject of a large investment by Pitango, along with Accel Ventures’ Israel division.

At the time of ICE’s bid, SuperDerivatives was valued at approximately $350 million, and had annual revenues of $150 million.

Another example of Pitango’s expertise in this sector is its involvement in Israeli technology firm Borderfree which was founded in 1999 by Yuval Tal in Israel under the name FiftyOne, as a forex conversion site for retailers.

It subsequently expanded its business to become the leader in its field, offering worldwide e-commerce for American retailers. The company raised $80 million in its Nasdaq IPO in March 2013. The IPO reduced the stake of Pitango Venture Capital in the company from 32.8% to 27.4%.

In May last year, US giant Pitney Bowes bought the firm for $395 million at a time during which the firm had generated $125 million revenue in 2014 and had 250 employees at its New York City headquarters and development office in Tel Aviv.

Perhaps even more interestingly, In January 2007 eToro raised a first round of financing to the tune of $1.7M from by private investors. In an interesting side note, one of these investors is Chemi Peres, who headed Pitango Venture Capital and also happens to be the son of statesman and former president of Israel, Shimon Peres.

Since then, eToro has gone from strength to strength and was subject to a $100 million investment last year from Russia’s Sberbank and China’s PingAn Ventures.

FinanceFeeds met with Lance Liu of PingAn Ventures in Shanghai at the time, who explained to us “Our core business is investment in financial services firms, and there are many good business models overseas with good technology which China does not yet have. We have a large market to serve so we have a remit to invest in new technology and foreign business model and bring it into China.”

“eToro’s collaboration with us is on two fronts” said Mr. Liu. “One is a cooperation on the social investment side, whilst we also invested in the fintech side of their business.”

As part of the structure of the new venture that is currently being created, Mr. Liu explained “At this stage, we did not establish a joint venture model with eToro because we wanted to do a trial first. Sometimes we do joint venture and sometimes not, it depends on the business itself. This time we just cooperate on a commercial level.”

“eToro created a wholly owned foreign enterprise (WOFE) which is in the process of registration and is a fully owned subsidiary under eToro. The market here in China is less strict than it was before, and it is less hard to open in China as it had been previously, as long as there is government oversight and input.” – Lance Liu, Head of Investment, Ping An Ventures.

Massive success abound in Pitango’s FX related ventures is clear.

With the launch of the new fund that is set to finance artificial intelligence and machine learning, FX firms will likely be able to benefit from Pitango’s deep understanding of this industry.

Andrew Lane, CEO of news sentiment-based technology company Acuity Trading, met with FinanceFeeds at the prestigious Londa Hotel in Limassol, in May this year, looking at a hot topic that was discussed relating to a panel at the iFXEXPO International FX industry conference that had taken place that week. “We had three areas to talk about with regards to automation during the conference. These were marketing – how automation could be used to help manage clients across the client journey, risk management, provided by automated retention firms like cPattern, and research.”

“At Acuity Trading, we have focussed heavily on the latter so that brokers not only gain from investment in new tools but help to increase their ROI from existing products, ones that their clients are familiar with but don’t utilise as much as they could do” said Mr. Lane.

Mr. Lane continued by describing how “A lot of the comments from a number of panelists focused on the automation within call centers which is by no means the only application for automation in this sector. Automation can and should be a much wider consideration for a broker if they are to prosper in today’s highly competitive environment. From reading the news, which is obviously where Acuity Trading is specialising, to advertising, automation has far reaching benefits for brokers.

When reflecting on that particular panel, Mr. Lane said: “I felt there was solid support for the role that automation can play in a broker’s operation but the general consensus was that the entire process shouldn’t be all automated, and there should remain some human resource element. However, one of the most successful brokers to date has been one where digitialization has replaced a physical sales team and I believe that automation will have even greater application in the future for brokers.”

FinanceFeeds discussed this at length with Mikael Breinholst, CEO of Tradeworks, which is an FX algo trading and automation technology company earlier this month.

We were also joined by George Agathangelou, Business Development EMEA at Tradeworks and began to discuss the main points during Mr. Breinholst and Mr. Agathangelou’s several years in the FX industry – Mr. Breinholst is a senior Saxo Bank alumnus and Mr. Agathangelou has substantial experience in both proprietary trading and retail FX among some of Cyprus’ largest firms.

This combination of experience led these executives to look for the tool that truly democratizes algo trading.

Mr. Agathangelou said “I have grown frustrated with the “big boy’s toys” and have been looking for a place where we can combine our business development skills and interests with a true purpose of helping traders realize their goals through powerful – yet easy enough to actually use by those without programming skills. Myself, along with many others at the company actually trade real money as proprietary traders to profit, however it is vital to uses these skills to stay sharp on the markets and recognize the needs of retail traders.”

FinanceFeeds then engaged in a very interesting conversation and interview with Tradeworks’ senior management, Mssrs. Breinholst and Agathangelou detailing the method by which algo and automated trading will be conducted in the future, and what Tradeworks’ part in this will be.

With regard to algorithmic trading and the technology that facilitates it, we asked if these two astute executives consider artificial intelligence (AI), automated bots in high frequency environments to increase in use alongside human analysts in the FX world, just as they are in futures and exchange listed derivatives at the moment.

Y”es, I do believe that algorithmic trading will have an exponential growth especially among retail traders as cloud computing now allows the opportunity for everyday people to have similar tools to those used by institutional traders” said Mr. Agathangelou.

Mr. Breinholst added “Technology has become better, cheaper and more efficient than any human, as it is impossible to match the high frequency execution or decision making speed of algorithmic trading robots. Instead of simply crunching numbers, the machines are now deciding and executing trades for us in the same way they are intended to be driving us home and cook or clean for us.”