James F. Moore originated the concept of business ecosystems about the same time Clayton Christensen developed his first ideas about business disruption. The basic definition comes from Moore’s book, The Death of Competition: Leadership and Strategy in the Age of Business Ecosystems.
Briefly stated, Moore says that an ecosystem is a community of interacting organizations and individuals that produces goods and services of value to customers. Members of an ecosystem include suppliers, lead producers, competitors, and other stakeholders. In every ecosystem, a leader or a group of leaders are valued by the community because they enable members to move toward shared visions to better decide on their investments and to find mutually supportive roles.
That is, until someone comes along and disrupts the whole thing.
Some disruptions alter an ecosystem when a company—sometimes one that was never even part of the ecosystem to begin with—takes power and influence from an existing leader. But truly big and transformative disruptions can only really occur when an ecosystem is forced to put its end users, who had until then been subsidiary to other, more powerful constituencies, firmly at the center of all activities of the system.
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At the age of twenty-two, Tom started his Wall Street career as an assistant to the traders on the fixed-income desk at Smith Barney Harris Upham & Company, not at all certain whether this was going to lead to anything in the long term. That was in 1991.
Within a year and a half, Tom had become a trader covering a variety of securities classes, including certificates of deposit, commercial paper, auction rate securities (ARS), variable-rate demand bonds, and municipal notes. Over the next decade, he successfully climbed his way up the proverbial corporate ladder. In 2007 Tom was named the head of all the short-term, tax- exempt syndicate and trading desks as well as the head of the tax-exempt and taxable ARS portfolio at the large global bank he worked for.
But in the heady days of July 2007, and at the top of his game, Tom became an unwitting participant in the first tremor of an oncoming earthquake. It was precisely those asset classes that Tom had built his success on, and for which he was a major market maker, that were causing a panic: collateralized debt obligations (CDOs)—an ABS product—and municipal bonds.
From his seat among the trading desks in New York, Tom watched as the markets disintegrated, turning relationships that had existed for years upside-down.
Tom was by no means alone. Executives at the rating agencies, senior bankers at other large banks, the most senior management at his bank, as well as individual and institutional investors were all part of a very specific ecosystem. They were part of what was to be later seen as the beginning of the worst global financial crisis since 1929.
Deep down, Tom knew he had to do something to disrupt and transform the situation.
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Ten years after the financial meltdown, large banks still dominated most aspects of trading, including the flow of information, by managing liquidity in fixed-income markets. When investors are convinced a market is illiquid, they tend to trade the asset class less frequently, far more cautiously, and then often only through the most knowledgeable brokers. And because the banks have so much control, they have the power to determine the interest rates and therefore the value of the paper in circulation.
Unfortunately, it was exactly this one-sided control that caused the problems in 2007. The scarcity of transparency in Tom’s markets helped cause illiquidity—an extraordinary situation which an outdated market construct was not prepared to deal with. Simply put, nobody wanted to buy paper that was in some cases losing tremendous value, depending on existing structures.
Using the simple ecosystem map below, you’ll in fact see that the banks are at the center of the entire system. That means that everything has evolved up to benefit them.
Visualizing an industry’s ecosystem in this way helps an erstwhile disruptor determine where the inefficiencies and inequities are and what larger entities need to be disrupted to put the consumer – investors – back in the center where she belongs.
The Ecosystem of the Municipal Bond Market Before 2007*
*The size of the bubble approximates the relative level of influence of other players in the marketplace.
The municipal bond market was particularly subject to the will of large institutions. Its ecosystem had changed very little over the past decades. Even ten years after the crisis, most transactions were still handled manually over the phone. Like many markets that have resisted innovation for generations, the powerful few had forced the other players to play the game their way.
Until 2007, all the players in the market—except the investors— profited from the scarcity of data and had no problem changing their analyses to suit the needs of the other important participants. Nobody questioned the quality or depth of their work if the ratings met the standards that the investors set.
Local and state governments, meanwhile, weren’t interested in changing a system that gave them access to capital when they needed it. While a few of them may have wondered whether there might be a better way of financing their needs, there was certainly little or no motivation to bite the hand that fed them. Small wonder that regulators let the then- current way of issuing and trading municipal bonds run uninterrupted until the ecosystem ground to a halt in the summer of 2007, which then spread to other financial ecosystems. And despite the rash of regulations that followed in the wake of the financial crisis, not much had really changed in the preceding ten years.
Having spent eighteen years of his life learning every aspect of the fixed-income business, especially in variable-rate municipal bonds, Tom felt he was one of the only people who had the knowledge and expertise necessary to take on the challenge of changing the situation.
After much planning, Tom assembled the perfect team and formed an aggressive business model he felt was worth the risk.
Tom’s company developed an electronic Dutch auction platform that issues and trades variable-rate securities accessible to any investor. The activity on this platform, in turn, generates large amounts of reliable and rich data which gives both municipalities and investors a depth of knowledge and a level of comfort often lacking in their dealings with the big banks.
While the road has been very difficult, Tom’s bet is starting to pay off. He and his team have handled several significant transactions for several states, and they add multiple private investors and investor groups to the platform daily.
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