This paper looks to history as a guide for successfully pursuing innovation in complex systems, such as the capital markets.
We examine the development and adoption of electricity networks, starting with the invention, development, adoption and commercialisation of Thomas Edison’s electric lighting system. We believe an understanding of Edison’s approach to innovation offers a useful guide for successfully pursuing innovation in the capital markets today, and guides the innovation efforts we pursue at Nivaura.
Section 1 discusses how, contrary to popular belief, Edison’s lighting system was not the work of a lone genius. Instead, it involved the input of a diverse group of experts, who drew knowledge from a range of disciplines and time scales to find solutions to identified problems.
In Section 2, we examine how the development of the electric lighting system was not a linear event, but involved a multi-step, iterative process. This saw inventors, scientists and technicians in various parts of the world working to identify problems, create solutions and attempt to impose their ideas on the optimal design of the system and its components.
We consider the social forces underpinning the adoption of electric lighting, specifically the importance Edison placed on the interests and influence of key participants impacting the adoption of his inventions, as well as the influential role played by regulators.
We also discuss how standardisation was vital for enabling the electric lighting system to scale; moving away from the ‘battle of the systems’ between direct current and alternating current, and towards the standardisation in voltage that enabled product design to proliferate and broad adoption to take hold.
In section 3, we consider what these lessons could mean for the future of the capital markets and the approach to innovation we see as being most impactful.
The process of innovation within an established system is often seen as a collision of two opposing forces, one seeking stability of the existing system and the other seeking to co-opt and change that system. In many cases this is true. Yet innovation does not always come from forces external to the established system, nor does the process always involve competitive tension.
While ultimately a story of an innovation displacing established technologies and institutions, we think key elements in Thomas Edison’s efforts to commercialise his electric lighting system offer useful insights for established firms in the capital markets today. Edison’s system of innovation, his emphasis on establishing long-linked social networks to support the commercialisation of his inventions, and the thoughtful design of his technologies offer a practical roadmap for successfully pursuing new ideas.
Rather than embarking on an inevitable path to displacement, we see the promise of a collaborative and mutually beneficial process of innovation that can benefit all stakeholders across the capital markets.
Section 1. Innovation is not a lone pursuit
“Edison is in reality a collective noun and refers to the work of many men.” Francis Jehl 
While popularly perceived as a lone genius, Edison’s talent arguably lay in his ability to direct teams of experts towards the effective development and commercialisation of new ideas.
The way in which Edison and his colleagues approached innovation is noteworthy for three reasons: their ability to obtain and assemble knowledge from a diverse range of expertise; looking to history for lessons on how to solve problems; and applying this knowledge in novel ways, such as the re-purposing of existing technologies to new ends.
Edison’s Menlo Park laboratory was home to a diverse group of experts, including mechanics, mathematicians, physicists, chemists and highly-skilled professionals including machinists and glass blowers.
These experts enabled the systems-level innovations pursued by Edison, such as his electric lighting system, rather than other inventors that focused on the invention and development of components within an existing system (such as Joseph Swan, the British inventor of the incandescent lamp).
In much the same way, we believe innovation in capital markets must involve the perspective and input of multiple experts, both upstream (issuers, banks, investors) and downstream (paying agents, central securities depositories, exchanges and ratings agencies). This belief is reflected in the make-up of our company, which comprises experts in technology, securities law and capital markets.
It also enables us to consider the broader impact of our innovations across the capital markets system, where we are consistently focused on finding end-to-end solutions for our products.
Looking to history for novel ideas
Edison’s development of the phonograph resulted from the integration of technologies he and his colleagues encountered through their work with the telegraph and telephone. His electric lighting system meanwhile came over 70 years after the invention of the incandescent lamp and subsequent developments in arc lighting.
We also believe that history can help us to identify novel approaches to addressing problems.
The primary problem we have looked to address is the inefficient way in which data is currently created, shared and interacted with in capital markets. We think solving this problem is of vital importance because capital markets are built on data.
If we break primary securities issuance down to its most basic components, we can observe a system whereby data is created (negotiating terms and producing final terms documentation for a bond issue for example) and shared (with investors, paying agents, central securities depositories, exchanges, custodians, ratings agencies etc).
The current process for creating, sharing and interacting with this data is extremely inefficient and prone to error, with associated operational risks. It involves countless emails, multiple and manual instances of data entry into various disparate systems, while the data nearly always exists in static form, either embedded in pdf or word documents or proprietary systems.
We think that by addressing the problem of data we can create the greatest impact for all capital markets stakeholders, whether they are creating, consuming or repackaging data from the securities issuance process.
We therefore studied the successful adoption of HTML as a means to create a market standard for interpreting and sharing data (turning data into images and text in the form of websites), which – once made open specification – was a key factor in the growth of the internet.
Taking HTML as a guide, we worked with leading experts in securities law to develop an open-specification mark-up language for making legal documents machine-readable, which could be easily understood and adopted by the market.
Setting a market standard for capital markets data
We call this language General-purpose Legal Mark-up Language (GLML) and see it as the base for automating the highly manual and error-prone processes within primary capital markets, while enabling service levels to improve across each step of the existing value chain.
The key benefit in creating a market-standard language like GLML – and the subsequent digitisation and automation of securities documentation it enables – is its ability to create structured data. This means each individual data point within the legal documents for a security can exist as an individual entity, enabling it to be sent, received and understood by any system – either upstream or downstream – within the capital markets.
This structured data can flow seamlessly between the various technologies used by participants in the existing system (i.e. interoperability), eliminating the need to re-enter data at various points in the securities issuance process.
Structured data can bring enormous benefits to all parties. Banks and their in-house lawyers can increase the productivity of their dealing desks by drastically reducing the time needed to negotiate terms and produce final terms documents. Companies can reduce the time they spend securing funding and greatly reducing the time taken to receive final terms documents. Law firms can deploy their people to more productive means and away from manual tasks. Infrastructure providers can meanwhile reduce the operational oversight needed to receive and input data into their systems.
Section 2. The Innovation process: iteration, social forces, universality, thoughtful design
Edison’s electric lighting system was ultimately overcome by the economic deficiencies inherent in transmitting direct current over long distances and subsequent improvements made to the competing alternating current (AC) system. Labelled the ‘battle of the systems’ it is however important to note that the dominance of the AC system – championed by industrialists like George Westinghouse and AEG in Germany – only eventuated after a long process of problem identification, invention, iteration and improvement by engineers and scientists in Europe, the UK and United States (at times concurrently, with resulting patent disputes).
This process is common with innovation and we expect the broad efforts across the capital markets today will prove no exception. In this spirit, it is worth quoting Edison, who in 1878 wrote:
“I have the right principle and am on the right track, but time, hard work and some good luck are necessary too…The first step is an intuition, and comes with a burst, then difficulties arise – this thing gives out and [it is] then that ‘Bugs’ – as such little faults and difficulties are called – show themselves and months of intense watching, study and labour are requisite before commercial success or failure is certainly reached.” 
As opposed to a lone pursuit, we believe the process of identifying problems and creating solutions described by Edison will be more efficient and effective within the capital markets if done collaboratively, involving all stakeholders across the securities issuance lifecycle, than if we were to pursue our objectives alone.
Social forces and innovation adoption
“…Edison played a prominent role in the financial and political scenarios concerning his inventions.”
Edison was also adept at assembling complex social networks and embedding cultural symbols in the design of his innovations to help improve the chances of commercial adoption.
In the case of electric lighting, these social networks included investors, established companies (such as gas companies), financiers and other leaders of industry. Essentially, Edison recognised that the successful adoption of his innovation would require a complex interplay of multiple actors and social and cultural forces within, and external to, the established (then gas lighting) system.
In a similar manner, we believe a collaborative approach involving all stakeholders in the capital markets is vital for enabling workflows to be improved through the use of structured data. That is why we have handed responsibility for the adoption and development of GLML to an industry consortium comprising the leading capital markets law firms (A&O, Linklaters, Latham & Watkins, Clifford Chance), banks, central securities depositories, exchanges, paying agents and ratings agencies.
Indeed our partnerships with these law firms (some of whom are also shareholders in Nivaura) form a critically-important part of our network. By having our partners mark-up pro-forma final terms in GLML and conduct comprehensive testing of these documents, we can give comfort to market participants and securities regulators that the processes followed in producing and working with machine-readable securities documentation are as robust as currently accepted practices.
In addition to the law firms, our network extends to our work with infrastructure providers, such as the London Stock Exchange (also a shareholder in Nivaura) and the central securities depositories, paying agents and ratings agencies that receive and interact with the data created through the securities issuance process. We also work closely with banks (MTN desks) and issuers in creating digital and automated workflow solutions through our flagship product, Aurora.
We also see regulators as an important part of our network, with whom we consulted closely in the development of our products (having being involved in five of the FCA’s sandbox initiatives and acquiring CASS and MIFID approvals in the process). Much as regulators played a key role in shaping the development and adoption of electric lighting systems – whether hinderance in London or help in Berlin – any capital markets innovation that will be adopted over the long term has to consider forces external to the system, such as regulation, in its design.
Universality and innovation
We see this broad network – and industry efforts to establish GLML as a market standard – as enabling universality (or broad acceptance), which we think is a key component for any successful capital markets innovation.
Universality from a systems and standards perspective is important for creating economies of scale, enabling efficiency and establishing a common understanding from which future innovation can be based. In the case of electric lighting for example, the adoption of a universal electricity system reduced complexity by establishing standards for power transmission while rationalising the number of voltages that had until then inhibited product design.
Universally-accepted structured data also enables further innovation to become possible, such as applying legal logic and artificial intelligence to vast libraries of transaction data, enabling near-complete automation of final terms documents for bond deals.
“Utilize the gas burners and chandeliers now in use…[and] effect exact imitation of all done by gas so as to replace lighting by gas with lighting by electricity…” Thomas Edison
Edison designed his electric lighting system to be as close as possible to the incumbent system of gas lighting then in use, sometimes to its detriment. This included the use of lamp shades (originally used to prevent drafts from affecting gas flames) to the underground transmission of electricity (a technical and economic challenge for the direct-current system) and the design of central power stations for distributing electricity over a wide area. The purpose of this approach was to enable the acceptance and understanding of electric light by incorporating a high degree of familiarity in how consumers would interact with the new technology.
We worked closely with industry experts representing each stakeholder within the securities issuance process to create an atomised view of all workflow processes, including all variables (however rare). We then built digital and automated processes, along with an interface following familiar workflow processes, which we have tested, adapted, and reiterated.
For institutional finance in general – and certainly in the case of capital markets – the incumbent parties involved in the primary issuance of securities play important roles that are defined and firmly entrenched in law. We therefore believe it is vital to design our technology to fit seamlessly into existing workflows. We also think social factors influencing the adoption of new technologies need to be considered; specifically, how an innovation’s design can enable individuals and established organisations to comprehend the new idea, as well as the value it can deliver.
We therefore designed GLML and our structured data workflow platform, Aurora, to mirror accepted practices for negotiating and creating new securities. For example, GLML has been designed so a lawyer can use it with minimal training and without the need to learn a complex coding language. We have also considered different legal requirements for signing final terms documents, offering a series of signing capabilities including wet, digital and biometric signatures.
Simply put, we worked to enable people to do what they have always done, just more efficiently and with little operational risk.
Section 3. Looking ahead: Does blockchain represent the emergent electricity network for today’s capital markets?
The ability for our technology to remain adaptable to future states of innovation has been a consistent focus for our development team.
Blockchain is an example of a technology that could modify existing processes and displace (or certainly modify the roles of) certain players in the existing value chain. Indeed there are numerous institutional efforts for experimenting with this technology, whether regulatory guidance for the treatment of security tokens under existing laws, bespoke regulatory initiatives or live experimentation by established institutional borrowers.
A new market infrastructure built around blockchain may eventuate. Our work in tokenisation has been extensive and a large focus of our various sandbox initiatives with the FCA. Yet the technology is arguably in a nascent position on its upward-sloping curve to broader adoption (Foster).
Our immediate focus is therefore on enabling the existing system and its participants to carry out functions more efficiently, securely and effectively. Importantly, our efforts with GLML and Aurora seek to achieve these ends while laying a foundation for our partners to effectively respond to future innovation and more easily adopt new systems and processes as they become viable, such as blockchain.
Capital markets lit by structured data
Much like Edison and his contemporaries worked with electricity to build a new system for lighting and heating, we view structured data as providing the principle element for innovation in capital markets today.
Aurora is the modular capital markets workflow platform we have built for stakeholders both upstream and downstream to improve workflows by creating and using structured data to automate today’s highly manual and error-prone processes.
We expect other firms will begin to work on similar principles and develop competing offerings based on GLML and the structured data it creates. As with the development of electric lighting, we expect this competitive process will result in the identification of new problems to solve, and new ideas and technology solutions for addressing these problems – all for the benefit of today’s capital markets stakeholders.
We are excited to be playing our part in the coming process of innovation and creating a more efficient and dynamic capital markets built on a foundation of standardised, structured data.
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