High frequency trading and proprietary trading have received quite a bit of media coverage as of late between the recent unexplained market plunge and of course the mortgage meltdown. Not to mention, there is a cloud of looming regulation over the industry. The senate passed a bill on Thursday that among other things aims to limit proprietary trading in banks and create more transparency in derivatives trading. Despite all of this, there’s a ton of innovation going on in trading from technology startups. For this week’s post let’s take a look at two companies in the space:

First up, a startup with a rather unique model in foreign exchange (FX) trading. The company is called Currensee and is a social network for FX traders. No new funding announcement, but the company recently announced its one millionth trade and claims approximately 5,000 registered members with 100 platform supported brokers. Total trading volume has reached more than $30 billion. That’s quite impressive for a company that launched only 6 months ago, but those who know the FX market know that it is an extremely large, fast-growing market with daily volumes pegged between $3 and 4 trillion and is fiercely competitive (disclosure: my firm has two investments in FX).

So what is a social network for traders? According to the company’s website, the platform allows “like-minded traders to connect with each other and share unique ideas, insights and data based on the actual trading activity of the community. Traders can collaborate using live trade data and can share trades and positions with their trading friends in real-time.” In terms revenue model, I read somewhere that the company charges for subscription services for advanced analytics, generates revenue from introducing broker relationships and transaction fees from its marketplace.

Currensee has raised a total of $12.8M from North Bridge Venture Partners, Egan Managed Capital and Vernon & Park. StockTwits is another company in the space that’s gaining traction. If you believe in the convergence of the real-time web and retail investing these are two startups to keep an eye on.

Switching gears to the world of low latency trading, startup Redline Trading recently raised $7.45M from five undisclosed investors. Generally speaking, Redline provides low latency market data solutions for trading applications. The company’s platform is called InRush. According to the company’s website, “InRush is an accelerated ticker plant that simultaneously manages user-supplied, direct-connected equity, futures, and option exchange feeds.” In the world of high speed trading every millisecond you are behind the competition could cost millions — the actual value of a millisecond has been debated, but it highly depends on your investment strategy. Market data volumes are increasing fast and not showing signs of slowing down any time soon. Liquidity is fragmented. Not to mention, supporting high speed trading usually requires significant hardware and support expenditures. These factors bode well for startups in the space. At the same time, the space is not without its challenges including possible future margin compression and differentiation. There is no lack of competition either. For example, earlier this year ACTIV Financial closed a $25M round from Bessemer Venture Partners. A few other players include Thomson Reuters, NYSE (Wombat), Interactive Data and Exegy.

While there is a high degree of regulatory uncertainty surrounding the space, one thing is for sure and that’s high speed trading is here to stay.

That’s it for this week. I welcome any comments and suggestions.

I’m starting a new weekly series called FinTech Roundup that will be dedicated to discussing technology startups in and around Financial Services. The series will highlight recent investments, M&A and trends across Payments, Capital Markets (Trading, Securities, etc), Banking and other related sectors such as Real Estate and Insurance. Okay, let’s get to it.

Payments is the theme for this week. There has been a ton of activity lately in the space in everything from mobile to e-commerce to prepaid so let’s take a look at a few recent investments:

First up, a European startup called Klarna. Klarna was founded in 2005 and is based in Sweden. The company recently closed an investment from Sequoia Capital and Mike Mortiz will be joining the board (his 1st European company). Klarna is reportedly one of the biggest providers in Europe of in-store credit and invoice based payment solutions for e-commerce. The company offers buyers flexible payment options — allowing payments after receiving the merchandise (up to 14 days in some cases) and small initial payment amounts. The company reminds me of alternative payments provider Bill Me Later. Online payments is a huge market and even behemoth Paypal’s market share is relatively small. Europe is also a large growing market for card payments, estimated at 1/3 of the US. Definitely one to watch.

Corduro is a stealthy mobile payments startup that Google Ventures recently invested in. It appears that Corduro is a payments platform for small businesses that want to accept credit card payments on the go. The service offers everything from e-checks and bill pay to recurring payment support to a branded payment gateway. Payment processing is a notoriously competitive space with many large incumbents (e.g. FirstData, Chase) and extreme pricing pressure so it will be interesting to see how the company’s offering differentiates. It sounds like there is an Android play here and that might be the spark behind Google’s strategic interest. Other newer competitors include Verifone’s PAYware Mobile and the high-profile Square from Twitter’s Jack Dorsey.

Last up, mobile payments provider Zong. The company spun out from its European parent earlier this year and recently raised a $15M round led by Matrix Partners. Zong let’s you pay for things (virtual goods mainly) via direct billing to your mobile phone and credit/debit card. The customer convenience factor is quite strong. No registration, bank account, or credit card is required. It’s been rumored that Zong’s payment conversion rates for merchants are up to ten times greater than traditional checkout payment methods. The company has been around a few years and has very good traction with Facebook — Zong’s platform powers mobile payments for Facebook Credits. Zong isn’t the only company with this approach. Direct competitor Boku also raised a $25M round a few months ago from Index, DAG, Benchmark and Khosla Ventures. With the incredible growth of social networking and virtual goods, this race will definitely be one worth watching.

That’s it for this week. Please send in your comments and suggestions.

This past weekend Fred Wilson wrote a timely post on VC and systemic risk. Aside from the topic, one comment particularly struck an accord with me. He said:

I believe entrepreneurs will use technology to reinvent the way financial services are provided to consumers this decade.

I agree and here’s why. First, if anything, the crisis has taught us that our nation’s financial system is utterly broken. From real estate to insurance to credit cards to banking to Wall Street, no area has been immune. It all needs a radical makeover. Second, consumer pain is incredibly high. Take financial advice as one example. Do you have a financial advisor? Most people don’t. Chances are unless you have minimum level of investable assets say $50K or $100K you will have a tough time finding one or at least a good one. Most brokers will turn you away because you are an unprofitable customer. Companies like FiLife and Financial Engines have recognized this gap. Last, the market opportunity is enormous. There are many billion dollar market opportunities in the sector. Online payments alone is pegged at $600B and PayPal has less than a tenth of the market.

Change is coming, but I think it’s going to require major disruption. Historically, companies in the sector have seemed to follow the adage: “He who has the gold, makes the rules.” Maybe a bit of an exaggeration, but the general principle applies. Banks get your deposits so they decide on fees and interest and can do whatever they like with your money (e.g. lend it out at a higher interest than they pay you). Legacy business models were set up to protect revenue streams. Monopolies are rampant. Look at the investment banks and credit card companies. The list goes on and on.

With all that being said, I’m optimistic and believe now is great time to be a tech entrepreneur in financial services. Incumbents aren’t going to change any time soon and many have massive cost structures to maintain. Their cash cows have plenty of milk left (look at inter-dealer brokers). That’s opportunity and a significant advantage for nimble startups. It’s up to entrepreneurs to re-define the rules and how we think about our finances. While it’s impossible to predict the future, I can guarantee you this: it will look very different than it does today.

I’m dedicating a series to this topic and we’ll take a closer look at new business models and startups in Payments, Banking, Capital Markets (Trading, Wealth Management, etc) and others like Insurance or Real Estate. Stay tuned.

Boy has the financial services landscape changed over the past year. Collapse and utter failure are the first words that come to mind. AIG, Lehman, Merrill Lynch the list goes on and on. At the same time, a few survivors like Goldman are thriving in this environment and getting ready to payout record bonuses. What does this mean to entrepreneurs in the sector? Is FinTech dead? I don’t think so and here’s why:

Inefficiencies are rampant across the entire supply chain: Voice trading is prevalent in the OTC markets. Real-time risk management is almost non-existent. Real-time settlement/clearing is non-existent. Clients don’t understand and sometimes don’t know what securities they hold and their risk exposure. Managing skyrocketing market data volumes is getting tougher and tougher. I can go on and on, but you get the point.

Talent and risk have flip flopped: This is an important one and good for all startups in the NYC area. In the past, most (not all) good programmers went to work on Wall Street to make a lot of money, working for hedge funds and large financial services firms. Startups weren’t really on the radar. Maybe it was cultural here on the East Coast, but pay wasn’t comparable and the perceived risk was high (not saying I agree). That is changing. For one, there hasn’t been this much high quality technology talent available in quite a long time. Many of the large banks significantly cut their tech teams. Great programmers and software product folks with strong domain experience are available. These folks are getting hired by fast growing tech startups. Second, what I’ll call startup risk is down. I’m in no way implying startups are less risky than in the past, but merely pointing out that perceived risk is down. Lower salaries with equity stakes and options in exciting venture-backed startups are looking better and better. The staying power of large financial services firms is very much so in question.

Diverse Sectors: Capital Markets is one slice of the FinTech pie. There are vibrant opportunities in other sectors like Banking, Insurance and Real Estate (who would have thought). Most of these sectors have under invested in technology for many years and replacement cycles are coming up. The cost of maintaining legacy technology is increasing rapidly. There are also broad financial management plays like electronic billing and payments gaining traction in sectors like Government and Healthcare.

Regulation and Reform: We all know regulation is coming at some point. The specific impact is unknown, but with that comes opportunity for nimble, disruptive startups. A few areas that I’m particularly excited about are risk management, real-time analytics, OTC derivatives automation, SaaS, settlement/clearing, anti-fraud, new marketplaces and consumer financial services.

FinTech is far from dead. I believe the crisis has strengthened the need for technology, automation and transparency and am confident entrepreneurs are the ones who can change things for the better.