Not All Software Companies Are At Risk of LLM Disintermediation
LLMs are a tailwind for some software companies
The market is in “shoot first, ask questions later” mode as it relates to LLMs disintermediating Software companies.
Those pockets of dislocation are good if you know where to look. Software companies that play in heavily regulated industries, whose software is architected to comply with those regulations, are a good place to look first.
Regulatory moats, hallucinations and lack of business logic
LLMs by definition are not a good fit for regulated industries given that they hallucinate. Imagine you own a Software company that strikes NAVs for mutual fund clients among other fund administration and trade execution services. That software must have access to fund data, to real-time pricing, to fund-specific compliance rules and mandates, to fund-specific business logic, and must comply with SEC and FINRA regulations. NAV errors mean reputation risk, potential lost business, and potential fines from regulatory bodies. FINRA’s 2026 report articulates some of the risks around LLMs (pages 26 & 27).
The various elements I have highlighted are table stakes. Anthropic, OpenAI and Gemini/Google do not have any of these elements. If they want them, they will have to acquire companies with vertical expertise.
Before I get to naming some of those vertical companies, I will address why LLMs hallucinate. The answer is because LLMs are probabilistic, not deterministic. LLMs predict the next string of tokens in response to a query, they do not retrieve facts from a database. LLMs do not “know” anything. They are fundamentally prediction engines.
There are certain tasks where LLMs have a purpose in regulated industries - text retrieval comes to mind. However, to suggest that an LLM company could supplant a Software provider in a heavily regulated industry is simply incorrect. In fact, Software companies in heavily regulated industries deploy LLMs where appropriate to further automate workflows. LLMs provide a tailwind in these instances, not a headwind.
Some of the vertical companies I am thinking of include S&P Global (tkr: SPGI), SS&C Technologies (tkr: SSNC), CoStar Group (tkr: CSGP), Broadridge (tkr: BR), Intercontinental Exchange (tkr: ICE), FIS (tkr: FIS), and Interactive Brokers Group (tkr: IBKR) to name a few.