To scan the headlines of the financial press is to fear for the future of this industry. The reasons for a gloomy outlook are many: endless scandals; criminal trials; technology failures; static investment returns (at best); economic uncertainty; political stasis. The list is seemingly endless.
After a period of too-light regulatory oversight, leading to an unprecedented global financial crisis, we should expect the hangover, in terms of changes to business models and regulatory frameworks, to be long and painful. It is perhaps inevitable too, as David Wright, secretary-general at the International Organisation of Securities Commissions noted in a recent interview, “that the regulatory tiller is jerked too far in one direction”.
The result of the corrective process – in combination with the caution that characterises the chastened, debt-laden, post-crisis developed markets – is lower volumes, lower commissions and lower investment: potentially, a spiral into stagnation.
But just as Keynesians argue that the antidote to depression is stimulus, it is in the nature of the financial markets to innovate to overcome problems, rather than be overwhelmed by them.
Hearteningly, there is plenty of evidence of necessity being the mother of invention in today’s markets.
Buy-side traders are responding to having fewer trades on their blotters by digging into data to tailor execution strategies to individual PMs in pursuit of every last drop of alpha. A broker recently told me that he had noticed clients requesting use of more parameters on their execution algorithms whereas 102-18 months ago they had wanted fewer. The explanation was simply that portfolio managers were making fewer calls and the trading desks were focusing more of their energy and expertise on doing the best for the trades sent their way.
In addition, technology is being deployed on the buy-side in ever more sophisticated ways to make the investment process cheaper, safer and more transparent, while sell-side firms are adapting their services to a low-capital world, focusing on relationships more than leverage. Both hedge funds and more traditional buy-side firms are investing in new technologies that give PMs new insights and automating rules for different markets so that traders can focus instead on refining execution processes. Forced to compete for business without using balance-sheet firepower, brokers and banks are collaborating more, as illustrated by Deutsche Bank’s recent suggestion that pooled resources and open source technology should play a role in the future development of securities trading systems.
We even see new market structures emerging to better meet the needs not only of institutional investors, but also the end-investors and issuers in the wider economy. In the US, exchanges are developing new services which provide competition to market-markers and may force the trading fees paid by retail brokers even lower. At the same time, innovators like MarketBourse and Squawker are putting together new markets that claim to use social media principles to build trading communities with common interests.
Without wishing to sound like a Cassandra nor Pollyanna, harnessing technology and expertise to an undiluted understanding of client needs and priorities would seem a sound basis for future financial market growth.