Moving capital markets towards their nirvana
Commoditisation of transparency and speed
In June 2006 IBM, through the IBM Institute for Value in conjunction with the Economist Intelligence Unit (EIU), published a research paper "The trader is dead; long love the trader".
The purpose was to set out the perceived trends in the Capital Markets business over the next 10 years. The research paper encompassed the views and responses of over 400 senior executives from buy side and sell side firms, large and small, from across the global regions. Additionally, views and opinions were sought from major service providers including exchanges clearing houses and central depositories, trade associations and financial services' regulators.
Transparency is expanding access to markets. This arises through the adoption of electronic means of tracking price and cost of execution, as well as consequential transaction execution. This may be exercised through more extensive and immediate access to data and enables institutions to achieve the so-called "alpha" (the value the portfolio manager seeks to add in the form of excess return) and "beta" (exposure to market investment) investment objectives.
It is anticipated by the majority of those surveyed that greater market transparency and speed of transaction execution will be commoditised in the sense that it will be available to most market participants on an efficient and cost effective basis. In consequence, it will be commoditised in a relatively short period of time.
Future focus will be on the development, enhancement and management of client relationships. This will force a change of emphasis for the major Tier 1 and Tier 2 plus banks whose focus has historically been to generate revenues and profits from transaction flows in asset classes rather than focus on the profitability of client relationships.
"The fundamental task for financial institutions will be to develop a perspective on risk: value will be created either by effectively assuming and managing risk or by mitigation of risk by eliminating it from the systems or managing it for their clients."
However, those surveyed were mindful of the immediate challenges to achieve those goals. From a technology perspective, among the challenges cited were high implementation costs, back and front office disconnect, lack of technology integration, insufficient and delayed access to data and weak vendor management.
The key sources of competitive advantage were deemed to be the depth of client relationship, product innovation, trustworthiness, risk management excellence and low cost provision. All these focus on one or more facets of the client relationship.
The top 10 technology innovations in order of perceived importance most likely to have an impact of strategic development (and, therefore, able to command premium pricing) all directly focus on developments improvement and maintenance of client relationships:
- Risk measurements systems
- Client analytics
- Technology platforms to provide multi-asset class trading capabilities
- Technology providing client/advisor/consultant electronic connectivity capabilities
- Software to provide "smarter" trading
- Service Oriented Architecture
- Data distribution capabilities
- Business continuity technology with the emphasis on provision of business resilience
- Software for smarter asset management
- Collaboration technologies
The dilemma for the IT industry must be to determine how aggressively it helps the capital markets sector forward to its Nirvana. Too rapid a move towards commoditisation of speed and transparency is likely to see some technology providers experience rapidly increased losses on their investment in technologies which premium price these service attributes.
Technology vendors hold some of the key ingredients to commoditisation of transparency and speed, which the institutions seek, but is there a financial risk to their own livelihoods if they commoditise their "transparency" and "speed" offerings too soon?
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