The future of capital markets trading
September 24, 2020
September 24, 2020
Even before COVID-19 hit, some capital markets firms were struggling to adapt to rapid changes in their trading businesses. As the pandemic has progressed, we’ve seen an acceleration in existing challenges and the rapid onset of new ones. Both demanded a solution—yesterday.
As a result, many capital markets firms find themselves completely re-thinking the trading business, from digitizing trade execution and trader collaboration, to the technologies needed to compete effectively, to the kind of experience that clients want inside and outside of a pandemic.
Adopting to this new shift requires a new and nimble framework blending hard applications (as a technology-driven efficiency play) with softer tools (designed to provide for the employee experience).
Based on discussions with our clients, and what we’ve been hearing in the market, we’ve identified five key challenges affecting the future of trading:
At the start of the pandemic, trading organizations found themselves handling high volumes with teams that had been pushed—with little preparation—into remote locations, often working "virtually" from home. Players responded well[1]:
11 OUT OF 13
tracked banks booked a year-over-year increase in total trading revenues
8 OUT OF 13
recorded higher revenues in the second quarter than in the first quarter
Firms, rightly so, were pleased with their ability to operate in this manner; however, cracks emerged between results and the very nature of trading itself.
Our conversations with traders at major banks indicate some of the stresses of working remotely. Concerns remain around the ability to protect sensitive information in a remote world, the difficulty of maintaining client relationships in the absence of face-to-face contact, decreased productivity due to technical issues, and, most significantly, the absence of camaraderie, shared culture and shared information fostered by the trading floor environment.
We see three new technology offerings emerging, uniquely aligned to the trader of the future’s unique needs:
Listen to Laurie McGraw on Bloomberg Money Minute discuss returning workers to the office:
© 2015 Bloomberg L.P. All rights reserved. Used with permission.
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Firms find themselves in an arms race, acquiring technology that might influence alpha and provide a point of differentiation. They compete with, but also collaborate with, fintech companies that regularly disrupt established businesses and drain previously lucrative profit pools.
Similarly, firms are awash in data, but there is little consensus as to how that data should be used. Data capabilities are often used as point solutions rather than as core elements for providing strategic direction to management and, ultimately, for creating value. Solving this requires a fresh approach, one outside of Wall Street.
We believe that designing the successful trading organization of the future calls for a new vision, one based on lessons learned by big technology companies as they out-innovated, out-marketed and generally outflanked their competitors.
Firms find themselves in an arms race, acquiring technology that might influence alpha and provide a point of differentiation.
The pandemic caused many organizations to take a hard look at their fixed cost base, assessing the structure in light of new ways of working. As these reviews continue, it’s critical that firms maintain their unique culture and fabric.
Firms should establish effective communications between remote and in-office employees. The trading floor itself needs not only the technology but as well the physical design to support a safe, positive experience for workers—mentally and physically. We see two cost levers emerging. For example, as the real estate footprint cost may decrease, there’s an inverse increase in other real estate costs like partitions, cleaning and spacing mandates to keep employees safe and healthy.
There is also the gradual electronification of markets to manage. For example, as fixed income trading becomes much more digital—and changes the $100 trillion-plus world of sovereign and corporate debt—we expect a similar democratization across the trading value chain and infrastructure—one that’s cloud-based and accessible in real-time.[2] Firms could try to secure a competitive edge by fully automating and digitizing corresponding functions.
A key element of our vision of the Future of Trading is what we call the Trading Squad. This is a client-focused group that emulates some Big Tech practices, such as:
The Trading Squad is designed to manage the client experience autonomously, selecting the right services for the right moment. The Squad conducts constant experimentation and innovation to reflect client needs but embraces ways of working and an employee experience grounded in an ownership culture.
In the Trading Squad model, individual teams have incentives to manage risks and costs. While business teams take responsibility for compliance and technology concerns, they are freed from non-core functions through technology or by arbitraging the skills of partner organizations.
Trading Squads identify and prioritize the needs of high-value clients, then define the tools, products and services needed to manage the customer experience to build loyalty and accelerate growth.
Data and technology services are selected on-demand to support the desired experience.
Squads use a robust, flexible technology toolkit to create new services. Where there are gaps, they use partner capabilities as needed. And Squads are connected to a virtual internal experience to provide consistency and collaboration, engaging the right support functions at the right moment.
The building blocks of the new client experience include:
Moving forward requires an honest look at the current cost base, client feedback, revenues and the competition. Part of such a strategic assessment calls for a thorough review of which operating changes have added value, which have created risk and which have diluted value. Successful initiatives should be made permanent, if possible, and trading organizations should analyze these inputs to learn from gains, minimize waste and build resilience.
But this is also a time to be bold, to set ambitious targets for the future, to solve inefficiencies and open new paths for growth. In difficult economic conditions, traders will need to imaginatively manage their own costs as well as their clients’ costs. Volumes will be unpredictable and competition for trade flow will be fierce. A slight edge in operational efficiency and effectiveness will likely weigh disproportionately in this environment, making it essential to plan now to design the trading organization of the future.
1 Goldman Sachs, Morgan Stanley, JPMorgan top gainers in strong Q2 i-bank trading
2 Pandemic propels old-school bond traders towards an electronic future