I started as a money broker 40 years ago, when people used to chalk prices on a board. We have come a long, long way from those days but there is still a way to go. So, as I look to the next 20 years, I can say with confidence that as the era of the universal bank comes to an end, the single biggest catalyst for change in trading will be technology.
Technology will bring us a new breed of trader, and those trading firms that embrace this change will end up looking more Silicon Valley than Wall Street.
The financial services industry has often been slow to adopt technology but we will see a tectonic change over the next few years. Already there has been a fundamental shift as regulatory and cost pressures have forced the unbundling of banks and forever changed the role of the bank and non-bank customer base in trading. Its impact will be felt across the entire life cycle of a transaction in the future.
Firms that provide solutions to support all stages of a trade will come out on top. With their high cost of capital and regulatory restrictions, banks will never be low cost producers. Where previously they would have innovated to create solutions in-house, this task will increasingly fall to other players to fill this void. The potential here is enormous, particularly in the hugely important areas of risk management and risk measurement, where solutions will become ever more sophisticated and integrated.
Post Dodd-Frank, banks want to put less of their balance sheet at risk and we have seen declining liquidity across all asset classes. As banks move away from the universal model, there will be more non-bank market-makers. We could see a return to specialisms with the emergence of smaller banks, more niche players, with banks externalising services and making more use of the liquidity creation of non-banks. Banks will struggle to hold on to their talented staff.
Technology is getting cheaper and the really sophisticated traders are getting younger, smarter and savvier. In the future, we will see banks and non-banks poaching the very best from the likes of Microsoft and Google rather than from traditional peers. An expensive race for talent will begin and I suspect today’s classic lifestyle of long hours in an office will start to change. Traders of the future will expect more freedom in how they work, where they work and what they wear to work. It will be the firms that embrace this that win.
The rise of high-frequency traders and non-bank market-makers in the customer marketplace will be another key theme for the future. HFTs will become ever bigger and more important as their consistently executed strategy and superior technology overtakes that of the banks. We will see more non-bank electronic trading players stepping out of the shadows to build their brand awareness.
For some years now there has been a tidal shift towards electronification and automation in trading. The evolution of smart tools and the wider adoption of artificial intelligence and machine-based learning will significantly alter the industry. As these tools become ever more sophisticated, they will eventually be able to spot trends in asset classes and group historical data to learn from mistakes and from studying human behaviour.
Such smart tools will enable market participants to offer best execution to customers. This goes beyond providing best available price by being capable of providing an assessment on the depth of the order book, depth of the market and real liquidity. The regulatory landscape will ensure that best execution and intelligence on order management and data analytics become increasingly important. Those companies with the best data systems will command the premium valuations.
With software now being distributed as a service, processes can communicate with each other over a network to fulfil a goal and I expect they will play a larger role as businesses seek to process a huge volume of data and offer a variety of different services at once. We have seen Amazon and Netflix embrace this type of technology but its application and usage can go much further.
The same is true of cloud-based hosting and cybersecurity. The risk of a cyberattack impacting the underlying infrastructure of financial services means that cybersecurity is an area ripe for addressing. Deeply engrained in cryptography, I expect to see blockchain applications being used to protect against cybersecurity breaches.
Cloud-based solutions are increasingly prevalent in trading technology. Certain providers are already making good strides in financial services and working alongside regulators to ensure the compliance and security needs of institutions are met. Offering cost-efficient and highly secure alternatives to complex and costly legacy infrastructures, we will see financial institutions move away from time-consuming, in-house builds and outsource these services.
We really are only at the beginning when it comes to the opportunity that exists for technology to profoundly change what we recognise today as ‘trading’ – but I, for one, feel very excited about its future.
Michael Spencer is founder and chief executive of Icap, an electronic markets and post-trade services specialist, which will be renamed NEX Group following completion of the sale of its hybrid voice-broking and information business to Tullett Prebon