New Delhi: In a groundbreaking global survey, IBM, in cooperation with the Economist Intelligence Unit, has forecast a fully connected and transformed financial markets industry by 2015, as three rapidly emerging forces are expected to rearrange the tectonic structure of global capital markets, creating a rate of change unseen since the 1970s.
Complete marketplace transparency, instantaneous and uniform global networks and a growing need to commit to a permanent state of risk are the underlying forces bubbling up to shape the new single market for the world's capital. And, in a notable new twist, it's the little guy - the individual investor - who stands to gain power and prestige.
The IBM Institute for Business Value develops fact-based strategic insights for senior business executives around critical industry-specific and cross-industry issues. The Institute, which is part of IBM Global Business Services, draws on IBM consultants around the world to identify issues of global interest and to develop practical recommendations with local relevance.
The survey connected with over 400 executives who manage 296 of the world's largest exchanges, broker/dealers, asset managers, custodians, hedge funds and regulatory bodies. These executives overwhelmingly believe that more profit will flow to investors in an increasingly transparent marketplace. Traders, analysts, fund managers; all who stand between investors and their money will come under withering pressure to deliver or depart by 2015.
"Power will shift from the traders who have benefited from merely facilitating transactions to the buyers and sellers who take positions on either end of the trade," said IBM BCS Global Financial Markets Leader, Financial Services Sector Sarah Diamond. "Ultimately, firms will need to reexamine their relationships with risk to uncover new ways to grow in the next decade's renaissance."
IBM GBS Senior Consultant, Institute for Business Value Suzanne Dence says the study shows how value can be created in the next ten years. "Over 74 per cent of survey respondents indicated that there will be significant change over the next decade. Value will shift to those firms that assume risk and those firms that mitigate risk. This is critical because we discovered that value (profit) will bifurcate into activities that are inherently riskier (proprietary trading for example) and activities that take risk out of the system (custodians, vendor processing utilities, or advisers, for example)".
Value in 2015 will bifurcate into risk assumption and risk mitigation; and leading firms will capitalize on this apparent paradox. Ultimately, the middle has the most to lose in this new environment.
The Indian Financial market has seen transformation over the last decade and is one of the mature markets of the world. The market has seen phenomenal growth, which includes facilitating transparency and flexibility through introduction of various instruments and systems. But the high level of risks involved continues to be the deterrent factor. Also there is a lot desired in terms of regulations and government control on the market.
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IBM FSS Asean/SA Director Swarup Choudhury says, "Transparency and speed will be critical for an emerging market like India where the volatility of the market is high. Alliances and collaboration will play a pivotal role in the coming years, the signs of which are already evident in the financial structure. But eventually what will make the difference is the Indian customer who will demand innovation in terms of products or services, demand investments and specialization."
"There will be significant change as today's global market structures mature and take on a very different shape over the next decade. As a result, far greater levels of sophistication, speed and flexibility will be required just to stay in the game," said Managing Director and Partner, and global head of algorithmic trading for Goldman Sachs Jana Hale.
"Clients will demand more choice and even more customized information," said First Vice President, Head of Global Operations Strategies and Solutions at Merrill Lynch Investment Managers Sanjay Vatsa. "Firms will need much deeper client insight to create meaningful client interactions - but achieving this depends on being focused on your specific domain. Being generic just won't work anymore - specialisation is key."
Capital Migrates to Indexed FundsPushed by marketplace transparency and the velocity of IT driven trading engines, the roles of many major industry players will morph, merge or die out in the coming years. Excessive agency profits will evaporate as automation replaces traders. Actively managed funds - currently 70 per cent of worldwide assets under management - will see a huge outflow of capital as investors look to passive, indexed funds for same-size returns. Many regional broker/dealers will be acquired by universal banks in a push to achieve greater scale.
IBM found five key drivers of change and implications for industry:
Fully Electronic Markets Zap the MiddlemenAs market electronification extends to fixed income and derivatives, clients will increasingly refuse to pay premium commissions for simple transactions. With almost limitless electronic access to market information, clients will perform their own investment research. Survey respondents, on average, expect to organize around industries versus product silos.
The Separation of 'Alpha' and 'Beta'Today, roughly 70 per cent of worldwide assets are in the form of traditional long-only, actively managed investments (most commonly, mutual funds). These products currently bundle alpha (instruments that seek to outperform market indices) with beta (instruments that aim to match the return of major market indices, such as the S&P 500). In the future, investors (both retail and institutional) will be less willing to pay alpha fees for beta returns, and the way that funds are priced and managed will have to change.
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Ongoing Challenge: Regulatory ComplianceNot surprisingly, for the buy side, processors and the sell side alike, regulatory burdens were at the top of the list of both external and internal challenges. On an average, financial markets managers spend 20 to 30 per cent of their time handling regulatory requirements; this is expected to continue into the foreseeable future.
Jockeying for Position: Short-term Advantage for the Buy SideThe buy side is likely to dominate in the short term, driven largely by hedge fund growth. But, over time, investors will increasingly demand access to better asset/liability matching.
Competitive Advantage: Client Relationships Plus InnovationWhatever a firm's size, seizing emerging growth opportunities will require deeper client relationships and a sharper focus on innovation. Regardless of their specific industry roles, respondents recognized the need to build strong client relationships and create differentiated products as the coming decade's top two most important sources of competitive advantage. Financial markets firms will have to create and sustain a culture of ongoing innovation to gain a better understanding of client needs and make the most of this well recognized source of competitive advantage.
Who is Poised for Success?Overall, survey respondents expect scale to be a top competitive advantage in the coming decade. Because of universal banks' diversified offerings, client base and distribution breadth, their scale potential was cited as a significant edge. For those firms that achieve efficiency through scale, aiming for other important scale benefits - such as greater scope, depth and breadth - will prove vital to seizing opportunities and combating margin pressures.
Study methodology:The IBM Institute for Business Value (IBV) and the EIU surveyed 402 business leaders from 296 financial markets firms. Financial markets firms include broker dealers, universal banks, asset managers, hedge funds, plan sponsors, custodians, exchanges and clearing firms.
Sixty-six percent of business leaders are C-level or divisional head with the remainder Director, SVP or VP level. Qualitative interviews were conducted with 130 executives and a survey of 272 executives was performed in partnership with the EIU.
The interviews and survey spanned three geographies (37 per cent from the US, 32 per cent from Europe and 31 per cent from Asia). Surveyed segments included:
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