The decimalisation of equity markets nearly 20 years ago transformed financial markets by permanently altering the way investment banks interact with their clients.
The electronification of equity trading then spawned a revolution of automated systems followed by a consolidation of data providers. What followed is sometimes referred to as the golden age of financial technology, though in reality that age was transitional in nature; many institutions were left with bloated infrastructures, over staffed and heavily exposed to unforeseen risks to come.
Those investments have left many firms unable to respond quickly to the changing marketplace of 2016, an environment where alpha is transitory, constantly moving and morphing. Product complexity, massive data requirements and emerging tech ecosystems make linear product models obsolete. TABB Group’s latest research – “Competitive Adaptability in an Opaque Market” – examines the actions today’s market participants must take to stay at the top of their game moving forward, focusing less on speed and more on the ability to adapt to changing environments.
As TABB details in the research, the largest institutions went on an infrastructure spending spree in the early 2000’s to either acquire start-up technology ventures or rebuild in-house solutions in order to stave off the threat of disintermediation. However, the wide adoption of the Internet for financial transactions, the rise of Big Data analytics, and a number of other advances have lowered previous bars of entry in financial services as a whole. In the aftermath of the 2008 crisis, fintech firms used talent from both inside and outside the industry to truly challenge the entrenched business of traditional brokerages.
“Though the well-worn ‘David and Goliath’ analogy is easy to apply to the current disruption of brokerage firms, it is not likely the end result will be a takedown of incumbent firms,” says report co-author and TABB COO Alex Tabb (pictured). “It is more likely to see continued change, with brokers looking to consolidate their businesses to become more agile. Otherwise, the incumbents run the risk of finding themselves reduced to regulated utilities offering commoditised products.”
TABB advises that for capital markets firms to master the present and future environment, they need to be highly agile in their operations. Innovation must include willingness to cast off the legacies that won the last arms race on disruption, opening up collaboration with an experienced partner that can handle each piece of the complex infrastructure puzzle and regulatory requirements across all geographic locations and product lines. With a single primary technology relationship, brokers can concentrate on their core business needs.