Traders feeling the squeeze of technology

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Nick Moules
23rd October 2014

Saxo Markets recently hosted an event focusing on the future of trading and financial markets at The British Museum. We went along to hear about how technology is disrupting this market, its challenges and opportunities, and what it means for the consumer.

Matteo Cassina of Saxo Markets outlined some of the changes in the market since the financial crisis. There is increased competition, tighter regulation and recognition that overcapacity and inefficiency are present, but being weeded out.

Value is the pressure point on the market. There is pressure on pension funds for example to find yield in a record-low interest rate environment. Tellingly, Dr Robert Barnes of Turquoise said 50% of people who have ever lived to 65 are alive today.

The speed of demographic change is posing a huge challenge to fund managers, who naturally are looking at ways to meet the needs of their customers as those drawing a pension live longer. It seems inevitable that where funds cannot find value they will either have to turn to new products or exit the market, such is the scrutiny on fees and low returns.

The typical behaviour of customers, where younger generations are very unlikely to walk into a branch or seek face-to-face help means the army of wealth managers in expensive offices might be numbered. This could create efficiency, but operators could then struggle to differentiate their services.

All this combined with the increasing adoption of open source infrastructure is leading to new entrants seeking to acquire market share – it feels a lot like the personal and business loans markets several years ago.

So as the end consumer we’re caught in a space between trusting established providers and accepting lower returns, or going with younger and leaner operators that could provide better returns.

Barriers to innovation

Ian Morgan of Google outlined the principle challenges that he sees in the financial services industry for incumbents in dealing with disruption:

- Regulation

- Legacy IT systems

- Culture; incumbent operators are typically risk averse and may not be able to effectively integrate innovation.

Matteo Cassani argued that traders are risk takers, with multi-million pound trades taken with minutes to consider impacts, but this is dominated by a short term requirement for profits. He highlighted the need for trading companies to look at their leadership to check that a long term view is being considered though. Typically traders and salesmen end up leading these organisations, whereas the long term view requires someone with more of a strategic and process-driven approach, like in manufacturing, to ensure people are thinking beyond this month’s numbers.

One of the ways large traders are dealing with innovation is to incubate potential disruptors and acquire them. The sheer amount of cash in the industry should ensure this is an effective way of delaying change, but the test will be in giving creative Fin Tech entrepreneurs the freedom to operate in otherwise rigid institutions.

Overall, this debate felt like there was acknowledgement in the industry of the need to change, but that the threat of disruption was not leading to dramatic change just yet. Where existing operators can create efficiency and cut cost at the expense of wholesale investment they will, but the real winners will find a way to retain short term profits and slide in new technology to maximise the value of existing market share.

It could be the last big battle between technology and tradition in financial services, so worth keeping an eye on.

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