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Advancing with the Advances in this Digital World 1.0


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Rapid advances in information technology are enabling more entities to gain access to larger amounts of rich information at lower cost, and the impact has been felt across numerous industries” — Paul Ebeling

In the financial markets, it has been Key for investment banks to control all aspects of the value chain from origination to distribution to dealing in order to maintain a competitive edge.

Proprietary access to information placed the balance of power in their hands.

But increases in processing power and bandwidth have allowed information to flow more easily and cheaply, particularly in securities pricing and supply, but also in the field of research and information-based investing.

With increased electronic trading in some OTC asset classes such as rates and FX, in which dealers are being forced to supply prices on a RFS (request-for-stream) basis without the benefit of last-look, the information advantage is shifting to the clients, who can see just as many or more prices as the dealer.

As a result, the entire competitive landscape is changing.

For example: the market-making universe has expanded to include high-frequency trading firms, hedge funds, and even asset managers. OTC markets are being forced onto exchanges, with new execution venues such as SEFs further undermining the banks’ monopoly on the price-discovery process.

In the case of securities inventory and supply, dealers have withdrawn from markets in which it is too expensive to warehouse, and assets have shifted from dealer balance sheets into buy-side accounts held at securities-services firms and trust banks, providing these players with critical insight into secondary-market flows.

At the same time primary markets are being penetrated by large asset managers, boutique investment banks like ours, regional banks, and private-equity firms.

Some large asset managers want to ensure that corporations are issuing the securities they want to invest in, rather than the securities that banks want to structure.

Securities deal terms and conditions have long been logged and registered with 3rd-party providers, and these data assets are today being acquired by nonbank entities that want to gain leverage in the origination market.

Finally, information-services firms are looking to digitally deliver a spectrum of data and analytics, workflow tools, and information-based products to a broad audience.

CMIB is no exception. The last two years have witnessed a data explosion, and the amount of data is expected to grow another tenfold in the next six years. A sevenfold increase in mobile penetration over the past four years is also having a profound effect.

This acceleration in innovation comes at a time when the CMIB (Capital Markets and Investment Banking) industry is most vulnerable.

Traditionally, investment banks have been shielded by their regulatory status, their unique ability to deploy risk capital, their unrivaled understanding of and ability to serve clients, their ability to attract the best talent, and the universal belief that they are the trusted agents of a complex global financial system.

But these foundational pillars are beginning to crumble.

Regulatory advantage has turned to disadvantage as sustained pressure continues to take its toll on the traditional operating model.

Risk capital now comes at a painful price.

Cost-cutting, unbundling, and ring-fencing undermine the ability to serve clients. The global financial crisis and subsequent scandals have damaged banks’ reputations as trusted institutions.

In short, the information advantage that investment banks have traditionally enjoyed is being eroded at the very moment when information technology is entering a new evolutionary phase.

Digital advances are facilitating the flow of information away from banks and into new channels. These advances are also allowing data to be created and controlled by nonbank entities.

Some CMIB firms see the handwriting on the wall and are implementing measures to stay ahead of the curve. For example, they are leveraging their unique networks and ability to standardize disparate sources of OTC market data to offer agency-like execution services to clients who want access to diverse pools of liquidity.

Other firms are adapting too slowly, if at all.

Investment banks will need to choose where on the value chain they wish to focus. But with digital advances come digital opportunities. Stay tuned…

Have a prosperous day, Keep the Faith!

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Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he is the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.