Winter is coming for investment banks.
The once-rosy role of the trader—hustling, bustling, and raking in dough—is giving way to a new sort of financier: The technologist. Automation, software, data analysis, and algorithms are taking the workplace by storm as financial firms seek ways to cut costs and manage increasingly dismal revenue results.
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“Unfavorable economic conditions, escalating capital requirements, and stubbornly high costs continue to depress the performance of many investment banks,” opens a recent Boston Consulting Group report on the state of investment banking. The report notes that these firms’ return on equity amounted to 6% last year, a figure that begins to look a lot worse when one considers that costs of capital typically run between 10% to 15%.
Companies like JPMorgan Chase (JPM), Citigroup (C), Credit Suisse (CSGKF), Morgan Stanley (MS), and Goldman Sachs (GS) have already begun to address the dreary situation by recruiting tech talent while slimming down their investment in more traditional functions, like trading. Expect those trends to continue.
If you’re looking for a picture of what the investment banking world will look like in years to come, the Wall Street Journal has an succinct prognostication. In short, robots take jobs, margins droop, and trading floors get jettisoned.
Per the Journal:
Trading will migrate to hedge funds. Jobs in the back office and stock-research departments will be done by machines. The heavy lifting of funding and capital allocation will shift from banks to giant asset managers, pension funds and sovereign-wealth funds.
Pressure on margins will persist, forcing investment banks to unbundle offerings and start charging for services like research and pricing data that they used to give away to win business.
In short, investment banks will be smaller, more specialized and home to technologists instead of traders. Instead of mastering the universe, they will seek to dominate smaller domains.
There’s a machine coup in the making, and it’s unseating the traditional market makers.
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Boston Consulting Group lays out three survival strategies for investment banks. As the Financial Times sums up: (1) “a ‘flow monster’ that has a large balance sheet and lots of trading capacity;” (2) “a niche complex product operator;” and (3) “a regional bank with a corporate or asset management focus.” Everyone else, good luck.
“If investment banks are to compete,” the report says, either glumly or hopefully (depending on your point of view), “they must recognize their ability to generate revenues as information companies.”
“They are losing the battle so far, but that does not mean they will lose the war.”