Winners and losers in finance

Changing market conditions offer banks and investors great opportunities, says Matteo Cassina, head of all business lines at the online multi-asset trading and investment specialist Saxo Bank


Canary Wharf

With so much rapid change in the world of trading and financial services, this is an interesting time to look at trading and the markets.

On the one hand, markets appear to be entering a change in the cycle in terms of increased volatility and greater economic confidence. Trading, on the other hand, is at the beginning of a secular long-term shift that will irreversibly change the make-up of the market structure and so-called power-sharing among key market participants, principally banks and individual traders. No longer are banks and major financial institutions in the driving seat.

There’s been a transformation over the last 15 to 20 years. Traders used to rely on banks for information about the markets and then they’d also need the banks to access those markets. We are experiencing a democratisation of information. You can now find analyst presentations via live streaming on the public internet, as well as videos of corporate interviews and useful financial information on YouTube. The monolithic position of the banks is being challenged in terms of information they provide and how the trade, based on that information, is being executed.

If you are a budding retail investor, you can now access the markets in the same way that a sophisticated hedge fund manager or institutional investor would do. The trading playing fields have been levelled; therefore private investors are becoming much more self-directed in terms of managing their money assisted through access to the tools which were traditionally only available to professional investors. At Saxo Bank, we are single-mindedly focused on equipping retail investors with the right tools to spot and seize market opportunities.

In many respects, financial markets and the entire world of trading have changed beyond recognition this past decade. However, notwithstanding the electronification of the equity and foreign exchange markets, and proliferation of free information through the internet, what we have today is a highly inefficient market.

The availability of technology has lowered the cost of doing business and a favourable regulatory environment, brought about in part by the original Markets in Financial Instruments Directive (MiFID), has allowed a greater number of players to participate in trading activities in financial markets. This increased competition, along with the developing opportunities for more people to become involved in trading, is to be welcomed.

However, because of the proliferation of trading venues, again due to MiFID, markets are more fragmented than ever, spreads continue to shrink to levels which would have been unimaginable a decade ago, and the cost of doing business in the form of increased regulation and compliance requirements continues to increase. Added to this is the lack of differentiation among market participants who all provide similar services. This means the mandate for change becomes more urgent than ever.

At Saxo Bank, we are single-mindedly focused on equipping retail investors with the right tools to spot and seize market opportunities

Trading is becoming highly commoditised and the participants indistinguishable. There’s a lot of duplication with many players providing the same service. Differentiation is key to adding value. They need to offer more to the customer in terms of information and specialise so they can create distinct, niche products.

From a markets perspective, many of us might be forgiven for being less enthusiastic about the promise of free markets these days, given the high degree of intervention we have seen in financial markets since the crisis of 2008.

This challenge and the need to pump billions of pounds of public money to shore up the banks, created a divide between the markets and the economic fundamentals. It has not only led to investors adapting their behaviour and their performance expectations accordingly, but has also prompted a radical and an inevitable rethink of the trading industry’s business models. Different firms, however, appear to be at different stages of their rethink and many still don’t understand the magnitude of the change taking place.

Some market participants appear to be oblivious to this new reality, continuing to cling on to unprofitable businesses in the hope that once economic recovery materialises, they will see a return to pre-crisis levels of activity. But the savvier players are already identifying the areas in which they have scale and liquidity, and where they can provide value beyond what can be delivered by the competition and change their business models accordingly.

Compare the current situation in trading participants with the mobile phone sector of a few years ago. Nokia continued to do what it had always done, offering the same services, but when Apple entered the market with the iPhone, they completely rethought the mobile phone concept giving it new potential and creating something that is genuinely exciting.

As the balance of power has shifted firmly away from the banks and big institutional traders towards individual traders and retail investors, the trick is to create a better user experience. The invisible hand may have lost some of its ability to influence the markets, but it is already playing a key role in making trading more efficient. Greater competition has led to lower spreads and better prices for end-consumers. The next stage in this highly commoditised but inefficient industry is the removal of overcapacity, with the survival of a handful of key players, which have scale, alongside highly specialised providers able to aggregate services to allow smaller players to retain their client base by outsourcing certain trading activities.

These smaller players are not held back by legacy systems and practices so they can introduce disruptive technologies and disruptive methodologies. They can break down barriers.

The financial services industry is often accused of being too innovative in terms of financial engineering, but it’s lagging behind other industries when it comes to removing inefficiencies and overcapacity to focus on core services. This is about to change.

It’s an exciting time to be in the trading industry, but only if you have understood the mandate for change, and embraced it to the benefit of your business model and clients.

SAXO CAPITAL MARKETS

Saxo Capital Markets UK Limited is a wholly owned subsidiary of Saxo Bank A/S, the parent company of Saxo Bank Group, an international financial services group specialising in trading and investment across global financial markets. Since receiving European bank status in June 2001, Saxo Bank A/S has rapidly become a leading presence in online trading thanks to its focus on client service, competitive pricing and the development of industry-leading trading platforms. Saxo Capital Markets UK Limited is authorised and regulated by the Financial Conduct Authority. Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.