It’s no wonder the best and brightest are casting their eye on careers in Silicon Valley instead of Wall Street. At New York University’s Stern School of Business, students are seeking out courses that blend finance, technology and entrepreneurship.
“They want data analytics first and foremost, and they’re much less interested in the pricing of derivatives,” says David Yermack, chairman of the school’s finance department. “Corporate finance as we have taught it is less and less relevant. In a way, we’re at the same risk of disruption as the banks.”
Some industry stalwarts see little choice but to disrupt themselves. For 30 years, the brokers at Icap Plc have traded swaps, U.S. government bonds and other securities for dealers worldwide. On a June afternoon, you can see a vestige of their operation at Icap’s base near London’s Liverpool Street Station. A trader on the interest rates swaps desk jumps up and hollers a bid as he slaps a phone receiver into his palm. Others shout counteroffers, while a pair of apprentices with Sharpies jot numbers on a tote board.
Zoom out, though, and you’ll see some of the surrounding desks are unoccupied. This can’t be chalked up just to electronification. With capital ratios spurring costs on risk-weighted assets and low interest rates squeezing gains, volume has slid along with the unit’s profit margins.
In the fiscal year ended in March, voice-broking accounted for only one-fifth of Icap’s trading operating profit, and in November CEO Michael Spencer made a deal to sell the division to Tullet Prebon Plc for 1.1 billion pounds ($1.4 billion).
Now the interdealer broker is transforming itself from a noisy bazaar into a fintech firm organized largely around its post-trade risk and information business. Later this year, the unit will roll out an offering designed to help banks save money by replacing the outdated systems used to reconcile and validate trading positions with one simple platform.
“Banks are so stressed now,” says Jenny Knott, CEO of post-trade risk at Icap. “Surviving with the current margins isn’t going to be achievable, and regulation is still coming. These guys have to take out costs over the next years. They have to turn stuff off as quickly as possible.”
For all the tumult, some senior bankers are confident their industry will eventually emerge stronger and leaner.
“Imagine what happens when the foot comes off the brake and clients start trading more actively and interest rates start rising,” says Chris Purves, the London-based global co-head of fixed-income rates and credit trading at UBS Group AG, which has scaled back fixed income to concentrate on wealth management. “You’re going to have these battle-hardened, tremendously efficient operations that can scale quickly.”
It’s an optimistic thought. But the big question for the rest of society is whether the financial-services industry will indelibly change its ways. Throughout its history, Wall Street has profited from complexity. During the housing boom in the 2000s, it wrapped relatively simple instruments like mortgages in complicated schemes ostensibly designed to neutralize risk. Economies in Europe and the U.S. continue to endure the reverberations of that frenzy of CDOs and CMOs and CDSs and CDOs squared.