Suzanne Dence isn’t a Cassandra by temperament, but the senior consultant at the IBM Institute for Business Value -- a think tank run by the Armonk, New York based technology giant -- has some chilling predictions for the securities industry circa 2015. In a recent report, “The Trader is Dead, Long Live the Trader!” Dence writes that the 50 percent of today’s trading revenue coming from agency transactions, which, in a recent interview, she described as “largely risk-free skimming” of the markets, will decline to 30 percent -- and produce only slim profits or serve as a loss leader for other business. Market transparency and speed will drive a shift to greater principal trading. Overall, the report predicts that the profitability of investment banking and money management will decline and that alpha will become more difficult to achieve.
The financial organizing principle for the future will be risk management: Some firms will be paid to assume it and others to reduce it. Firms should find their area of expertise along the risk continuum, focus on it and outsource or partner those activities that are not central to the focus.
Which firms will emerge victorious? “Seventy-four percent of the 402 senior-level finance-business leaders we surveyed internationally said they believe the universal banking model will be the most successful and that consolidation will lead to two major universal banks worldwide and two tier- 1 Wall Street brokerages,” says Sarah Diamond, global financial markets leader at the IBM Institute. “We agree with them on consolidation, because scale will become critically important, but we don’t completely agree on the universal model.” She notes that universal banks rarely leverage their many attributes, and that “value is derived as much from specialization as it is from scale.”
