Marcus Cake

IBM’s Insitute for Business value has released a new study entitled “The trade is dead, long live the trader! A financial markets renaissance. If you are interested in financial markets, this is an essential read. The first two paragraphs of the IBM report are extracted below for your convenience.

“In the face of commoditization and fierce competition, financial markets firms have continued to thrive by innovating and hustling, leading to an overall 15 percent return on equity (ROE) over the last decade, compared to 8.7 percent ROE for the average company. Firms have long benefited from the edge provided by proprietary information access and market insight, but these advantages will come under significant pressure over the next decade as two inexorable trends accelerate: transparency and speed.

As these two forces approach their limits – transparency can’t exceed the point at which everyone knows everything, and speed can’t move beyond the instantaneous – many of today’s profit engines will stall, while new value engines will begin firing on all cylinders. Firms must be able to succeed in an environment where analysis, not knowledge, is the value creator, and where it’s not seconds that count, but milliseconds. Power will shift from the traders who have benefited from merely facilitating transactions to the buyers and sellers who take positions on either end of the trade, and that which is most highly prized in financial markets – the ability to create value – is likely to experience a renaissance as transformational as anything the industry has ever witnessed.”

Click here to read the executive summary or here to download the full IBM report.

An Article in Guardian Unlimited on 17th April 2006 titled Middlemen will feel the squeeze in markets consolidation, predicts IBM report offered the following additional comments on the report.

“Fewer but larger stock exchanges in Europe’s increasingly consolidated financial hubs are part of a new world envisaged in an IBM report on how the continent’s capital markets might look in 2015. Retail investors stand to gain most as value is drained away from the middlemen, according to IBM. The report, based on a survey of almost 300 exchanges, brokerages, regulators and hedge funds, suggested the world’s financial markets are about to move into a transformational phase with ‘a rate of change unseen since the 1970s’ … Another IBM consultant, Suzanne Dence, said Europe’s stock exchanges would also be forced to rapidly adapt, as well as consolidate, in the face of greater competition. “While exchanges provide a level of unique value in providing surety about the counter-party that you are dealing with, much of the rest of their service is little more than a glorified eBay.”

The opportunity for online social networks in financial markets is becoming clear. An Ebay type business with a focus on the financial market is likely to emerge. Such an online business will need to have a sustainable competitive advantage in the emerging open source world. It must also be able to survive the challenges from current industry players struggling to adapt and government faced with an industry increasingly difficult to regulate.