A Tabb Group report published this week makes for
interesting reading as it highlighted the challenges currently
faced by the world’s top investment banks and
The report by Tabb analyst Radi Khasawneh found the
combination of weak markets and heavy regulation has focussed
firms’ minds on short-term profitability and
turned them off the kind of strategic projects that they need
to be thinking about to secure their longer term
"As markets become increasingly order-driven and
competitive, only those firms able to algorithmically automate
cash trading while maintaining profitability will become market
"Specifically, these fixed income dealers need to invest to
revamp, integrate and automate ahead of an accelerated change
looming in market structure," added Khasawneh.
This is not an easy message for the banks but it is one that
they must heed if they are to survive.
Khasawneh goes further in fact and identifies two key
options for banks.
"Two separate camps have emerged among dealers, those who
see the potential for fully electronic execution on
order-driven markets and those that see a renewal of existing
sales/ trading based on updated technology," the report
The possible bifurcation of the market will be fascinating
to watch and it is anyone’s guess at this early
stage who are going to be the winners and losers.
Banks may plead poverty and claim they simply
can’t afford to invest in these kinds of strategic
moves at this time (and some of them would be right) but for
others there is a real opportunity here.
One thing we can be fairly confident about is US and
European interest rates will start to rise again either later
this year or early next and this will likely prompt a surge in
activity from banks, brokers and prop traders, most of whom
have spent much of the last few years twiddling their
Interest rate moves will help those regions’
traders but also the exchanges, not least the main European
short-term rates Liffe, which has taken advantage of the
relatively slow trading this year to shift all of its contracts
over to the technology platform support by the
IntercontinentalExchange which bought Liffe late last year.
Some interest rate movement will help Liffe and start to
payback some of the $8.2billion that ICE spent on Liffe.
Another certainty, unfortunately for the banks, is that
tighter regulation of their activities is here to stay so any
investments need to be made mindful of the regulatory reforms
that are only now starting to take shape.
Particularly topical for brokers is the next round of the
Markets in Financial Instruments Directive, a huge bill that
covers many aspects of the ways that banks and brokers operate
Some traders have been reluctant to engage in the regulatory
debate but it was welcoming this week to see ACI, the trade
body that represents the foreign exchange community, calling on
the Financial Stability Board to ensure global consistency in
its implementation of new FX benchmarks.
ACI said: "Work currently taking place to further harmonise
the various codes of conduct is very helpful in reducing the
risk of ethical arbitrage, and in fostering a functioning
The notion of ethical arbitrage is a new one on me but I
think ACI’s intentions are genuine. The banks they
represent could do worse than taking a leaf out of its book and
working to come to terms with the challenges they face.