The data geeks are taking over Wall Street

Freaks and geeks

Wall Street is changing, fast.

Investment banks are having a torrid time. Investors are in the ascendancy. Technology is changing everything.

Boston Consulting Group tackled some of these issues in a big report on the capital-markets and investment-banking industry on Tuesday.

One of the interesting takeaways is that investment banks are now in an information business, rather than a capital business.

In times gone by, big banks had big balance sheets, and would take big positions in the markets. Those days are over, as post-crisis regulations have crimped their ability to put their balance sheets to work in the same way.

That has coincided with changes in market structure. More and more asset classes are becoming transparent and standardised, and are shifting to electronic trading platforms. That creates a huge amount of data, and now banks need to think about how to make use of that. Here is BCG (emphasis ours):

The role of capital itself is changing. Escalating capital costs, occurring simultaneously with the growth of buy-side assets and revenues, indicate that the industry is moving toward leveraging benchmarks and other index products aimed at passive investors. Both the ability to discover liquidity and the demand for risk transformation services are becoming less dependent on capital. If investment banks are to compete, they must recognise their ability to generate revenues as information companies.

There is a big problem, though: The banks don’t typically own that financial data. Instead, information providers and exchanges do. That puts these companies in a strong position to grow.

BCG estimates that growth in electronic trading, the use of central clearing, and increased demand for market information and analytics will drive the revenue pool for information providers and exchanges to $125 billion by 2020. That would represent 19% of the total revenue pool, up from just 8% in 2006.

It doesn’t end there. Information providers and trading venues have the potential to expand to new business lines, potentially competing with investment banks.

Here is BCG (emphasis ours):

Very few elements of the value chain will be off-limits to information service providers and to exchanges. There will be a greater push for liquidity to form on trading venues such as swap execution facilities. Exchanges will focus more on bolstering intellectual-property assets and on expanding their post-trade capabilities. As the role of the human trader declines, information service providers will cease to give away desktop applications and software in the hope of generating demand for chargeable data. As machine-to-machine trading proliferates, these providers will seek out new opportunities across the technology stack. There will be a greater focus on diversifying and developing dormant intellectual property.

The chart below shows the potential for information providers and trading venues to move into adjacent business lines. Core business lines for different financial institutions are in green, and new potential growth fields are in blue and yellow.

Information service providers could end up having a finger in every pie on Wall Street. The geeks are taking over Wall Street.

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