Expert Insights The future of trading floors Compete on cloud platforms with a remote workforce Experts on this topic Søren F. Mortensen Søren brings over 25 years of financial markets experience delivering mission critical transformational projects for IBM Director Global financial institutions. His responsibilities include complex Financial Markets transformations of financial institutions and innovation in linkedin.com/in/sorenfmortensen/ financial markets. In addition to his role at IBM, Søren has, [email protected] since January 2017, been an advisor to the Consultative Working Group of ESMA’s Financial Innovation Standing Committee (FISC), advising European regulators on technology and innovation. He is also on the advisory board of the EDM Council. Tina Naser Tina is an organizational strategy expert with over 20 years of experience designing and executing sustainable Partner and Practice Leader, people strategies at the intersection of digital and Enterprise Strategy business transformation. Tina works with clients to design IBM Global Business Services and bring to life their future workforce, workplace, and linkedin.com/in/tinanaser/ ways of working, with a focus on banking and financial [email protected] markets. This includes strategy activation, defining the future of work, designing and implementing resilient operating models, and transforming culture to be oriented around purpose, innovation, agility, and growth. Laura Cheung Laura is an Associate Partner in IBM’s strategy consulting practice, working with clients to understand and ride the Laura Cheung waves of ongoing disruptive change in their markets. She is Associate Partner, experienced in shaping and executing multiyear strategies Enterprise Strategy and transformation journeys. Laura draws upon a prior IBM Global Business Services career in architecture to help others navigate complex linkedin.com/in/laura-cheung- systems and effect real change. ba796317/ [email protected] Rethinking trading floor operations and ways of working is a necessity. Key takeaways A mindset shift empowers The realization of a problem talent to leverage exponential Trading practices weakened over the last technologies decade, questioning the capability of Trading practices are among the most complex in financial existing operations to remain competitive services. Traditionally, centralized and co-located and generate top revenues. Risk-taking operations reflected trading desk needs for face-to-face communication, regulatory demand for management ambitions were dampened by the control (a first-line defense) in risk management, and increasing cost of capital, regulatory technical preferences. restrictions, and unorthodox monetary Yet, the pandemic forced many to move quickly “from policies affecting the mechanics of centralized to anywhere,” which happened without quantitative finance with nearly zero or significant disruptions. The short term was doable as negative interest rates. regulators—understanding the challenges—eased on their requirements. However, this might not be sustainable for the long term without a fundamental review of trading Doubling down on talent and technology room practices. Advanced institutions envision the new trading floor as a platform underpinned The transformational journey to the trading floor of the future will require the following: (1) flexible workplace by two critical innovations. The first is to norms to attract and retain talent now accustomed to reimagine culture and ways of working. remote work—across all generations; (2) the cultivation of The second is to develop secured and new business approaches and architectures to advance cloud adoption of data and AI services; and (3) a refresh of regulated environments for decentralized risk and compliance procedures to keep pace with the modeling and the testing of machine virtualization of tasks on flexible operations. learning to explore new, unconventional trading ideas with alternative datasets. Decentralized access to trading models To boost competitiveness and address concerns of operational resilience following the COVID-19 pandemic, trading floors can extend beyond physical rooms and onto new trading platforms. The future of trading is underpinned by virtualized access to strong data and artificial intelligence (AI) foundations on open hybrid multicloud architectures, which can be accessed from decentralized locations. 1 Looking through the lens of time, the future of trading will Breaking “out of the box” be very different (see Figure 1). This transformation will allow trading institutions to improve: Trading is facing a progressive decline in competitiveness that began with the impact of the 2008 global financial – Agility. Decouple workloads to run on the most crisis on the structure of capital markets. Trading floors appropriate technical infrastructure. were asked to “confine” their practices to a narrower space – Control. Create operational consistency across the in response to tighter business rules, unconventional trading floor based on necessity and preference, with macro-economic conditions, and disintermediating workloads optimized for security, compliance, and technologies. latency. Regulators made risk-taking an unprofitable proposition – Flexibility. Adapt trading operations to match workload addressing a more prudent risk management expectation. capacity and workforce requirements. Unorthodox monetary policies saved the global economy— – Scalability. Support working conditions to sustain current at least temporarily—but dampened the economics of and future trading volumes and workforce demands. quantitative desks. The lower-volatility framework – User experience. Meet customer expectations and create narrowed most bid-ask spreads, countering profit-making a more responsive engagement with trading floors. on growing volumes. Figure 1 Trading floor transformation Operations become decentralized, electronic, and based on insights and algorithms. Trading will be less Trading will be more From anywhere Centralized Flexible workforce according to function, seniority, necessity Electronic Direct Electronic execution counters margins compression Insights-based Sales-based Contextualized inside client ecosystems Quantitative Algorithmic Co-development of trading algorithms with alternative data Source: IBM Institute for Business Value. 2 To succeed, trading desks need to embrace a cultural shift. The simplification of pay-offs, and the settlement of over Quantitative desks have also started embracing new the counter (OTC) operations to centralized clearing modeling techniques based on machine learning. However, houses, contributed to a significant contraction of trading trading floors have found that they often lack enough fees. Finally, the ban on proprietary trading constrained competencies in data science and access to alternative profit-seeking and forced most investment banks to scale datasets to gain sufficient time to market for trading of back operations accordingly. The glamour of Wall Street insights. In 2019, Goldman Sachs announced the intention faded, and talent was lured to Big Tech and start-ups to recruit more than 100 engineers (coders and data embracing data science and new exponential technologies. scientists) to join the trading floor and help automate part Global fintech investment reached $44 billion in 2020, an of the bank’s trading business.3 overall increase of 14% from 2019.1 To regain higher competitiveness, traders must break “out of the box.” Financial markets are moving toward more Putting the “tech” in fintech standardized products, which intrinsically will have lower margins. Therefore, to maintain and grow revenues they While the industry started to scale back, trading floors need to increase the volume traded, which is done by responded by modernizing their trading infrastructure with entering new geographies, attracting new clients with electronic trading. According to The Financial Times, most fintech channels, and having more cross-asset play. mainstream government bond trading is now electronic, and inroads into more traditional market segments, such as This cannot be done without fintech innovation. Financial corporate debt, are now trading electronically. At the end of institutions can reclaim the top spot with new value 2020, 38% of investment grade and 27% of high-yield propositions based on flexibility and work-life balance (see paper traded electronically, almost double from 2 years Figure 2), contextualization into ecosystems, and higher 2 earlier. ethical standards. Enabling a flexible workforce may appeal to new talent, countering the competitiveness of non- For the last half-century, capital markets have grown more banking players. institutionalized, while 2020 signaled a sudden reversal from the trend following an increased participation of retail investors riding an all-time high stock market. Fintech innovation and smartphones have made direct trading an all-day-long opportunity, demanding higher regulatory scrutiny of the suitability and appropriateness of digital offers engaging a non-professional population. This has increased the velocity and market relevance of non- institutional trades compared to the previous surge in retail interest preceding the dot.com bubble in the 1990s. Social media and zero-commission market access have also brought changes in market sentiment. Trading floors are asked to incorporate new behavioral patterns in their trading models amid novel ethical and regulatory considerations. 3