A chill breeze is blowing, as investment banks face uncertain future

There’s a distinctly chill breeze blowing around trading rooms and back offices, and no amount of Christmas goodwill and merriment will likely make it feel any better.

I don’t want to do an Ebenezer Scrooge here, because HITC readers have every right to enjoy a merry Christmas. But it’s the 'Happy New Year' part that concerns me! My point is that if 2015 was a pretty tough year for financial markets professionals, then I wonder just what’s in store in 2016 ?

Never a day goes by without the headlines alluding to further cutbacks and job losses at the biggest firms. Only this week we had the news that 1,200 front line staff at Morgan Stanley face the chop. It’s a seemingly endless squeeze on the financial sector. So what’s really going on ?

Well, we all know that there’s a regulatory framework now in place which massively adds to business costs, and is preventing firms from doing what they used to do best - punting the markets and positioning for client flows. These days there's a much greater need for firms to conserve 'buffer capital' and restrict the deployment of their balance sheets. In short, costs are higher and revenue growth is limited.

Then there's central banks, like the ECB, still hoovering up assets, and official interest rates at historical lows. In this world, needless to say, investor volumes are way down, and this leaves even less on the table for the investment banks. That’s why fixed income divisions, usually the big drivers of revenues, are sucking wind with no end in sight. And that’s why management has got the knife out. CEOs and management have to appease shareholders, change the business plan PDQ - and try to keep your own jobs intact!

Many of us older hands thought we'd seen it all before - well, we haven’t seen anything like this. The squeeze is simply on (on too many fronts), and there’s still one more train coming down the track - increasing use of electronic trading platforms. I had a colleague who left my bank to go to an electronic platform, and we had lunch recently. And he was feeling so bullish, he was actually buying!

'Mate, you have no idea! We see all the flows out there. It’s massive. And when I visit clients they see me as a partner, not another salesman with his hand out', he told me.

With lesser market liquidity to rely on, clients are dealing directly with each other over platforms, or using them to find better pricing. Yet again the investment banks get cut out of the action. And who sees that changing any time soon ? As technology gets even more efficient, you soon won’t need sales and trading staff at all. It won't be long before we are in danger of extinction!

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