Till Guldimann, vice-chairman of financial services solutions provider SunGard, outlines the major changes in capital markets and the accompanying technology trends. Interview by Parveen Bansal. With a focus on the company’s long-term strategy, Till Guldimann sees a dynamic future for the capital markets. Each of the three main market segments – institutional asset managers, intermediaries (brokers, dealers and some corporate treasuries) and private investors – faces a number of key inter-related challenges.
Economies of scale
Institutional investors’ business totals $16,000bn in the US alone, and a key challenge is how to achieve economies of scale. Mr Guldimann notes that while there has been considerable consolidation in back office processing, for example in custody and settlement, this cannot be done in the front office – the trading desks.
“The difficulty for the front office [portfolio decision-makers] is that it cannot be scaled because to beat the market they need to be agile and small,” says Mr Guldimann, who was vice-chairman of Infinity Financial Technology before its 1998 acquisition by SunGard, and has been watching the industry for more than 25 years. “So portfolio management remains fragmented, with the exception of index funds, where there is no decision to be made on what should be in the portfolio.”
The increase in direct access to electronic communications networks (ECNs) is another hurdle. “Institutional investors can access markets directly, so brokers are increasingly being used just to handle clearing and settlement,” says Mr Guldimann, who spent 21 years at JP Morgan before his job at Infinity, latterly as head of JP Morgan’s global research group, where he developed its risk management systems. “And because the institutional investors can electronically initiate trades, they now need to implement order management systems,” he adds, noting that standardisation of FIX messaging – an industry standard messaging system between back office users, in the form of brokers and banks, and institutional investors – has been an important factor driving this trend.
Network headaches
Increasing use of ECNs is a major cause of headache for intermediaries. As clients increasingly access ECNs directly, intermediaries are losing
market-making business. This is most pronounced in the equities markets but is also starting to happen in fixed income markets. “One of the brokers’ primary functions or reasons for existence is disappearing and they have to look for new sources of revenue,” says Mr Guldimann. This, he says, has been borne out by “the expansion of OTC [over-the-counter] derivatives, particularly credit derivatives, which are all far from being accessible via ECNs”. He also highlights renewed interest in the energy space, which is slowly picking up again after the failure of Enron.
The third tend that is changing the business of institutional investors is the emergence and popularity of the hedge fund market. The popularity of hedge funds – now growing at over 25% a year – is a catalyst for major change in the intermediary business, since intermediaries have to provide a whole new set of services and products – in other words, prime brokerage.
“Most hedge funds have no back office systems themselves – these are outsourced; and most hedge funds require credit to borrow securities and leverage their bets,” points out Mr Guldimann.
Wealth management competition
Regulatory changes, and the resulting need for compliance and changed governance are also demanding a lot from the market, but two more challenges have arisen in the wealth management sector, which has grown from just $4000bn in financial assets held by households in 1980 to $16,000bn in the US today.
“There is huge competition between the distributors of products – the banks – and the brokers,” says Mr Guldimann. “The banks have an advantage over brokers because of their broader relationship with customers, through the range of products they offer. The brokers, on the other hand, have moved from providing access to the markets to a broader distribution role,” he says. “Bring in the life insurers and you get three types of institutions trying to get a piece of the growing pie; so in the end this brings us back to the first challenge.”
According to Mr Guldimann, distribution, particularly for the life insurance business, is an important issue for two reasons. “Typically, life insurance products are long-lived, lasting for 30 to 40 years.” But new products are developed each year, he explains. “Life insurers have to deal with the cost of maintaining very old systems and keeping up with new developments all the time.”
“There was an attempt to merge the life insurers and banks in Europe, the so-called bancassurance model,” he adds. “But this did not work very well because people don’t think of life insurance as asset investment. It has traditionally been sold very differently.” Now the providers are trying to separate out the business again, despite having already invested substantial amounts of money in trying to make the bancassurance model work.
Alongside the rising competition in wealth management falls personalisation of service. In the old days, private investors used to have a personal relationship with their banker or broker. Now, with the internet and massive amounts of data on each consumer, the banks have to be able to personalise the products while providing the service to a much broader range of people. Mr Guldimann notes that retailers such as Amazon are probably the most experienced at the game of delivering personalised service that consumers are beginning to demand of their financial services providers. “This is not about replacing the salesperson,” says Mr. Guldimann. “It’s about making the salesperson much more efficient and effective, with instant access to personalised data and automated suggestions”
All these challenges are effecting changes in the business and in how and which technology is used. Nowadays, says Mr Guldimann, there is an abundance of information on consumers. “It used to be of competitive advantage to have information early,” he says. “Today, there is little advantage to be gained as information is easily available to all. Now, to create competitive advantage you have to use this information faster. This creates the demand for faster processing of information.” Data visualisation tools to help deal with the avalanche of information bombarding decision-makers have become more important. “There is a growing trend to use graphics so that the mind can quickly focus on what matters, rather than having to trawl through the detail.”
Faster decision-making
The availability of faster processing power and the ability to automate decision-making is changing the way business is done. Mr Guldimann cites the example of equity trading, large parts of which are already fully automated. “The time-cycle of automated trades is in the order of milliseconds – much faster than the human mind can operate,” he says. “Just as blue-collar jobs were replaced by automation, today it is about automating white collar jobs. At the high end, this is done by using artificial intelligence and at the basic level, this is done using workflow management tools. Technology is now available to accelerate decision-making dramatically.”
The network effect is another key driver in technology use and changing business. “Business is getting global and at the same time businesses are specialising so that there are fewer, more highly specialised institutions delivering a particular service, e.g. global custodians, OTC derivatives market makers,” says Mr Guldimann. “So when you want anything done, you have to deal with a lot more specialists, which means that the whole industry is highly networked. There is intrinsically more risk as well as economies of scale.”
Mr Guldimann notes that this trend is already evident in other industry sectors, citing the example of an Asian mobile phone battery maker that commands 60% of the global market share. He emphasises that as networks become more important, businesses have to be careful about who they are depending on, where they fit into the network and be aware of how stable the network is.
One way or another, the trends towards faster, more automated decision-making and the network effect are visible across the institutional asset management, intermediary and private investor sectors. Mr Guldimann concludes that not only is change constant, but it also creates vast opportunities for those who lead. “There will always be consolidation at different spots in the supply chain,” he says. “The question is: will you eat or are you lunch? Darwin noticed that centuries ago.”
