Human and Machine-Rise of the Cyborg: The Cycle of Voice Trading

Celent has explored voice trading in Human & Machine-Rise of the Cyborg: The Cycle of Voice Trading, published yesterday. In this piece, we look at the power of voice trading as well as the business drivers, challenges and forces that are driving change in voice communication, collaboration and voice market engagement.

Celent believes that voice is a key channel that will remain relevant and will work more seamlessly with electronic and data channels in the coming years. A move toward unified communication approach and advances in technologies, combined with a challenging business environment, are reshaping the modern trading desk. Cost cutting, front office effectiveness, gleaning better insight into customer behaviour combined with digital automation are pushing this frontier forward. Voice trading remains the major channel for transferring risk, across asset classes, yet remains a challenge due to the difficulties in leveraging this unstructured data set.

Advances in both preparing and leveraging data for advanced analytics are creating a demand for business insights-the demand for better data is ever growing. Firms are beginning to leverage advanced data tools for not only risk mitigation and regulatory requirements, but are creating front office opportunities for better counterparty engagement and communication.

Fintech continues to advance in the capital markets and the implications are profound for incumbent players. Firms that effectively leverage the full spectrum of innovation available are becoming more streamlined and more effective. The overarching need for business model evolution and the importance of technology in the markets continues to ramp up. As one example,last week alternative dealer Citadel Securities hired Microsoft COO to be the new CEO of it electronic market making business.

We are surrounded by advances in voice technology for interacting with machines in our life in general. We are getting comfortable with Apple’s Siri on mobile, and Amazon's Echo in our homes. Similar technologies have advanced in areas outside the capital markets, but leading firms are trying to leverage voice data for better insight, engagement, and automation. While we are nowhere near Robotic Stingray Powered by Heart Cells from Rats published in last week’s WSJ, in merging machine and biological elements we are heading more into an era of the cyborg-where capital market participants will increase their direct engagement with machines via voice interaction.

Balancing the effect of automation on workforce

In the spirit of the recent Brexit discussions, I would like to shed some light on another matter of broader economic and social significance that will have repercussions for the financial services and capital markets in the long run as well. The ever-increasing emphasis on automation and use of artificial intelligence will help companies streamline their operations and economize on scarce resources. But there is a flip side to the coin that is possibly getting sidelined in the rush to 'robotize' the workplace. I am referring to the need to retrain and absorb the  workforce that is getting replaced due to automation. 
There has been some mention in the media recently of the lack of relevant skills in the Spanish workforce at a time when the rate of unemployment is above 20%. Companies are struggling to find workers with the right training. Similarly, in emerging markets such as India and Indonesia, the high rate of population growth and the high proportion of younger people means that there is an urgent requirement for jobs, and before that for the right training to make the youth employable. Spain's example shows that emerging markets cannot take employment creation for granted. The rate at which the population of India is growing means that it needs to create employment at a rate only China has been able to match in human history. China grew on the back of a manufacturing boom over three decades. India is mainly a service economy that is now dealing with the after-effects of the global financial crisis and growing automation. Its struggle to encorage the manufacturing sector and provide employment opportunities has been evident in the last year. Other emerging markets such as Nigeria, Indonesia and Pakistan are in a similar quandry. 
From a financial market point of view, automation obviously has benefits, and Celent has always been a strong advocate of the same. But in the long run, there is a need to provide alternatives to the workforce both in mature and developing economies, without which there would be a dampening effect on economic growth and market performance. Jobless growth can only take us so far.

Post-Brexit questions loom over Europe

The post-Brexit environment is still quite hazy, but the politicians and regulators in the EU are trying to lay markers for future discussions and negotiations. There have been several comments that betray a fear of further demands for exits from  the EU by the politicians and citizens of other countries that have high levels of Euro-scepticism, such as the Netherlands, France and Greece. 
The French president recently stated that clearing for Euro-denominated securities would no longer happen in London and this "could serve as a lesson" to those who are questioning the need for the EU. Strong words indeed for a market that currently gets jittery at the drop of a hat. In a similar move, the president of the German financial regulator, BaFin, has  also expressed doubts on the possibility of the LSE-DB merger if the resultant entity is based in London. The exchanges themselves have mentioned their intention to go on inspite of the added complexity due to Brexit, but I am sure they are keeping an eye on the political headwinds that are developing around them.
On their part, the British politicians and regulators are trying to calm the markets down and lull them into believing that little has changed in the aftermath of Brexit. The desire to delay invoking Article 50 to officially confirm UK's demand for exit is an example of this strategy, although EU leaders are opposed to this move. The claim by the politicans who supported Leave that there would not be any major and immediate economic or financial change after the referendum is another attempt of this nature.
While both these parties would probably be interested in discussing the issues that have arisen behind closed doors, in public they have to make the right noises to ensure damage control. There is also anger and resentment in the EU at the UK's decision and this shows from time to time in some of the comments. The German Chancellor Angela Merkel has a very balanced attitude to Brexit, but she has also conceded that the UK cannot enjoy access to the EU single market the same way as it did earlier, something that was suggested by Boris Johnson. There is a genuine concern in the EU to prevent cherry-picking in this regard. 
The various questions that have arisen post-Brexit will take a while to be answered. But what is clear is that there is going to be a significant parting of ways and the separation is going to be less than amicable, at least in public. For capital market professionals, in this landscape the discussion ends up being about political rather than economic or financial issues, in spite of trying otherwise. The latter have to take a backseat at time like this and this might continue for the weeks and months to come.

A New Black Swan

So the latest Black Swan was spotted in the last few days in the UK when the outcome of the Brexit vote took everyone by surprise. While many are still trying to make sense of the whole situation and figure out what it means for the future, the only thing that is certain at this moment is there will be a lot of uncertainty in the coming weeks, months and possibly years.

In question is the constitutional and political arrangement of the United Kingdom and broader EU, but how is it going to impact the financial services industry? The future of the “bank passport” that allowed financial institutions to do business easily across Europe will be a topic of much interest. Restrictions in ease of doing business might result in them moving out of the UK, and some have already started the process. This would not only result in shifting (if not loss) of banking jobs, but could also balkanize the markets. Technology requirements, for example hosting of data centers within national jurisdictions, could similarly balkanize operations. This would also impact adoption of centralized operations, like cloud services, and slow down the growth of start-up culture and innovation. Balkanized operations and restricted market access would deter or slow down smaller players in designing and launching innovative solutions, and help larger incumbents.

Then there is the question of pan-European regulations and initiatives like Target2 Securities. T2S entailed firms with significant European presence to restructure their operations across Europe. While UK never decided to join the T2S project, firms with European operations were so far busy designing their optimal operational mix within continental Europe. If the UK vote now requires further restructuring that may force them to rethink their current plans and impose additional resource constraints. Also of interest would be the LSE-DB merger; even though both parties have said the deal is not threatened by the vote, politicians might have other ideas.

The political negotiations in the coming weeks would therefore be closely watched as market participants look to navigate their way through the latest developments. All in all the level of complexity and uncertainty in the system has suddenly grown manifold. All blame the Black Swan.

How do you say “Brexit” auf Deutsch?

I was in Frankfurt a couple months back to host a client roundtable and there was a palpable rubbing of hands in anticipation of a possible Brexit. It reminded me of the time I had spent in Frankfurt in the late 1980s, right after university, back when the only real skyscrapers in town belonged to Deutsche Bank. There was a real sense in that era that with the coming together of the European Union in 1992, Frankfurt stood to emerge as a global financial hub.

Obviously, London was to usurp that role. For reasons of language, geography, regulation and infrastructure, that ascendance seems in retrospect to have been inevitable. And yet now, with the UK vote in favor of Brexit, London’s preeminence appears to be at risk.

Jangled announcements of redundancies by a few large banks belie the fact that once the dust settles, financial institutions will shift into a wait and see mode. Yet to say that much remains to be determined is as interesting as saying that the original Star Wars movies were better than the litany of duds that followed.

I hate to fault my friends in Frankfurt, who have fostered the growth of a robust fintech sector and capital markets businesses, for seeing opportunity in the UK decision to step away from the Continent. Schadenfreude is after all, a German word. But I believe that Frankfurt’s aspirations are overdone. Wasn’t it just a few months ago that HSBC and a few other institutions were threatening to decamp Britain for Hong Kong and Singapore? Wisely, they decided to stay. The acquisition of the London Stock Exchange by the Deutsche Börse was another vote of confidence in London.

The ties between the UK and Europe are thick (London is home to second largest community of French citizens after Paris) and mutually beneficial. They are unlikely to be undone by this plebiscite. Yes, the vote will give heart to seccessionists elsewhere in Europe, and increase the fissiparous tendencies (look for another Scottish independence referendum) already present in the UK.

But it’s important to take the long view. The UK has survived, even thrived, in the wake of greater challenges, including strikes, war and the loss of global empire. It is a mature democracy that hosts a financial services hub unrivalled in the world history. Surely it can work through this Brexit.

To Brexit and beyond!

So the Brexit has finally happened. The equity, forex and bond markets are still reeling from the news, the volatility probably caused as much by the fact that Brexit was unexpected as of yesterday night in the UK as by the event itself.
While the overall impact will reveal itself over the next several years, in the next few months the capital markets would have to deal with issues such as the future of the LSE-DB merger. Does it make sense anymore, and if yes, how do the two parties proceed? One would expect that now there would be political pressure to ensure that trading and jobs do not move away from either London or Frankfurt. Keeping all stakeholders happy would be a more complicated affair, although it could still be done.
EU wide market infrastructure regulations such as T2S and MiFID II would also now be seen in a new light. London was seen as the financial capital of Europe. The EU would now have to proceed with these significant changes at a time when the UK is preparing to exit, and is weighing its options in terms of how best to deal with the rest of Europe. It could take a middle ground as Switzerland has taken, or position itself even further away with more legal and policy independence but less overlap with the European capital markets.
In an earlier blog that considered the possibility of Brexit, I stated that technologically this might be the best time for an event such as the Brexit. Technology is more advanced and we are better connected than ever before across nations and continents. However, undoubtedly there will still be significant impact from an economic, financial and demographic point of view. As always, there will be winners and losers. As a neutral, one hopes that the people in the UK are able to achieve the goals they had envisioned in making this decision.

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