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Wednesday, June 21, 2006

The Trader is Dead, Long Live the Trader!


Just finished a great research report from IBM Business Consulting Services regarding what they called a "Financial markets renaissance." I think their assessment is spot on in many regards. Of particular note, is the role risk will play in defining the financial institutions of the future.

They argue that firms have long benefited from the edge provided by proprietary information access and market insight, but these advantages will come under significant pressure over the next decade as two inexorable trends accelerate: transparency and speed. As these two forces approach their limits – transparency can’t exceed the point at which everyone knows everything, and speed can’t move beyond the instantaneous – many of today’s profit engines will stall, while new value engines will begin firing on all cylinders.

In the not-too-distant-future, firms must be able to succeed in an environment where analysis, not knowledge, is the value creator, and where it’s not seconds that count, but milliseconds. Power will shift from the traders who have benefited from merely facilitating transactions to the buyers and sellers that take positions on either end of the trade, and the way that firms create value will likely experience a renaissance as transformational as anything the industry has ever witnessed.

The fundamental task for firms going forward will be to develop a clear perspective on risk. Value will be created in two ways: by effectively assuming and managing risk, or by mitigating risk, either by taking it out of the overall system, or by reducing it for their clients. Today, we characterize industry segments in terms of buy side, sell side and processors out of convenience. However, as value bifurcates on the risk dimension, this terminology may eventually become irrelevant.

Posted by Trade Monkey :: 9:26 PM :: 0 comments Perma-Link

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