OPINION: The Three Most Dangerous Words in Finance

Shanny Basar

“I remember when” have to be the three most dangerous words in finance. Whenever a panel of sellside and buyside get together to talk about the problems they are facing, they always reminisce on what it was like when they started in the industry.

On the sellside they hark back to days when they began trading and banks employed a huge salesforce to maintain an originate-and-distribute business model without remembering how expensive and inefficient or risky this was. On the buyside they remember the halcyon days when they could trade whatever size they wanted at exactly the price they wanted without remembering the occasions when the sellside trader decided not to pick up their phone.

It has been eight years since the financial crisis and yet there are still discussions on the reduction in fixed income liquidity without the necessary changes in business models or the necessary changes in behaviour. The sellside has been slow to move from a principal to an agency model and the buyside has been slow to embrace electronic bond trading and take more responsibility for making, as well as taking, prices.

Everyone is familiar with difference in structure between the fixed income and the equities markets, where a few bonds are very liquid but there is a long tail which does not trade very often. However Chris Anderson wrote his famous article, called ‘The Long Tail’ back in 2004, when he was editor of Wired magazine,

Anderson wrote about Netflix, which he used as an example of achieving success story through aggregating dispersed audiences. He said: “What matters is not where customers are, or even how many of them are seeking a particular title, but only that some number of them exist, anywhere. As a result, almost anything is worth offering on the off-chance it will find a buyer.”

Netflix uses recommendations to drive demand. “Long Tail business can treat consumers as individuals, offering mass customization as an alternative to mass-market fare,” wrote Anderson.

Netflix is just one example of an industry that is decades ahead of the financial services in using technology to serve its client base. There are signs of hope as Algomi is using a social network approach to match axes in the bond market while BlackRock has started to pair young traders with more experienced staff to use electronic trading in new ways.

Supurna VedBrat, BlackRock’s deputy head of trading, told Business Insider this month: “Your 25-year-old may come up with a brilliant idea that somebody with 20 years’ experience may not come up with just because they’ve been so attuned to the status quo.”

Ben Carlson writes on his blog, A Wealth of Common Sense, about reading “Only the Paranoid Survive” by Andy Grove, the former chief executive of Intel, who passed away this week. He quotes two paragraphs on how Grove decides to change the firm’s failing strategy in a discussion with chairman, Gordon Moore:

“I looked out the window at the Ferris Wheel of the Great America amusement park revolving in the distance, then I turned back to Gordon and asked, “If we got kicked out and the board brought in a new CEO, what do you think he would do?” Gordon answered without hesitation, “He would get us out of memories.” I stared at him, numb, then said, “Why don’t you and I walk out the door, come back in and do it ourselves?”

If existing management want to keep their jobs when the basics of the business are undergoing profound change, they must adopt an outsider’s intellectual objectivity. They must do what they need to do to get through the strategic inflection point unfettered by any emotional attachment to the past. That’s what Gordon and I had to do when we figuratively went out the door, stomped out our cigarettes and returned to the job.”

His advice would be to stop saying ““I remember when”.

Featured image via Granik/Dollar Photo Club

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