Markets Media Thought Leadership features in-depth, big-picture interviews with top executives in trading, technology and market structure.
For this segment, Markets Media spoke with David Donovan, Senior Vice President of Sapient Global Markets, in a May 26 telephone interview.
Markets Media: What is your current role and responsibilities and what is your career background?
David Donovan: I’ve been at Sapient for 10 years. I am a senior vice president, I run what we call our capital markets portfolio. That’s a global portfolio where the concentration of clients is global investment banks, asset managers, hedge funds, and market intermediaries. We service those clients around the globe. I also sit on the Sapient leadership team to help set policy and strategy.
Before Sapient, I spent 25 years on Wall Street. I was in equity trading, institutional trading, both on the sell side and the buy side. My last job before Sapient I was a head trader of Fidelity Investments. I was there for 14 years, so that combination of experience I have a pretty good understanding of the business, the inner workings and the pressures they’re under.
What are you seeing in terms of the business climate out there broadly? What are the main challenges that your customers face?
There are two main challenges that drive strategy within our portfolio.
One is around cost. We’ve had low interest rates across the globe, even negative rates in some countries, for an inordinate amount of time right now. So what has happened is banks are struggling to grow revenue, both from the net interest margin as well as through other ways that they make money. They are forced to keep a large percentage of their capital in liquid assets like treasuries that return little revenue.
That introduces the other challenge, which is regulation. Regulation has basically not allowed banks to be able to trade for their own account or invest in other businesses that might be higher yielding, i.e. hedge funds or other types of corporate entities that in the past they were able to get a good rate of return on. Regulation is a factor with all of our clients because they introduce new requirements that impact trading through to reporting, which is impacting the cost-per-trade. For global investment banks, the effort towards complying with rules like Volcker, Dodd-Frank, MiFID, and EMIR is huge. We then see on the horizon rules such as Fundamental Review of Trading Book (FRTB), which will have a huge impact as they have to set aside more capital.
Banks, and asset managers, have evolved for the past 20 years by building up a huge infrastructure within their business. A lot their business was tailor made around custom trading activities, where they would trade for their own account. Many of these businesses were proprietary. To support those businesses, they needed huge technology infrastructure that consisted of a lot of FTEs and a lot of hardware and infrastructure.
Now, with all of these regulations curbing bank trading activities, they need to de-leverage themselves from the infrastructure. So you’re seeing a huge focus on cost reduction. All of our conversations have a cost element to them.
We’re very strong within technology services and within complex technology builds. We leverage our globally distributed model, which really speaks to the cost piece. We also put a lot of investment both in solutions and accelerators as well, training and investing in business consulting that’s specific to regulation. Our strategy dovetails with where we see needs.
Global banks have been on the defensive for years now. When might this change?
It is a very difficult period for these banks. They cannot grow revenues, for reasons around low interest rates, slow M&A, and slow trading, but they need to figure out a way to continue to make their quarters. The only lever left is wringing more cost out of their model, so their number one focus is to do more with less. This is why we see an increased focus on cost-per-trade, and the total cost of ownership (TCO) of their operations. As result, you’re seeing more layoffs and a wider examination of new operational models. They are levering us by having us do more of their work in a globally distributed way where we leverage lower cost geographies, which lowers the TCO without compromising the quality of the work being executed. It is also why you see more firms examining shared service or ‘utility’ models for many post-trade areas and particularly around regulatory reporting where the cost is huge but it offers no competitive advantage.
Banks are waiting for rates to rise. I think that that’s part of their strategy, at least right now in the short term.
What is your view on interest rates and financial markets broadly?
I’m actually really positive on the recent market action.
When the Fed talks about raising rates, and the market reacts positively, I actually look at that as a silver lining. After they raised rates in December, we had a very volatile time in Q1. Markets went down and the reaction was very negative. This time, since the Fed has sort of hinted and indicated that they’re looking to raise rates in the next couple of months, the market has gone up. I feel that’s very positive for the market and our clients, because what that’s telegraphing is that the Fed feels comfortable with where the economy is growing. They’re trying to do things with an eye towards the next 12-18 months. What they must be seeing in their data is very positive, going out with a longer term lens.
There are areas which would support that. Certainly, employment has been strong, at least for people with advanced skills and indeed there’s a shortage at that end of the market, making it hard to hire people. Even at the lower end, you see employment strengthening. We’re at 5%. I think there’s been some constructive work done there. Housing has been really strong. The consumer and service sector, which makes up about 70% of GDP, is strong.
On the delta side, energy has been volatile and manufacturing has been lower, especially in relation to a higher dollar. But I like the action that I’m seeing from the market as far as with the Fed indicating higher rates. You’ve seen the markets go up, you’ve certainly seen banks trade up. Energy has stabilized off its Q1 lows. So you’re starting to see signs of the market accepting higher rates.
I’m hopeful that things are getting better.
The problem has been that we haven’t seen wage growth, and markets and businesses have been weaned on low rates. To me, the key is whether we can get wages to rise. Can people make more money and stay at least balanced with inflation, with housing, and with healthcare costs. So wage growth is very important.
Businesses have borrowed a lot of money at lower rates and instead of investing in their businesses, they’ve done a lot of financial manipulation, i.e. buying back stock and raising dividends. You’ve seen a focus on the stock from a financial perspective, but they’re not necessarily investing in the business for the long term.
I was a little worried by that because I didn’t see a lot of growth in companies’ operating cash flow, which made me nervous. But recent market action is more the type of action that we need to see.
From there businesses need to grow earnings organically and invest. The growth in the 1990s was based on significant capital expenditure in the internet. You didn’t see people buying back stock, you saw them investing, and the productivity of their enterprises went up. We haven’t seen that investment in technology in a while, but I think we’re starting to see it with the advent of digital transformation.
If you look at what Amazon and Microsoft are doing with cloud services and the applications that they’re building, what companies are doing with machine learning and artificial intelligence, I feel like this is the next leg up. As companies start to use their investment dollars and use technology to increase productivity, that should bode well for markets.
Outside of work, I understand you are involved in philanthropy?
I serve as trustee of a school in Rhode Island that deals with children with language-based learning differences. Not all children learn in a mainstream way. You’ve seen budget cuts in public schools which has produced cutbacks on services for children that don’t learn mainstream.
But not learning within the mainstream doesn’t mean that they don’t learn or that they cannot learn. The school that I’m a trustee of is world-renowned school. Children come from all over the world to go to that school. Essentially, it deals with very complex language-based learning differences, and allows children to unlock some of their learning challenges and help them figure out how to learn like a mainstream individual. Most of those children, when they were in public school, were told that college was not an option but they come to this school and they realize that it can be an option.
The people that work within this school are amazing educators. They understand children and they’re passionate about what can be for them. I’m amazed at the tremendous work that they do for children in allowing them to realize their dreams.
What’s on the horizon for you and Sapient?
We’re excited about the future, the capabilities we’re developing, the possibilities available and how we can help our clients. I don’t want to call the current landscape internet 2.0, but I feel like we’re just in the first or second inning in companies realizing that they have to realize business transformation in a digital world.
This is because many firms have built a ‘digital presence’ but now need to become what we refer to as digital at the core. What digital at the core means is that everything that you do within your business evolves around transforming your businesses, whether that be from an analog world or leveraging the legacy IT infrastructure that we’ve talked about before. So it is much more than online portals and apps, which some consider ‘digital’; it is about using digital to break down those silos and rewiring the enterprise with the mindset of becoming far more agile and responsive to evolving client needs.
Featured image by chones/Adobe Stock