Uncertainty is certain: Repositioning financial markets firms to operate on demand

After enduring three years of stagnant growth, watching fee-based business decline and reliable revenue sources like commissions and clearing become commodities, investment banks and asset management companies seem to be at the mercy of a sour market. Although the industry has been conditioned to expect a certain amount of volatility, the past few years have shaken securities firms more violently than anyone can remember. In an environment where the only constant is uncertainty, what can financial markets institutions do to gain more control over their own destinies?

The newly announced U.S. balance of trade figures vary significantly from the market consensus, causing a scramble on trading desks in New York and London. Your traders react to the news, causing the firm's position in Japanese yen to rise. As exposure reaches a predetermined threshold, rules developed by your risk manager automatically kick in, directing your traders around the world to lower their limits and begin working within tighter boundaries. Your risk manager monitors the situation enterprisewide, watching the overall yen exposure top out. Meanwhile, the swap desk has begun to put together deals for a targeted, prioritised list of customers who, based on their known appetites, might be interested in yen-based deals. Offers -- aggressively priced and set to expire in hours -- are transmitted to selected groups of customers in staggered waves. As you work down your yen exposure, you scale back the aggressive pricing, until risk and pricing both return to normal levels, and customer solicitation stops. How were you able to take advantage of a fast-moving opportunity without undue risk? You've learned the art of operating on demand.

Financial markets firms have been slow out of the gate in the twenty-first century. Investment banking fees from mergers and IPOs have fallen off dramatically, broker-dealer commissions appear finally to have bottomed out after a seemingly inexorable decline, and asset managers have seen assets under management actually shrink. In fact, the revenue of the largest global securities firms fell more than 17 percent from 2000 to 2002 ¹, while the revenue of New York Stock Exchange (NYSE) member firms declined 20 percent in both 2001 and 2002.²

With revenues free-falling, firms grasped at ways to quickly slash costs. One of the first targets was the most obvious: capacity. Since reaching its all-time high in 2000, City of London employment has been reduced by an estimated 15,000 employees, or 9.4 percent, of the year-end 2000 workforce.³ In the worst percentage decline since the recession of the early 70's, the U.S. Securities industry shed over 10 percent of its workforce -- some 80,400 jobs -- between April 2001 and February 2003.⁴