At the recent Financial Technology Expo held at the Jacob Javits Center, WS&T and PricewaterhouseCoopers co-hosted a B2B roundtable featuring executives from Morgan Stanley Dean Witter (MSDW), Merrill Lynch, Deutsche Bank, J.P. Morgan and CS First Boston. Featured below is a segment of the give and take between the moderator and the panelists that participated in this forum.
Question: With regards to your traditional business and your business going forward, how will online markets affect you?
Ben Wolkowitz (BW), Managing Director of Fixed Income at MSDW:
Right now, with fixed income, the number of ventures that are planned and are about to be launched ... far exceed the number of ventures that currently exist. So the empirical evidence is light and we're early in the exercise. But what we have seen, and what I believe will probably be the case for the next couple of years, is that e-commerce has become an effective way to deliver to clients those securities and those types of trades that are in some ways not the most interesting activity for either the buy or sell side. And by that I mean that a buy side client who knows precisely what it is they want finds it easier to access what they want on a screen than they do calling several dealers. On the other hand, when you are on the sell side, on the dealer's side and you are fielding those calls the value added of your sales person is not very great.... We are glad to see that kind of activity migrate to screens. We think it is in the best interest of our clients, and we think it is in our own best interest because what it does is it frees up both of us to have much more indepth conversations about what we are trying to accomplish.
Michael Packer (MP), Managing Director of CICG Direct Markets at Merrill Lynch:
In essence, in the past, the value in the industry really has been centered on five or six fundamental functions. There was clearly a fundamental research kind of function, which had value, and people were willing to pay for it. There was a product development-structured, new idea kind of function. There was a client aggregation function. There was the actual price discovery and matching training function. And then there was some value in the post-trade side as well. And now I think that we are all seeing that change and shift so that you are still seeing an enormous value in new product ideas. The client aggregation function is starting to gradually shift to a more online kind of distribution, but you still have those relationships that have to be built.... In addition value is shifting away from the point of trading itself to more pre trade integration of information, and now increasingly toward the post-trade process, which has become, with globalization of trading, much more important and much more messy for a lot of firms to deal with.
Ira Lehrman (IL), Director of Debt Capital Markets at Deutsche Bank:
I think B2B markets will change our businesses dramatically, from just adding that facet to the new issue market, with the advent of auctions that have come into syndication. It could have dramatic effects on the industry from a fee structure basis, bringing more new issue to investor capabilities.... For the most part, on the secondary level, I think it will have dramatic effects on allowing the dealer side to actually extend itself to the middle markets and second and third-tier layers, as well.
Brian Lynn (BL), Vice President in charge of E-commerce trading projects, J.P. Morgan:
... By making these markets more liquid and more transparent, the B2B phenomenon will tend to drive the costs down and, therefore, drive the profits down in the firms, and there is a fear of that. And I think there is always the truth that individual trades will become less profitable.... But I think that this is not something to be feared, but something to be embraced. It will definitely change the dynamics of the fixed-income market, from a place of making money on individual transactions by traders and sales people entering trades, to creating an infrastructure that allows these trades to be done, automatically, integrating the clients' firms with the dealers' firms and providing a broad distribution.
Question: What kind of thinly traded, illiquid products have a chance of becoming accepted by a wider audience as a result of online trading?
BL: I would not necessarily say that they are thinly traded or illiquid, but say, for instance... U.S. Treasury contracts, which have a huge share of the market in terms of the number of trades that are done. There is no inherent reason why the emerging market debt, for instance, could not become much more widely traded, if it were more convenient to do so .... So what I am expecting to see are investors who will broaden the range of products that they trade in and, therefore, the volumes of some of the more thinly traded instruments will tend to go up over time.
BW: I also believe ... that the dealers will increase the number of issues that they trade and the number of different types of securities that they get involved with. I think that is another part of the notion that having e-commerce, in this sense, enables you to bring more research, more analysis and have a more thorough going relationship with your client.... The type of innovation we have seen in fixed income over the last decade or so, I believe, if anything, will accelerate among the more successful dealers in the future. And in some ways e-commerce will provide a catalyst to make that happen.