2 Celebration of Excellence: Sponsor’s Foreword
Minority report:
Capital markets in the 21st century
By Sean Park, global head of debt syndicate and investment grade trading
Everything you can imagine is real —
Pablo Picasso
would imagine that for those bankers
I involved in the birth of the Eurobond
market, the global capital markets and
their workings would seem to harbour only
vestigial similarities with their own early
endeavours.
Forty years is a long time at the turn of
the 21st century. I wonder if our reality
bears resemblance to their vision.
Globalization, Moore’s Law, the end of the
Cold War, the Euro…did they imagine?
In the end, all visions are necessarily
reflections through the kaleidoscope of the
present. With respect to the financial world
this is doubly true: for despite the self-
attributed importance given to them by
bankers and financiers, financial markets
are no more than the grease that oils the
machine of human progress. They are a
means not an end.
The markets reflect the world they exist
to serve; envisioning their future involves a
correspondingly complex escheresque
reflection upon a reflection. Heisenberg’s
uncertainty principle states that you cannot
know both the position and momentum of
a particle at once as the very act of observ-
ing one will change the other. Financial
markets follow a similar principle: asking
where we are today inevitably and inex-
orably changes where we will be tomorrow.
So in the full knowledge that the laws of
nature are aligned against any prediction I
may make, I nevertheless will hazard to
project a vision of how the future of capital
markets banking will develop in the com-
ing years.
Much has been written (by people emi-
nently more qualified than I) about the
productivity miracle – or lack thereof –
brought about by the revolution in infor-
mation technology. Without re-opening
this debate and ignoring any quantitative
data, it would seem anecdotally obvious to
most in the industry that the impact on the
financial services industry has been enor-
mous.
Can you imagine trying to publish real
time prices (and spreads and yields) on
thousands of bonds simply using an AIBD
calculator? Or pricing and distributing the
trillions of euros of new securities issued
EuroWeek
every year using only a telephone and a
telex machine? The examples are endless.
Yet due to the continuous, incremental
nature of the adoption of new technologies
much of this massive increase in productiv-
ity and capacity has gone relatively unno-
ticed by most industry professionals.
However, every so often a number of fac-
tors accumulate and precipitate a quantum
shift in behaviours and organizations. I
believe we are in the early stages of just
such a phase.
A giant asteroid struck the earth millions
of years ago, wiping out the dinosaurs and
setting the scene for the emergence of a
new wave of evolution and allowing a new
lifeform, mammals, to thrive. The disloca-
tions and turbulence of the past two years
in the financial markets may be a similar
‘extinction level event’.
Set against the massive increase in the
power of communication and information
technologies, it has set the scene for the
emergence of a new model for investment
banking.
Only three basic ingredients are involved
in a capital markets business: financial cap-
ital, information technology and infra-
structure and human capital. Until recent-
ly, only the former and the latter were seen
as relevant to competitive advantage, with
technology seen only as a (necessary) utili-
ty. Going forward this relationship will be
turned on its head. While all three elements
are needed, financial capital will increas-
ingly be seen as a pure commodity – valu-
able and scarce but no longer in and of
itself a driver of competitive advantage.
Human capital will continue to play a
pivotal role in creating value however not
in the current or traditional sense. It will
Old model
Information
Confidentiality
Relationships
Changing success factors in a capital makets business
June 2003
be the ability to leverage this human capi-
tal with powerful technology and infra-
structure that will differentiate the best
firms. This does not mean simply throwing
more powerful servers and fatter pipes at
the front, middle and back offices but
inventing completely new organizational
conventions and workflows in order to
harvest an entirely new set of opportuni-
ties and circumstances.
Firms in our industry are constantly
reshaping themselves: merging this busi-
ness and that, creating new teams and silos,
breaking down walls on one hand and
building up new ones on the other.
For the most part this combinatorial bal-
let has avoided real innovation and has yet
to break free from the chains of past expe-
rience. It is a classic example of turkeys not
voting for Christmas. But clinging to the
status quo only avoids the inevitable. The
death of the salesman. And the trader. And
the syndicate manager. Etcetera.
The job titles may yet survive as a pri-
mordial reminder of our evolutionary
antecedents (think of it as our reptilian
brain) but the functions themselves will
change beyond recognition. (Imagine the
captain of a 16th century galleon trying to
captain the space shuttle…) Although his
star may now be somewhat tarnished, Jack
Welch’s “destroyyourbusiness.com” initia-
tive at GE was prescient in its underlying
philosophy: if you don’t engineer the obso-
lescence of your business model someone
else will.
Daunting challenge
The current model of investment banking
relies on the judicious management and
manipulation of information, confiden-
tiality and relationships.
New model Stripped down to its
barest facets it relies on
Data arbitraging a heretofore
scarce commodity —
information — against
Transparency a privileged position
within the population of
actors. Information,
Customer Service
however, is no longer
scarce and is increasing-
ly difficult to ration or
arbitrage.
One commentator
www.euroweek.com
 June 2003
recently drew the parallel between process-
ing information in the internet-enabled
world to drinking water from a firehose: the
problem is not getting enough information,
it lies in using it effectively. Tomorrow’s
model of investment banking will rely on
altogether different drivers of success. Data,
transparency and customer service will
become the factors that will challenge the
current incumbents to the very core of their
organizations and philosophies.
The ability to store, manage and manip-
ulate data is the single most daunting chal-
lenge faced today in the capital markets
arena and will ultimately play a determin-
ing role in defining leadership in the new
era. As financial markets harness the expo-
nentially growing power of information,
their reliance on complete, robust and
accurate data multiplies accordingly.
Unfortunately for most financial institu-
tions and investment banks this is an area
that is too often delegated (or relegated) to
the dusty corners of operations or IT and
does not enjoy either the focus or the
understanding by senior management that
it deserves.
After all, who wants to discuss the minu-
tiae of six- sigma-quality reference entity
data mapping with hundreds or even thou-
sands of measurable market data points,
when you can talk about the next big deal
or the next round of cost cutting? If noth-
ing else, Basle II should at least get these
items on the radar screen at board level, but
a compliance based approach to data will
only get you so far in terms of unleashing a
true revolution in downstream production
benefits.
In a world where competitive advantage
was predicated on the ownership and
exploitation of scarce and guarded infor-
mation, it is only natural that investment
banks built cultures of secrecy and fiefdoms
as these rules were also applied within the
organization.
This is perhaps the most challenging of
changes that must be faced as it goes to the
core of how many bankers define their self-
image: I ‘know’ this fact, I ‘know’ this per-
son (and you don’t!).
It also touches a sensitive nerve with
respect to the ideal of a bank as the ultimate
secure repository, the guardian of trust and
confidentiality. While it is clear that any
bank that wishes to remain in business
must protect the trust and the contract they
have built with their clients and customers,
it is equally clear that they must marry this
legacy with a future where the value of
information is transitory, and even then
only insofar as it can be processed and
leveraged at speed, more often than not in
real time.
The only way that this can be possible is
to throw open the gates and embrace trans-
parency. Rather than worry about who
knows what, worry about who doesn’t
know and what it is they don’t know.
We no longer have the luxury of
rationing and measuring as we go along,
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Celebration of Excellence: Sponsor’s Foreword 3
Sean Park Vision of the future
but need to make information available
to as broad a population as feasible so that
we can tap the entire power of the
organization allowing it to constantly rein-
vent itself to the ever changing problems
and opportunities afforded to it.
Customer service
If the ability to manage and distribute data
and information in a seamless and trans-
parent fashion across the organization are
prerequisites for success in investment
banking and capital markets going for-
ward, the driver of that success surely lies in
adopting a culture and structure predicated
on customer service.
Putting aside the business of proprietary
risk taking that is an important pillar for
most investment banks, the customer side
of the business is in need of a complete
overhaul.
“I am among the last of a
generation who did not grow up
with a computer in their bedroom”
Much is promised by banks in terms of
‘putting the customer first’ and ‘delivering
solutions not products’ however the reality
is that, even if this is the good faith intent,
the current structure of the banks is still
aligned to the delivery of financial products
as a holistic package with all the ancillary
bits (settlement, research, payments, etc.)
thrown in to a greater or lesser extent. An
essentially analogue model for an emerging
digital world. The ‘digital’ model breaks
down all aspects of the business into dis-
crete component parts and allows for each
to be optimised (either in-house or out-
sourced) and then packaged and delivered
to the client according to their needs.
Through this industrialization of the
process, the skills and functions of the
bankers must equally realign, with expert
designers, engineers and manufacturers
on the production side, and state of the
art customer service representatives on
the other.
In this way the investment bank of the
future is more likely to closely resemble a
service company like IBM or Oracle
and/or a distribution powerhouse such as
Walmart.
Certainly the interface with customers
needs to change with the traditional secu-
rities salesperson, trader, and originator
going the way of the dinosaur and a more
intelligent adaptive combination of cus-
tomer service representatives and prod-
uct/technology experts taking their place
with realigned focus.
There is no way to summarize even the
most cursory of forecasts and ideas on the
future of any industry in two pages, how-
ever recognizing this I hope the above
gives some food for thought on the sub-
ject.
The main point remains the idea that
the stunning progress in information and
communication technologies that contin-
ues apace will undermine the current
shape and structure of our industry in
ways that we can hardly imagine and that
while change is not new (witness the last
forty years!) and will remain a constant,
we are currently in the midst of a particu-
larly fundamental shift in our paradigm.
The single most important driver of
this shift (and the reason why I am con-
vinced of its inevitability) is not the tech-
nology itself but the people involved in
our industry. Throughout the years
investment banking has continued to
draw some of society’s best and brightest,
and perhaps uniquely in industry, from all
walks of life.
This I believe will continue.
More importantly, and not unique to
banking, the bankers of the future will
have grown up with these new technolo-
gies and this new culture.
To the leaders of today, these technolo-
gies are a novelty. They may or may not
have first hand experience with them and
they will still remember carbon paper and
long distance calls.
I am among the last of a generation
who did not grow up with a computer in
their bedroom. I did not use a word
processor or a spreadsheet until universi-
ty. I did not surf the net until well into my
adult life. The next 40 years will see lead-
ers emerge for whom the novel technolo-
gies of today are ubiquitous, innate.
Marshall McLuhan once said, “In this
electronic age we see ourselves being
translated more and more into the form
of information, moving toward the tech-
nological extension of consciousness.”
For those joining our industry today
and in the years to come, this will be their
reality. For the older generation and cur-
rent leaders, maybe some (of Randy
Bachman’s) words from their youth will
help sum it up: “B-b-b-baby, You just ain't
seen n-n-n-nothing yet…”
(Oh and by the way, if you don’t already
know it, you should probably learn the
meaning of ;-). ) ✩
EuroWeek