When I began my career in finance – originally on the cash side – I had several wise people (including my father) tell me that the low hanging fruit in finance was gone. And they were, roughly (as I will get in to) right.
I think it’s understandable that high salaries and bonuses attract talent – like bee’s to honey – which promotes competition. That competition then drives down margins as participants compete on price, which drives down the overall profitability of the business. For the last 50+ years, the holy grail of finance positions has been to get a client facing role. These ‘front office’ roles were also paid higher because client relationships were the bread and butter of business. Then something happened: along came machines.
In the late 80’s, and picking up steam in the late 90’s, electronic trading venues began to emerge. These electronic trading venues were computer driven, with algorithms (better known as algos) now making decisions that were previously left to humans. These machines were cheaper to operate, cheaper to sustain, and much quicker than their human predecessor. As margins on business began to fall, the brokerage community looked more and more to these computer solutions as a way to control their profits. Just like auto manufacturers have turned to automation to lower the cost of a traditional workforce, Wall Street began to turn to computers to lower their costs – and so the feedback loop began.
As profitability fell, pay fell in step (as it is now). The problem that Wall Street participants are still struggling to fully address is that there has been a fundamental paradigm shift: from an emphasis on humans to an emphasis on technology.
Now, I want to be very clear that I am just not talking about trading infrastructure here. I am talking about the fundamental way that Wall Street structures itself.
The Low Hanging Fruit
In my mind, the disappearance of the low hanging fruit only tells half the analogy. Yes, the low hanging fruit is gone – but next door, there is a barely touched orchard that has fruit laying on the ground, never mind low hanging. Wall Street loves the status quo, for a plethora of reasons. This love affair with the status quo has created a tidal wave of opportunities in the orchard next door – the orchard that is named ‘technology’.
Take trading and trading infrastructure – over the last 5 or so years, the general finance community has gotten a glimpse into the world of high frequency trading (HFT). These market participants are making a boat load of money off leveraging technology to execute faster than their competition. It might be one of the few industries where you can actually buy a competitive advantage.
Take communication – Wall Street is barely done adopting email. There are no services that cater to the community as a whole, a few fragmented platforms, and a lack of street wide messaging system (believe it or not, most firms use AOL instant messenger).
Take data – Wall Street is just figuring out how to incorporate non-financial data into trading algorithms. They have barely begun to look at non-numerical data in a statistically reliable way (except for a few start-ups), and they have not yet found a way to take advantage of social data.
Take aggregation – there are so many services that are universal to Wall Street members yet fragmented. Morning notes, research packages, analyst reports, etc. All these products are offered in a terribly fragmented market.
Take customization – Wall Street still treats every customer the same, at least on a non-verbal communication level. Customers get the same research packages, same emails, and same morning notes. In an age where Amazon can tell me what books I might like, it’s a wonder that Wall Street hasn’t figured out the same thing.
The point of this post is that the low hanging fruit may be gone – but that’s simply due to over concentration in one particular area. The holy grail of a junior person entering the financial industry has been to get a customer facing position in a cash business. That holy grail is shifting – to a technology group focusing on a scalable business.
Wall Street has lots of opportunity still – it just might involve leaving the orchard we have all always known.