Oliver Blower is CEO of VoxSmart.
What were the key theme(s) for your business in 2023?
The lava from the eruption of regulatory fines dished out by the SEC and CFTC has continued to spill out in 2023, engulfing more and more financial institutions in a chasm of regulatory smog this year.
In August, the SEC and CFTC announced a combined $549 million in penalties against Wells Fargo and a raft of smaller or non-U.S. firms that failed to maintain electronic records of employee communications, having swept through the largest banks on Wall Street in late 2022 to impose over $2billion in record-keeping related fines.
In the same month, British regulator Ofgem fined Morgan Stanley £5.41m after energy traders discussed business over WhatsApp on private phones, with the bank failing to record the messages. The FCA also launched an inquiry this year into banks’ use of WhatsApp on personal devices for trading.
These fines and continuing scrutiny from regulators do nothing to change the fact that WhatsApp is still the go-to form of communication between investment banks and their clients. Aiming to change an entire generation’s communication behaviour is not a feasible way of tackling this issue – it is instead up to banks to adapt their approach to risk management to cater for the modern ways of doing business, and satisfy regulators that the messages are being recorded and monitored.”
What are your expectations for 2024?
In the face of unprecedented fines levied against investment banks for the misuse of messaging apps, attempting to ban an entire generation’s communication behavior next year is shortsighted and misguided. The $549 million penalties underscore the urgency for a paradigm shift in risk management.
Rather than suppressing evolving communication channels, banks must embrace adaptability. It’s time to recalibrate risk strategies to align with modern trading practices, fostering a culture of responsible communication and innovation instead of futile attempts to curb the inevitable evolution of technology-driven collaboration.
However, it is not just the WhatsApp issues that needs to be tackled in the New Year. It has been beyond frustrating that every man, woman and their dog have been fixated with talking about AI in the abstract in 2023. If you are a senior executive within an investment bank being bombarded with all this AI literature in January, where on earth do you start? Until the industry as a whole starts having a grown up, pragmatic and practical debate on specific use cases for AI in 2024, then we will continue to be left spellbound by grandiose and vacuous statements about how the technology is going to revolutionise capital markets.
What trends are getting underway that people may not know about but will be important?
Whenever there has been a technological innovation in capital markets, the starting point has traditionally been cash equities trading. Exchange traded, highly liquid and highly transparent, technology has driven equities to lead while others have followed. One of the most prominent followers has been fixed income. Over the years, the bond market structure reform dog has been well and truly wagged by the cash equities tail.
From algorithmic trading to transaction cost analysis, fixed income trading desks have historically adopted equities innovation. However, with AI, we could very well be on the cusp of a paradigm shift in 2024. Unlike equities, the vast majority of the fixed income market is traded over the counter. As a consequence, the market is highly opaque with different pockets of illiquidity scattered across all parts – particularly in corporate bonds.
This is why there is such a wide range of different views when it comes to prices for multiple instruments. Bond markets have also become more complex and highly nuanced over the past decade, while valuation processes are still relatively simplistic. Days or sometimes weeks can go by without a block of specific high-yield bonds hitting the market, meaning a greater number of instruments are left without market-based prices.
By gathering all the disparate data relevant to the fixed income desks, and then deploying AI on top, this is a realistic way to solve some of the long-standing pricing and illiquidity issues in this market.
