International

After Brexit Boost, What’s Next for Banks and Trading?

Wall Street

The recent news that Brexit led to a surge in trading-related banking revenues that helped put results over the top, beating Street estimates, leads to the question: What will they do for an encore?

After all, the boost is likely one time in nature or perhaps at best intermittent as panic allows, and as Brexit becomes ever closer to reality. But the banks shouldn’t bank on trading revenues to grab bottom line traction.

The trading issue begs another question, one that is larger than any set of quarterly results. How are the banks going to navigate a brave new(ish) trading world where volatility is the name of the game, and politics can wreak havoc with carefully and finely wrought financial strategies?

Bloomberg reported Wednesday that the “lions are turning to mice” in a bid to find just what is going on when it comes to rocky shoals among bond and equity trading. In other words, financial giants are seeking counsel from relatively nimbler firms, with one foot in trading and the other in technology, to better handle electronic trading volume demands.  

Spotlighted in the newswire piece was an unlikely dynamic duo, as JPMorgan sought out the expertise of tiny tech firm Virtu Financial to suss out what happened when the former’s stock dipped double digits in a single day last year in the hazy days of August, typically a slow period for stocks. The upshot? JPMorgan needed to know whether to trust its own analysis, so it had Virtu analyze that analysis. The pairing worked well enough so that the relationship blossomed to a level such that Virtu now helps JPMorgan trade in treasuries and other markets. Not bad, little mouse.

The giants now know that size matters to a point but turning a battleship in mid-battle needs some cover and flank support. That spells opportunity for the firms like Virtu that can help make sense, and plot course as waves of regulation and capital requirements may crash against bows. Speed trumps size in these markets, especially in risk management. Risk management works best when there is liquidity and liquidity works well when there is a nimble middle man (or middle firm) in the market that gives settlement to both sides of the transaction.

Might we see more linkups between lions and mice in the payments space? Sure, given the fact that the first step toward collaboration is admitting you need help. The clearing houses and the cross-border FinTech firms that operate on a firmament of transparency can help the big players navigate their own blind spots –  leading to the age old question of build or buy. Look for both options to get increasing scrutiny in the payments landscape. 

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