Due in large part to a coordinated agenda to increase risk appetites following the dot.com implosion, over 60% of the U.S. population invested in the financial markets. That number continued to climb as Wall Street reinvented the investment wheel and politicians identified ways to prolong the inevitable ramifications of our societal addictions.

The Federal Reserve understood—or so we hope—the dichotomy between debt-induced largesse and legitimate economic growth would eventually be unmasked. It was a grand experiment gone awry, a cumulative comeuppance of financial engineering that finally came home to roost in 2008.

Coincident to this big picture conundrum, there was a steady migration on Wall Street as players in the broker-dealer community chased the sexy sirens of hedge fund wealth. That shifted the structural chemistry in the marketplace as neophyte risk managers employed outsized leverage with hopes of capturing smaller moves in a range-bound tape.

Paradoxically, the demand for return created compression in the marketplace once hidden by a docile tape. As volatility increased, it triggered the seismic unwinding of risk akin to dominoes laced with dynamite and as the debt bubble popped, it was a matter of time before capital market destruction followed.

The motivation to trade with bulge bracket firms once predicated on the promise of fat IPO's, “first calls” and advantageous execution is a thing of the past. Further, when Red-FD rounded relative “edges” and technology provided one-click access to shared networks, customer business shifted to low-cost, volume discount solutions.

Research expenses are no longer justified by investment banking revenue and an emerging trend of "outsourced information" will soon emerge as industry standard.
In time, a customer will have the ability to "opt-in" to a pool of research much the way they currently craft a risk profile. This will benefit the investing public but has far-reaching implications for the financial complex.

The convergence of technological advances and regulatory oversight won't eliminate the broker-dealer intermediary but their roles will dramatically shift. Traditional brokers will need to highlight human capital and provide a platform that marries low cost trading solutions with real-time and transparent information.

The current "one and done" morning call won't cut it, not in the world of instant messages and real-time decision-making. Therein lies the task at hand for financial professionals around the world—the sell-side, once a conduit of execution, must reassert themselves and demonstrate relative, compliant value if they’re to stay in the mix.

There will always be a need for capital markets, or so we hope. The trick, for an industry mired in overcapacity and suddenly shunned by the mainstream, is to adapt before the trade again passes them by.

R.P.