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The State of the Art


It's all you baby!


You don't have to be in the trenches to see that Wall Street has changed. What was once an exclusive club of power players and money makers became a household hobby as technology made enablers of us all. In the storied history of the financial markets, the rate of change has been nothing short of remarkable. The last ten years have revolutionized an industry once known for clubby relationships and handshake agreements. The next ten years will forever alter the industry as we now know it.

When I started at Morgan Stanley (MWD), I arrived at my turret while the skies were still dark and transcribed our derivative positions by hand. As ancient as it may seem--and conscious that this has a "walk five miles through the snow" feel to it--the risk management approach was that arcane. A single stock position was "paired off" into buy-writes, conversions and ratio spreads. This process was universal as traders relied on phones, Quotrons and an acquired acumen to guide them through the frazzled fray.

As option desks typically set the standard, we were the first to beta test new systems. I remember when we first started pricing over-the-counter products (instruments not listed on the exchange) and would "win" business by 30, 40 or 50 "vols." A reborn industry was in its infancy and nobody complained. The customer was happy, the firm was profitable and the wheels of capitalism continued to grease. In time, as the technology evolved and margins slimmed, the fat slowly dripped off the bone and the easy money began to evaporate.

The emergence of relative efficiency forged the way for new products and applications. If Wall Street has proven anything, it's an ability to reinvent itself and recreate risk. Coincident to this evolution-or perhaps because of it-the information age democratized the world of finance and opened the doors for the retail customer. This introduced a fertile audience to the minxy mechanism and raised the stakes for all involved. We've arrived at a juncture in history where 62% of the world's population invests in the markets and that number has nowhere to go but up.

In recent years, we witnessed a migration from the sell-side to the hedge fund community as talent was seduced by the sexy sirens of open-ended payouts. That shifted the balance of power, the understanding of technology and the risk-appetite in the marketplace. The bulge bracket firms still command respect, of course, but their moxie has waned in recent years. Without the lure of fat IPO's and with Reg-D rounding the relative edges, customer business has increasingly focused on low-cost solutions and volume discounts.

As we edge forward and peer ahead, my sense is that the current inertia will continue to manifest. The regulatory environment will only stiffen and that will pave the way to increased transparency throughout the Street. Further, as research expenses can no longer be justified by investment banking revenue, an emerging trend of "outsourced information" should soon become industry standard. In time, a customer will have the ability to "opt-in" to a pool of commoditized research much the way they can currently craft a risk profile.

While traditional brokers will need to redefine their value proposition and highlight human capital, the balance of power will continue to edge towards the individual. Therein lies the task at hand for financial professionals around the world-the societal shift towards self-empowerment will have far-reaching ramifications for our industry. This is good news for those who want to learn how to make better and more informed decisions. And for those who don't, there will always be a broker available to lend a helping hand.

Good luck today.

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