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Will Wall Street Ever Be the Same?


The leaders coming out won't be the same as the leaders we're used to.


The Wall Street Journal had an interesting article yesterday entitled Wall Street Turns the Gun on Itself, and I would like to add some observations from my perch.

We've seen a seismic shift in the DNA of Wall Street as the confluence of regulation and technology collided ten years ago. We first touched on this in The State of the Art in 2006, when we offered:

"The bulge bracket firms still command respect... but their moxie has waned as a function of this Darwinian evolution. The motivation to trade with the big cap brokers was once predicated on the promise of fat IPO's and advantageous execution but that is a thing of the past.

Further, Reg-FD has rounded the relative edges of information and technology providing one-click access to shared networks, and customer business has shifted to low-cost solutions and volume discounts.

The regulatory environment will only stiffen -- particularly if the screens aren't green -- and pave the way to increased transparency throughout the Street. This will have a profound effect on virtually every spoke of the Wall Street wheel.

Indeed, the traditional banking model has "inverted"; facilitation has become commoditized, the IPO market -- while heating up -- was dormant for a long time, and the lesser dependence on research reports is another by-product of the ongoing information deflation (which is a direct result of the Internet, also know as the most deflationary invention of all-time).

There's also been consolidation as a function of need, and corporations tap the attendant economies of scale. Bank America (BAC) isn't just Bank America; it's Seafirst Corporation, Security Pacific, Continental Illinois National Bank and Trust Co., Robertson Stephens, NationsBank, FleetBoston Financial, MBNA, US Trust Co., Lasalle Bank Corporation, Countrywide Financial, and of course, Merrill Lynch.

On top of that, former professionals have morphed into insta-viduals, migrating to an online space that is dominated by the TD-Ameritrades (AMTD), E*Trades (ETFC), and Schwabs (SCHW) of the world. Self-directed investors have the world at their fingertips and the point of differentiation is now experiential; these players offer services and information, and have become a reflection of the company they keep.

We know the leaders coming out won't be the same as the leaders going in, so perhaps none of this should come as a shock. While big banks are cutting back, boutiques -- BTIG, WJB, MKM -- are thriving on a relative basis, adding capacity and human capital, many of whom used to work at bulge-bracket shops.

Why? It's simple, really. Boutiques don't have the reputational risk or the balance sheet baggage. One door closes and another door opens, as evidenced by the former four horsemen of tech -- Intel (INTC), Microsoft (MSFT), Cisco (CSCO), Dell (DELL) -- and their flat-line performance since the tech bubble burst.

The trick to the trade, if you're gonna trade this trick, is to identify the migration and position yourself in front of the next secular trend. For tech, the new face will likely be Facebook, Twitter, LinkedIn (LKND), and Groupon.

For the banks? It's a wide open race. But if you're looking at the former leaders for guidance, you're likely facing the wrong direction.


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