Finding opportunities on the sell side

Introduction

The sell-side landscape today offers significant opportunity amidst a tsunami of change.

Technological disruption wrought by digitization, data science, and fintech entrants is putting pressure on financial institutions to invest heavily in technology. Meanwhile, mushrooming regulatory complexity, increasing customer expectations, and economic challenges are pushing financial institutions to shift business priorities.

In 2020 and beyond, sell side firms will need to focus on scale and differentiation through technology.

In investment banking, firms continue to struggle to show stable returns while adjusting to the post-economic crisis environment. With underwriting under pressure from broader macroeconomic trends, banks are decreasing capital allocation and shifting emphasis to their advisory businesses. This is increasing competition as newcomers enter the market.

As dramatic as those pressures are, the sales and trading businesses are undergoing even more transformation.

Deloitte forecasts that sales and trading businesses will split into two parts over the coming decade: one focusing on execution services, another on clients or front-office functions.¹ Mid-sized players that are unable to scale up will find it difficult to operate in this new environment.

Profit margins at sell-side firms are narrowing. Return on equity is now in the 5% to 10% range, down from 15% before the economic crisis. Much of that stems from regulatory requirements increasing minimum capital ratios, heightening liquidity and funding requirements, constraining leverage, and more.

All these factors are forcing the sell-side to evolve. The ever-increasing compliance and regulatory requirements are both increasing costs and altering workflow processes. Firms are relying on new technology such as data science, artificial intelligence, and machine learning to rise to the challenge.

Firms are partnering with fintech companies to handle regulatory requirements, which are continually changing. Some upcoming changes from FRTB, IFRS 9, BCBS 239, and other regulations are highlighting the need for effective risk data aggregation and reporting.

Since the start of the financial crisis more than ten years ago, financial institutions have spent vast amounts on compliance and risk IT. Overall, risk IT expenditure grew by about 5% between 2017-2018 to $77.8 billion and has continued to grow.²

In this report, we explore timely issues in data and technology, risk and regulation, and client service and profitability. Sell-side managers may be grappling with fast-paced change, but also have many exciting opportunities in this complex market.

1. Deloitte Insights, 2020 banking and capital markets outlook, 2019, p. 27.

2. 2020 Chartis RiskTech 100 report, page 11.