As traders leave, the developers arrive

I find it a little amusing to see the noise being made by banks about FinTech.  Lots of noise, not so much action.  And where there is action, it’s not necessarily real.  There are a few exceptions, but the majority seem to be tackling FinTech as more of a marketing requirement than an active cultural change program.  That’s the mistake: are you a financial institution using technology or a technology firm offering finance?  The two are very different, as financial institutions using technology think within their blinkered views of existing products and services; the technology firm offering finance begins with the thought: what could I do with this platform?  That’s how the Stripes and Zopas appear, and is why the FinTech firms that are flourishing have no preconceptions or constraints.  Just look at Ant Financial, valued at $60 billion, for more on that (PayPal $45 billion; Deutsche Bank $13 billion; Barclays Bank $25 billion).

The reason I’m blogging about this today is after having a little conversation with a banker who was telling me that their seasoned Chief Information Security Officer (CISO) had just been poached, having held the position for the past four years.  In their search for a replacement, they’ve found that the candidates want ten to twenty times more remunerations than the last guy.  I guess that’s why he left.

Developers are the new rock stars, as I blogged a while back.  As a rock star, you have to pay decent dollars for them, and that is happening in a few banks either by hiring good people or buying interesting start-ups.  From Shift Central:

ANZ recently hired the head of Google's Australian operations, Maile Carnegie, for the newly created position of group executive for digital banking. Meanwhile, JPMorgan appointed Seth Wheeler, a former economic adviser to President Barack Obama, as its managing director to lead fintech innovations. Bank of America moved one of its top executives, Thong Nguyen, from its Charlotte headquarters to San Francisco as it seeks to boost it mobile payments technology through partnerships with tech firms and acquisitions of startups. Goldman Sachs also recently acquired Honest Dollar, an online retirement savings platform.

Other large firms, like Morgan Stanley and Nomura, have also been hiring as the fintech movement surged through the financial services sector and has increasingly captured the attention of the MBA talent pipeline with promises of disruptive innovation. Japan's Nomura said it's offering associate-level jobs in their expanding fintech teams, while Morgan Stanley's MBA recruiter in London said the bank's tech team, which includes fintech, has grown so large that it's been divided into sub-categories.

Just yesterday, JPMorgan announced the hire of Alex Sion, co-founder of Moven.  There’s something going on and big bucks are involved.  But not here in the UK.  Lloyds is hiring a FinTech Tsar and could offer up to £100,000 for the job.  Good luck with that.

Anywho the reason this is interesting is that, on the converse side, the trading rooms of the banks are ejecting talent faster than Angelina Jolie is getting rid of the Pitts.  I’ve been saying for a long time that the future will be trading by machine, especially as most active managers are no more effective at investing than an ape.

So far this year, active fund managers have seen over $35 billion move from their hands to those of the ETF machines.  In a March 2016 article, MorningStar reports of Flowmageddon:

PIMCO has seen a remarkable $35 billion in outflows through the 12 months ended February 2016.  A striking 18 Morningstar 500 funds suffered outflows of at least 40% of assets under management in the trailing 12 months ended February 2016, 61 shed 25% or more, and 168 had outflows of 10% or more.  Also, in January we saw something we rarely see: a firm that subadvises a fund was liquidating. It isn't just that TAMRO was merging into another fund, but that TAMRO was closing up shop. Two years ago, the firm was running $1.3 billion. One year ago, it was running $800 million, but at year-end 2015, it was down to $150 million.

If we had just endured a brutal bear market, then the wave of redemptions would be par for the course. But this comes after a tremendous equity rally and therefore is unprecedented. The simple answer to this riddle is competition from exchange-traded funds. ETFs have gained the upper hand in the active/passive debate. More advisors are switching to ETF-focused strategies, and, when they get a new client, they quickly sell the weakest-performing active funds in the client's current portfolio. Self-guided investors are moving to ETFs, too.

The impact of this has been a significant swathe of job losses in the trading room.  State Street had 32,356 people on the payroll last year. About one of every five will be automated out of a job by 2020, according to Michael Rogers, president of the Boston bank.  Both Bank of America and Morgan Stanley, which together employ more than 32,000 human financial advisers, are developing automated robo-advisers.  Barclays imposed a hiring freeze in September and is part way through a plan announced last year to cut 19,000 jobs across the group, including 7,000 in its investment bank.  European and US banks announced almost 100,000 new cuts in 2015 (about 10% of the workforce), a year when global economic growth rallied and many banks posted improved earnings, with Deutsche Bank, Credit Suisse and Standard Chartered accounting for almost 30,000 of the job cuts alone.  In 2011, Deutsche Bank had 1.7 infrastructure staff to every front office banker. In 2015 it had 2.4. Unsurprisingly, the bank’s new strategy is focused on cutting complexity in the back and middle office.

The list goes on.

In other words, what we are seeing here is the outflow of human jobs to be replaced by machines.  Developers are commanding seven-figure packages whilst the big swinging dicks of the trading room are getting their pink slips.

The world is changing.