At the end of 2019, we didn’t know the garbage fire that awaited us in the new year. On the eve of 2021, we’re at least aware of, if not prepared for, plenty of uncertainty that will lie ahead. People who like to state the obvious say the future is unknown, sure, but I think 2020 showed us there are definite degrees to that truth. One of the few absolutes we can count on next year is that Covid will continue to roil the markets. As for how, people have their guesses and ideas, but if you’re betting the house on your predictions, beware the odds are in the casino’s favor.

As the coronavirus spread around the globe, we spoke with numerous tech executives about potential long-tail effects. I picked out just four areas that I think will reverberate for a while to come. While these stories are so-called “think pieces,” hopefully they paint a picture of how capital markets firms are adjusting their plans in the face of this new reality that we live and work in. You can find all of our pandemic-related stories here.

Think we’re missing something? Let me know: anthony.malakian@infopro-digital.com.

Office Space

Perhaps one of the most pressing questions is of all that pricey, urban office space, and what the banks, asset managers, and data providers will do with it if employees continue to work remotely.

While the pandemic has shown that capital markets firms are adaptable, the genie is now out of the bottle. While Wall Street has long been a 9-to-5 (maybe 7-to-7) job with many tethered to their desks in full business attire, some employees are going to dig this new remote-working environment. For the biggest institutions, the future is NOT a workforce that is 100% remote. Rather, it’s likely to be some hybrid mix either through adopting rotation systems or offering smaller, remote offices outside of the major financial centers of New York, London, and Hong Kong.

For most of us though, it’s likely the days of near-100% office capacity are coming to an end (knock on wood). Of course, the coronavirus isn’t going to just disappear in 2021—no matter how much we might hope for that to happen. That means that social distancing rules will still be in effect and intermittent office closures will still occur.

Real estate is typically a financial firm’s second-highest expense, behind staff and above the cost of market data—which itself can run to hundreds of millions of dollars for medium- to large-sized financial institutions. Firms that own their buildings may be able to easily sell off or rent out unused space—although they may lose the right to name their building if their ownership and occupancy levels fall below a certain percentage—but those who lease space may be tied to lengthy rental agreements. And though landlords may be willing to offer rate cuts for leases coming up for renewal in the near term, they are unlikely to forgo long-term income by allowing clients to wiggle out of their leases.

As both a short-term and long-term thought experiment, firms—especially those who own space or are locked into leases that aren’t set to expire anytime soon—are thinking about what they can do with their office-space footprint. One idea that Max Bowie explored was turning these spaces into something akin to “WeWorks for Fintechs”.

Essentially, the idea is this: the largest banks and asset managers have been busy in recent years setting up innovation hubs/accelerators, venture capital practices, and buying unique tech companies so as to not fall behind in the innovation arms race. Why not bring these startups in-house to help them cut down on overhead costs, while having the benefit of working side-by-side with their end-user counterparts?

Banks are highly-regulated, bureaucratic entities, meaning the prevailing tech mantra of “move fast and break things” can only be taken so far. Machine learning has explainability issues. Commercial quantum computing is still in utero, let alone in any kind of infancy. Banks have grown disillusioned with blockchain and its practical benefits for the capital markets. These internal innovation hubs and financing practices help banks to stay abreast of emerging technologies while allowing their own IT staff to stay focused on day-to-day trading operations.

So the thinking here is that banks and asset managers can expand these efforts by creating ecosystems within their four walls to house and create workspaces for startups using a so-called WeWork structure (though hopefully with a better business model) or, as others have put it, a college environment.

Anthony Woolley, head of business development in Europe at Ownera, a blockchain platform for digitizing ownership of digital securities, told Max that finance firms have been increasingly embracing working from home for the past five years, as these companies are looking to attract tech talent by offering flexibility while building a more geographically diverse workforce.

“Parallel with that, banks are working more closely with fintechs, and many banks have set up accelerators on their own premises, in a WeWork style,” said Woolley, who served as chief innovation officer at French bank Societe Generale prior to joining Ownera. “And in the last two or three years, we’ve seen the rise of banks as venture capital (VC) firms. Originally, banks’ VC arms tended to be quite separate from the rest of the organization. But in the last two or three years, banks have realized that if they are going to have a VC function, it should not be a classic VC function, but should be more strategic. Yes, the aim is to make money, but it should also be a strategic investment that is backed by one of the business divisions. So there is a lot of benefit to having those parties working closely and on-premise.”

For the full rundown of the pluses and minuses that surround this idea, read Max’s story. The key takeaway, though, is that firms have to think strategically about what to do with their office space. Renting out space willy-nilly can bring in outsiders that make the regular workforce feel alienated. Leaving space empty can create an environment that feels like a hoary library…or a crypt. Making short-term, knee-jerk cuts can hurt the firm in the long-term. This valuable space doesn’t have to go to waste, it will just take some creative thinking.

Moonshot Projects

Speaking of innovation, while banks don’t always have the best track record on this front, they can’t quite be blamed for putting some of their “moonshot” projects on the back burner this year.

In mid-August, we published a feature looking at how large banks are devoting their IT budgets to technologies that facilitate remote working, and turning their backs on so-called ambitious moonshot projects meant to have longer-term payoffs for their organizations.

Oliver Bussmann, the former chief information officer of UBS who now heads his own consultancy, said that big, multi-year transformation projects are being put on hold at tier-one banks “because that has an immediate effect on capital expenditure and cashflow. There is much more focus on short-term impact and cost-efficiency. The investment priorities have changed significantly since the beginning of the year.”

As the pandemic pushes banks into remote working, they are rethinking their approach to technology—and their IT priorities. Cloud-based ‘soft turrets’ enable traders to work from home in compliance with policies and procedures that apply in the office. Digital toolkits facilitate cross-regional communication through visualizations of trade flows. It’s more important to focus on the day-to-day and the seemingly-mundane back-office needs, such as data quality, as Covid-19 has emphasized the need to remove errors and enable banking controls. As a result, innovation projects are proceeding with a renewed focus on what works for trading desks and clients.

While some belt-tightening should be expected for some time, the one good thing is that—unlike in 2008—tech and ops departments have not been gutted (not yet, anyway). That means that the institutional knowledge honed over the last decade will still be there when firms are ready to play ball again.

Right now the game is about keeping the lights on and using duct tape to plug the floor boards. But technologists, by nature and by demand, are innovative, and one thing that the pandemic has laid bare is the need for innovative solutions to unthinkable problems.

It’s also important to remember this: companies like UBS and Deutsche Bank had already made significant investments in remote-working solutions prior to the pandemic, potentially freeing up resources and time to dedicate to moonshots, while others play catch-up. In either case, now isn’t a time to stand still—it’s a time to envision what you want your organization to look like in the future, and figure out how innovation can get you there.

I also think that there’s something being lost in translation here: Moonshot projects are still in the works at banks across the globe, even the ones that were unprepared for Covid-19. It’s just that those banks—which could be described as stodgy when it comes to innovation—are, and have been, relying on vendors to do the heavy lifting. Rather than build a Charles River-esque OEMS, State Street goes and buys the company. RBC doesn’t build an operating system to pop its internal OMS into, it partners with OpenFin. Banks don’t build video conferencing technologies, they license tech from providers like Symphony. 

Rest assured, there are plenty of capital markets businesses shooting for the moon; they’re just not always the ones calling the shots.

Alternative Data

As I’ve written many times this year, this pandemic offers a proving ground. If your product falters when the market is in turmoil, users will abandon ship. Take, for example, the field of alternative data. The market of providers has been growing rapidly over the last few years, but practically overnight, buy-side firms needed data to help explain market volatility and the effects of the coronavirus.

While banks and investment firms were pumping money into alt data providers in 2019, a lot of the oxygen left the room in 2020, as outside investors decided to play it safe and sit on the sidelines, and asset managers looked to trim costs.

At the same time, though, certain types of data became incredibly valuable. Analysts employed alt data to help understand the economic impact of the coronavirus epidemic, such as tracking how fast China’s workers were returning to jobs after being forced to leave in an effort to contain the virus’s spread. Firms also tracked data on air quality, traffic jams, airline bookings, app downloads, and more. Some used natural language processing to scan company releases for coronavirus mentions and check what managers were saying about its impact. Geolocation data of all sorts took center stage. Vaccine tracking data went from a niche subset of the alternative world to prized information. And credit card data helped to show the worsening economic conditions for unemployed and underemployed individuals, as well as small businesses.

But the fact remains that incorporating alternative data is hard. First, there’s so much of it—ESG, consumer spending, employment data, geolocation, sentiment, shipping, and that’s before considering a firm’s own internal data that can be captured and repurposed to create a unique dataset.

Earlier this year I spoke with John Walsh, director of strategy and innovation at Refinitiv, for the Waters Wavelength Podcast. He says that where buy-side firms most often go astray is failing to understand just how challenging it can be to blend these datasets together to gain valuable insights. Essentially, each dataset is a small piece of a big puzzle—combining those pieces helps the user to see the full picture.

He noted that users have to keep in mind that the revenue gained from any one alt dataset is likely to be relatively small, so fund managers need to balance projected revenue against cost—both explicit (the cost of the dataset) and implicit (the cost of building the infrastructure to ingest, blend, and incorporate alternative data into the portfolio management process).

It’s also a highly competitive field, in which the savviest quant funds have a large head start. Plus, when you have multiple parties use the same information, you also get alpha decay, so firms have to consider whether their datasets can withstand that to justify the cost.

If you can’t answer the question of, “How can I use this dataset to create a novel approach to investing?,” odds are you’re only going to spin your wheels. Alternative data requires commitment.

While the coronavirus has highlighted the need for including alternative data into the investment process, it’s easy to get lost in a sea of information. If that lesson hasn’t already been learned, it will only be a matter of time before the New Year presents another surprise.

Mental Health

Over the hundreds of stories we’ve published in the last year, I’d say most of them in some way involved the pandemic and its ripple effects, even if it wasn’t explicit. Every new platform or product enhancement has been about fine-tuning efficiency, improving workflows, and creating a better user experience—important factors as employees and clients, alike, expect greater flexibility.

I could certainly hit on other trends stemming from Covid, like how ESG is growing in popularity, how surveillance tools could be improved, how risk models need to be revamped, how open-source tools are gaining traction, or how buy-side firms are turning to nowcasting techniques in the investment processes. Instead, I’ll finish on something far more important than financial technology.

Three years ago, at about age 38, I started to experience anxiety in a significant way. This is not unusual, as it tends to happen to men in their late 30s and early 40s—or so my shrink says. What’s weird is that it’s (likely?) not work, or my home life, or social life, or family, or friends that bring on this anxiety, but enclosed spaces—I don’t like to feel trapped. As a result, getting into an elevator makes me feel like I’m about to pass out or have a heart attack. Weird…trust me, I know.

I bring this up because I think the greatest challenge facing Wall Street—and every street—is how to deal with employees and teams that work remotely and, as a result, feel isolated, disinterested, or overwhelmed. How do you keep them engaged? How do you make them feel that they’re on a real team and working toward a common goal, rather than robots, typing away in their living rooms for a paycheck? How do you develop those bonds that stem from working side by side for eight hours or more, five days a week? These have always been difficult questions for managers to answer, but it’s only become more complicated.

There’s another reason I bring this up—during the pandemic I stopped seeing my psychologist. I need face-to-face visits because video calls for something like this don’t work for me. Also, I’m going to switch to a cognitive behavioral psychiatrist—once, you know, I find one—as I need to address this phobia directly and I might need some meds to help me along, but I’m not fully there yet in my own head.  

Why am I telling you all this? Well, the pandemic has posed challenges for those of us who see psychologists or psychiatrists—and to quote comedian Neal Brennan, if you don’t know the difference between the two, congrats on having a great life. Even for those who have not sought out mental health experts in the past, it doesn’t mean that the pandemic has been easy on them. I’m lucky; I’m in a great relationship, I have amazing friends, I enjoy my job, and everyone I know who has been infected by Covid-19, including myself, are OK (knock on wood again). I know there are a lot of people who cannot say the same things.

I’ve never liked traveling, but I have flown to Asia, Europe, and to South America, as well as all over the United States and parts of Canada. I never enjoyed flying, but I could do it. Then…one day I couldn’t. I started working from home more and more—next thing I knew, I couldn’t take the subway for fear of being trapped. Then it was bridges, then elevators. Things I’d done a thousand times in my life were suddenly nightmares. I can’t explain why it happened, and it’s scary to think about what could be next, but I’m doing my best to address it before I become a hermit living in a cabin in the woods.

People do not like to talk about mental health. I’m an open book, but that probably comes from years of drinking and spilling my guts at the bar. This is to say, though, that managers should try to keep their people in mind—as humans, not as job roles—as they bring back their workforces. While I don’t expect folks to develop the same phobia as I did, I do believe that there is an untold number of people out there who are suffering from something, and this pandemic has not helped.

Listen to people. Reach out to them. Talk to them. Be open to new ideas and requests. For somebody who clearly doesn’t have all the answers, that’s the best advice I can give.