30 Sep ACCA Annual Debate 2015
This is an excerpt of a speech delivered by Patrick Teng, Founder & CEO of Six Capital, at the ACCA’s Annual Debate held on 30th September 2015 at The Four Seasons Hotel, Singapore.
In the midst of the Digital Revolution, Singapore’s largest Banks today will relinquish their position as the dominant players in Corporate Finance in 2025.
Good morning ladies and gentlemen. I thought it would be worth starting with a very short, famous story about King Canute – the 11th Century King. A King who at the time also ruled over England, Norway and Denmark; clearly an extremely powerful man. King Canute is said to have set his throne down by the sea shore and then commanded the incoming tide to halt and not wet his feet and robes. There are no prizes for guessing what happened next: he got wet. Why did King Canute do this? He staged the scene to rebuke the flattery of his courtiers, to show them that there are some things that even one of the world’s most powerful men cannot stop.
You see ladies and gentlemen, some things are inevitable. Some things cannot be stopped by even those who think they hold immense power. The impact of digital disruption is exactly the same; it is inevitable. Technology is disrupting everything – and banking, whether it is corporate finance or FX trading is no exception.
From the way my friends on the opposition speak against the motion and about the digital revolution, it does seem that they have convinced themselves that this is an evolution – not a revolution. They argue that they can embrace digital technology, tinker their systems a little, and everything will be fine. Ladies and gentlemen, you and I both know, this is a revolution. No amount of fiddling around at the edges is going to keep away the tides of change.
It is already happening
I can confidently say that I am not simply putting forward a theoretical argument. Indeed, we can see this is already happening today. In my sector of expertise, FX trading, the role of the major banks has already changed significantly and will continue to do so. Change, that my friends on the opposition would have laughed off as unthinkable only a few years ago. Indeed, back when I was trading for the major banks, I would have said exactly the same.
But things have changed: the role of the banks as ‘market makers’ due to the ban on proprietary trading through the Volker Clause has changed significantly, leading to reduced liquidity and heightened volatility. So who is stepping in to provide the liquidity? Independent, entrepreneurial firms. And how is this possible? Primarily due to developments in technology and the new digital world that we live in.
The company that I founded six years ago, Six Capital has been being doing exactly this. The firm was set-up after the financial crisis of 2008, as it was clear there would be a demand for a new type of FX trader. There are new regulations, different dynamics and increased volatility in currency markets today – new approaches to trading are therefore required. That includes a new technological model, which is where we saw the opportunity to develop a platform that not only processes large volumes of trades, but also generates insights by leveraging and analysing big data. Ricebowl, our algorithm-based training and trading platform, does exactly that; by forcing traders to submit trades every 90 seconds on dummy accounts it enables big data to be created and analysed, removes the emotional aspects of trading, and therefore reduces the risk in trading FX, whilst leveraging scale through access to crowds.
The era of the ‘big-swings’ trader is over and the pendulum is shifting from the long-position, big-bet trader to the consistent, aggregation of a small-wins trader mentality. This business model would not be possible without the digital revolution and the ability of technology to provide access to crowds.
If this is happening in FX markets today there is absolutely no reason whatsoever why the same principles will not hold true for the other parts of the major banks’ business.
Delivering access to scale and increasing efficiency
Those arguing against the motion speak about the scale and the uniqueness of the major banks, which will lead to their dominant position always holding true. They argue that adapting their services to become more digital is the best way forward for all.
This reminds me of a quote from Thomas Jefferson, one of the Founding Fathers of America, who said: “Power should be taken away from the banks and restored to the people, to whom it belongs”. You see ladies and gentlemen, there is no inherent rule that says the major banks must exist. Far from it, banks exist because previously they fulfilled a role that could not be delivered in any other way. That quite simply is no longer true today. The digital revolution – not evolution – has changed that. Technology means the services they offer can be provided more efficiently, with more stability and more conveniently by others.
On the point of scale – that is exactly what the digital revolution is providing – the ability to draw on the resources of crowds and entire populations. Resources can now be scaled in a manner that has never previously been possible. Barriers to entry – the fortress the major banks have always relied on – have also been smashed down. Independent, flexible and agile firms are now able to enter markets, gain scale and offer services more efficiently and at higher levels than the banks can match.
The tides cannot be stopped
It is clear that those arguing against the motion believe that the banks’ dominant position will always hold true because it is ‘different’ to all other industries – as if it is somehow immune from the digital revolution like no other. Ladies and gentlemen, the position of the opposition rests on an underlying assumption that the role of the major banks in corporate finance is somehow unique and therefore will remain dominant forever.
This is an assumption that has no basis. When the role of banks can be fulfilled more effectively and more efficiently by other players – their role will diminish. Due to new technology, delivering access to scale and reducing barriers to entry, that time is now. You cannot stop the incoming waves; the banks are about to get very wet.