Monday, 16 November 2015

Not a Happy Christmas for Bank Employees.

First please forgive me for not commenting on the terrible events in Paris, nor offering any solution. My horror and sympathies are total and absolute but don't need publicly broadcasting and I have no solutions. Instead I am going to ramble about the employment prospect  for financial analysts and traders.

Parkinson’s rule - "work expands so as to fill the time available for its completion".

Parkinson's rule,  data derivative - "data expands to fill the data storage space available".

Polemic’s rule of Fed watching  - "the number of forward Fed moves analysed will fill the amount of analysis available".

This observation was triggered by my first sightings of speculation as to when the next Fed move will be after the one that is ‘obviously’ going to be in December. This reallocation of analyst CPU time to the next task, having decided that the first task is complete or at least now only needs minimal background processing, might be worthy but is probably not. The huge amount of processing power applied to working out the first Fed move has been so inaccurate over the last few years that moving on to the next derivative seems foolhardy at best. The further up the derivative family tree one goes the greater the compounding error factors mount up.

The traditional analyst model is that analysts are much like the CPU in your computer. You have paid for it to sit there so you might as well have it doing something. Most analysts are employed full time by institutions and so are expected to be analysing things for every hour that they are in paid employment. This results in a fixed analyst supply that does not respond to demand, well not swiftly anyway (I’ll come on to that later). So when demand shoots up, usually when markets are flying around, accompanied by economic, financial or political crises, the limitation of supply means there isn’t enough analysis going on, or at least not at the speed needed, but when things are deadly quiet analysts apply themselves with equal vigour to the equivalent of the SETI project, examining noise and trying to find patterns of life in it. Yet most of it really is noise, such as trying to determine when the fourth Fed hike will be or if the colour socks that a CEO wears has any bearing on profitability.

Yet supply of 'analysis' is not totally fixed. An increase in demand sees part-time analysts come out of the woodwork, forgoing their other day jobs for an hour or two to do part-time analysis. Yet unlike a normal supply and demand curve where an increase in demand will see prices rise and a better quality of analyst feel it worth getting out of bed to fill the gap, these part time analysts are usually of dramatically lower quality. Every Tom, Dick and Harry jumps on the airwaves to give their analysis, which is usually just a view, making it harder to filter out the wheat from the chaff.

This is how it has been, but the shape of the analyst market is changing fast. Banks are under the cosh as their investment bank arms are dramatically trimmed or closed. The strategy desks in banks have always been as much showmen as market calling geniuses but if no one is willing to pay for the show can we expect the show to go on?

Funds are turning more to algo and roboadvisory, macro funds are performing appallingly and restructuring, even the mighty Brevan Howard let 70 people go last week and tough they are said to be back office and support it is part of a bigger underlying trend. Even the target audience for independent analyst companies are having their spends questioned by investors and regulators.

With strategy and analyst desks being shredded there is a growing population of individuals out there looking to either rejoin other units, coagulate into smaller cooperatives or go it on their own. Going it on your own is exceptionally hard and unless you have been a super-name and can afford to hire an infrastructure around yourself to provide the management and sales support you are most likely to end up as a zero hours contractor hoping that the spiel you put out gets read. It is very hard for a one man show to switch hat at the end of a presentation to become salesmen and negotiate fees. Getting read is hard enough with every bank and house feeling obliged to put something out each day but then getting followed is probably only as good as your last five calls. The horrible reality is that even if you get the first four calls right the chances are the client will act on your fifth which turns out wrong, so despite a 80% hit rate you are back to square one.

The banking layoffs are continuing with a vigour in the trading operations too. The Sunday Times story yesterday 'Bonfire of the bankers" (sorry it's paywalled) encapsulates it but there is a lot more going on below the surface of the headline banks. All the second and third tier global operators who have units in London are going through the same pain. The latest raft of layoff are going to find life even tougher than the first as alternative employment posts have already been applied for. Moving to completely different careers is tough for many as the skill sets developed in dealing rooms are not as transferable as many think.

If traders are hoping to move into the corporate sector they will find that their too restructuring has killed any ‘profit centre’ style trading reducing then back to old fashioned hedging units. Risk taking opportunities in Hedge funds has collapsed too. Macro performance this year has been appalling and the layoffs in that sector continue. Brevan’s lay off of 70 staff last week may be tagged as ‘back office and support’ but that doesn’t hide the trend. The alpha singularity is being approached. The mind boggling application of IQ chasing the finest basis point has driven alpha returns to microscopic levels as trends are lacking and most macro trades are based upon the development of a trend. Even when one does arise it is interesting to see that funds rarely outperform the trend once leverage and risk allocation have been discounted.

So where’s the margin gone? Any one popping into a bank or trying to transact FX at an airport Travelex can see that margin is alive and well but at the lower retail sector leading, in the UK, to a proliferation of new companies stepping in to try to take value out it. If you run a small company you will no doubt be currenty recieving cold call on daily basis from small shops offering you bank beating FX rates. I can only assume that they are growingly staffed by ex-wholesale salesfolk who have managed to find a home before becoming the drivers of FX taxis (even that back stop has been screwed by Uber).

The squeeze in pricing will continue to cascade down the retail tree until even that becomes a margin singularity as someone such as Google or Amazon steps in offering FX services or even, someone (and here’s an idea) sets up the Uber of FX where you type in how much cash you want and the app tells you in real time the location of anyone willing to do the other side of the trade allowing you to meet on a street corner and swap your currency notes. Security would be a problem though, with the app becoming a muggers guide so the next iteration would lead on to centralised Amazon style distribution centers and which point, voila, we have recreated the original biblical hall of the money changers.

The upshot of all if this is that the employment prospects of rafts of university leavers hoping to join a well paid and steady carrier in the City are shot. The whole idea of a City career has been anathema to me for years. Most city workers have a series of jobs, not a career.

However if you are a 15 year old wondering what to do, finance may not be such a stupid choice.  By the time you finish university the banks will have fired too many people and suddenly be desperate to find new cannon fodder.

I will end here and comment on markets in a further post, but I have a feeling that any readership I have in financial institutions will be be dramatically culled in the next month or so. Sorry folks, it isn’t going to be a happy christmas for many.

1 comment:

Anonymous said...

Very true. However, no great loss: 95% of people in the City offer zero value and we are much better off without them, rather than having to pay their over-inflated salaries via excessive costs on our investment products. Hopefully the next major cull will be corporate management - most of whom would make even finance folk look clever, and that's saying something.