6 issues that will define the future of capital markets

(Credit: Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Matthew Blake, Head of Shaping the Future of Financial and Monetary Systems, World Economic Forum & Akash Shah, Chief Growth Officer, BNY Mellon

  • In the wake of the pandemic and an unequal economic recovery, global capital markets are being transformed by a number of interrelated forces.
  • The democratization of public markets has brought benefits and challenges, as has greater access to new wealth creation opportunities in private markets and alternatives.
  • Other significant issues include concerns around data and cyber security, the changing dynamics of financial intermediation, and environmental, social and governance transparency.

In the wake of the pandemic and an unequal economic recovery, several interrelated forces are transforming the way global capital markets work. As the world’s economies rebound, market participants broadly recognize a need for reforms to the established modus operandi, to build resilience, to remain competitive in the face of innovation, and to retain their customers’ trust.

The World Economic Forum’s platform on Shaping the Future of Financial and Monetary systems, in collaboration with BNY Mellon, will launch a new series of multi-stakeholder conversations on the future of capital markets. The project aims to help financial market participants to better understand the dynamics shaping the future of capital markets, while strengthening trust in the system. The following six areas will be central to the discussion:

Have you read?

1. Democratization of public markets

In January, a contingent of retail traders (non-professional traders) on Reddit’s WallStreetBets launched the equivalent of a market revolt by drastically influencing the prices of several publicly-traded companies. These episodes cost hedge funds and professional investors – many of whom had been betting against these same stocks – billions of dollars, and raised questions about market practices and resilience.

Historically, access to capital markets was highly mediated, available only to institutions or individuals who had the time, money and resources to manage their assets with the help of brokers and financial advisors. Today, market data is readily accessible online and new technologies have significantly reduced the cost of trading and other barriers to entry. This means that more people can trade, at any time, from anywhere.

Retail investors' estimated share of US equities trading volume
Image: Bloomberg Intelligence, The Wall Street Journal

Retail investors now make up an estimated 23% of US equity trading volume, which represents more than a two-fold increase since 2010. Increased access to markets is a positive development, but it is not without risk. It raises important questions about market and institutional resilience, and investor safeguards, as well as opening a broader discussion on financial education.

2. Greater access to new wealth creation opportunities

Private market investment opportunities, with their more lucrative return profiles, were historically available only to institutional and accredited investors. This exclusive access was based on a perceived level of sophistication and risk management expertise among these investors. Today, new products are being developed that allow retail investors to allocate capital to private market alternatives.

Here again, challenges surface when opening these products to a larger community of investors. People need to know about the associated risks, which differ materially from investing in traditional stocks and bonds.

3. Blurring of public and private markets

More companies than ever before are entering public markets worldwide, and yet in the United States we are seeing firms remain private for longer, and others electing to transition from public to private. This trend is fuelled by heightened disclosure requirements and regulatory scrutiny for publicly-held firms, as well as investor eagerness to fund private companies. Firms are also exploring other avenues to raise capital and reduce dependency on equity markets.

Publicly traded companies by region
More companies then ever are entering public markets worldwide, but US companies are now tending to remain private for longer Image: The World Bank World Federation of Exchanges Database. “APAC” includes South and East Asia, Australia & Pacific Islands, “Europe” includes European Countries and Central Asia

More recently, we have seen a burgeoning market for special purpose acquisitions companies (SPACs) as an alternative route to the traditional Initial Public Offering (IPO). Many businesses have turned to SPACs as a means of streamlining the process of raising capital in public markets, but increased competition and potential regulatory scrutiny have raised questions around their future.

4. Concerns around data and cyber security

Capital markets processes have become more digital as market participants demand faster execution speeds and seamless access to information. These technologies accelerate changes in the industry, but also raise concerns around cybersecurity and data protection.

Data is emerging as its own asset class, and data management infrastructure is a key growth area for traditional financial firms. Institutions are actively seeking ways to leverage analytics to remain nimble and promote growth.

The World Economic Forum’s FinCyber initiative, in partnership with the Carnegie Endowment for International Peace, is working to connect the industry’s various cybersecurity initiatives. But questions remain around how firms can innovate safely, benefiting from a more agile use of data while mitigating risks.

5. New roles for financial firms

Some functions traditionally performed by large financial firms are being performed by a new set of competitors. As a result, institutions across the value chain are redefining their roles, taking on new responsibilities, partnering with new technology providers, and introducing new ways of operating in order to keep pace with their clients’ needs.

As of 2020, 250 of the top private fintech startups internationally had raised nearly $50 billion in aggregate funding. These platforms often provide complementary services to those offered by legacy institutions, presenting new chances for collaboration and integration. While industry stakeholders have made substantial progress in understanding how consumer-facing fintechs are reshaping financial services, the role of fintech in institutional capital markets is less well understood.

For instance, Blockchain and distributed ledger technologies have the potential to disrupt core functions within capital markets, including trading processes, settlement systems, payments, and capital raising. At the same time, regulators and lawmakers are increasingly vocal about concerns around cryptocurrencies, raising important questions around their future viability as an asset class.

What is the World Economic Forum doing about digital trade?

What is the World Economic Forum doing about digital trade?

The Fourth Industrial Revolution – driven by rapid technological change and digitalization – has already had a profound impact on global trade, economic growth and social progress. Cross-border e-commerce has generated trillions of dollars in economic activity continues to accelerate and the ability of data to move across borders underpins new business models, boosting global GDP by 10% in the last decade alone.Embracing Digital Trade

The application of emerging technologies in trade looks to increase efficiency and inclusivity in global trade by enabling more small and medium enterprises (SMEs) to repeat its benefits and by closing the economic gap between developed and developing countries.

However, digital trade barriers including outdated regulations and fragmented governance of emerging technologies could potentially hamper these gains. We are leading the charge to apply 4IR technologies to make international trade more inclusive and efficient, ranging from enabling e-commerce and digital payments to designing norms and trade policies around emerging technologies (‘TradeTech’).

6. Transparency around ESG

ESG is a top priority for financial firms. As investors, asset owners, and corporations navigate their roles in supporting the transition to net-zero and stakeholder capitalism—including adopting consistent reporting standards around ESG metrics—significant questions remain about what market structures and tools are needed to support sustainable investing.

Why now?

We are living through a unique moment in history. The COVID-19 pandemic has forced reflection and accelerated change. Capital markets will continue to evolve, and they must do so in an inclusive and collaborative manner in order to retain public trust.

the sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

European Commission: the LED lights of your Audi A6 shall save our planet

A new approach to scaling-up renewable power in emerging markets

Ensure that widows are ‘not left out or left behind’, UN chief urges on International Day

COVID-19 wave III and the lessons learned

Threats from mammoth banks and Brussels fuel May’s poll rates

EU and Amazon cut deal to end antitrust investigation over e-books deals

MEPs urge EU countries to be transparent about their COVID-19 vaccine supplies

Here’s how private investors can turn plastic into gold

Still a long way to go to achieve gender equality in all EU countries

Africa is set to get its first vertical forest

‘Millions facing starvation’ – Global political and business leaders on the economic impact of COVID-19

How the gender commuting gap could be harming women’s careers

Will 2020 be the year blockchain overcomes its hype?

Progress in medical research: leading or lagging behind?

Bacteria vs. humans: how to fight in this world war?

The future of energy is being shaped in Asia

What we know and what we don’t know about universal basic income

The first new university in the UK for 40 years is taking a very different approach to education

OECD household income up 0.7% in first quarter of 2018, outpacing GDP growth

First seat projections for the next European Parliament

The energy industry is changing. Are governments switched on?

What is the IMF telling Eurozone about fiscal and banking unification?

Trump ‘used’ G20 to side with Putin and split climate and trade packs

Re-thinking citizenship education: bringing young people back to the ballot box

Commission issues guidance on the participation of third country bidders in the EU procurement market

Car rentals: EU action leads to clearer and more transparent pricing

What’s going on in Chernobyl today?

Here’s how we get businesses to harmonize on climate change

Why are the Balkans’ political leaders meeting in Geneva this week?

Support for EU remains at historically high level despite sceptics

US pardons for accused war criminals, contrary to international law: UN rights office

European Business Summit 2015: In search of a vision for the future

Brexit casts a shadow over the LSE – Deutsche Börse merger: a tracer of how or if brexit is to be implemented

Migrants and refugees face higher risk of developing ill-health, says UN report on displaced people in Europe

Autumn 2019 Standard Eurobarometer: immigration and climate change remain main concerns at EU level

Stop the waste: UN food agencies call for action to reduce global hunger

The term AI overpromises. Let’s make machine learning work better for humans instead

How blended finance helped to keep energy supplies flowing during COVID-19

What will a post-pandemic economy look like? Here’s what chief economists expect

Innovation is the key to the pay-TV industry’s long-term growth

Mergers: Commission approves GlaxoSmithKline’s acquisition of Pfizer’s Consumer Health Business, subject to conditions

Coronavirus: Commission launches call for innovative response and recovery partnerships between EU regions

Parliament names radio studio after journalists murdered in December attack

4 things to know about the state of conflict today

World-famous cultural institutions closed due to coronavirus are welcoming virtual visitors

As Houthi forces withdraw from key Yemeni ports, UN monitoring chief welcomes ‘first practical step on the ground’

Get out, stay out: how financial resilience helps end poverty

The ‘ASEAN way’: what it is, how it must change for the future

30 years of tissue engineering, what has been achieved?

Businesses are lacking moral leadership, according to employees

Mental health and suicide prevention

‘Perseverance is key’ to Iraq’s future, UN envoy tells Security Council

Belgium: Youth Forum takes legal step to ban unpaid internships

European Commission recommends common EU approach to the security of 5G networks

The Future of Balkans: Embracing Education

The European Parliament fails to really restrict the rating agencies

Gas pipeline in the European Union. (Copyright: EU, 2012 / Source: EC - Audiovisual Service / Photo: Ferenc Isza)

EU Investment Bank approves € 1.5bn loan for Trans Adriatic Pipeline (TAP)

Could Europe become the first climate-neutral continent?

Venezuela’s needs ‘significant and growing’ UN humanitarian chief warns Security Council, as ‘unparalleled’ exodus continues

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s