Several interconnected dynamics are altering the way global capital markets function in the aftermath of the epidemic and an uneven economic recovery. As the world’s economy recover, market participants acknowledge the need for modifications to the established business model in order to increase resilience, stay competitive in the face of innovation, and maintain consumer trust.
In conjunction with BNY Mellon, the World Economic Forum’s platform on Shaping the Future of Financial and Monetary Systems will start a new series of multi-stakeholder talks on the future of capital markets. The project’s goal is to improve financial market players’ understanding of the forces driving the future of capital markets while also bolstering faith in the system. While keeping that in mind, let’s explore the factors that are holding back the capital market industry.
Public-sector market liberalization
The equivalent of a market rebellion was initiated in January by a group of retail traders (non-professional traders) on Reddit’s WallStreetBets, who substantially influenced the prices of numerous publicly listed businesses. These instances cost hedge funds and professional investors billions of dollars, and highlighted issues about market procedures and resiliency. Many of them had been betting against these same equities.
ICMA told that previously, capital markets were only accessible to institutions or people with the time, money, and resources to manage their assets with the assistance of brokers and financial consultants. Market data is now easily accessible on the internet, and new technologies have drastically decreased the cost of trading and other entry barriers. As a result, more individuals will be able to trade at any time and from any location.
Retail investors now account for over 23% of all equities trading activity in the United States, a more than two-fold increase since 2010. Increased market access is a good thing, but it comes with certain risks. It raises significant issues about market and institutional resiliency, as well as investor protections, and opens a larger conversation about financial education.
Increased access to new sources of wealth production
Historically, only institutional, and accredited investors had access to private market investment possibilities, which offered more lucrative return profiles. This special access was granted based on the investors’ assessed degree of knowledge and risk management competence. New solutions are now being created to enable ordinary investors to deploy cash to private market alternatives.
When these products are made available to a bigger group of investors, issues arise once again. People should be aware of the dangers involved, which are significantly different from those linked with traditional equities and bonds.
The distinction between public and private markets is becoming increasingly blurred.
Worldwide, more companies are going public than ever before, but in the United States, some companies are staying private for longer than ever before, while others choose to go public. Enhanced transparency requirements and regulatory scrutiny for publicly-held corporations, as well as investor enthusiasm to finance private startups, are fueling this trend. Firms are increasingly looking at new options for raising cash and reducing their reliance on equity markets.
We’ve noticed a growing market for special purpose acquisitions companies (SPACs) as an alternative to the standard Initial Public Offering (IPO) (IPO). Many firms have turned to SPACs to simplify the process of obtaining capital in public markets, but growing competition and potential regulatory scrutiny have prompted concerns about their long-term viability.
Concerns about data and cyber security
As market players expect quicker execution speeds and easier access to information, capital markets procedures have grown increasingly digital. These innovations speed up the pace of change in the business, but they also raise issues about data security and privacy.
Data is becoming its own asset class, and data management infrastructure is a crucial area of development for conventional financial institutions. Institutions are actively looking for new ways to use analytics to stay flexible and develop.
In collaboration with the Carnegie Endowment for International Peace, the World Economic Forum’s FinCyber project is striving to integrate the industry’s different cybersecurity initiatives. However, issues remain about how businesses may develop responsibly while minimizing risks by making better use of data.
New roles of the financial firms
A new set of rivals is doing several activities that were formerly provided by giant financial corporations. As a result, institutions along the value chain are redefining their roles, taking on new duties, collaborating with new technology suppliers, and introducing new methods of doing business to stay up with their clients’ expectations.
By 2020, 250 of the world’s top private fintech businesses had raised approximately $50 billion in total capital. These platforms frequently offer services that complement those provided by traditional institutions, opening up new avenues for cooperation and integration. While players in the financial services sector have made significant progress in understanding how consumer-facing fintech are altering the industry, the function of fintech in institutional capital markets is less well understood.
Blockchain and distributed ledger technologies, for example, have the potential to disrupt basic capital market services such as trading, settlement, payments, and capital raising. Simultaneously, authorities and legislators are becoming more public about their worries about cryptocurrencies, creating serious doubts about their long-term sustainability as an asset class.
Transparency in relation to ESG
For financial institutions, environmental, social, and governance (ESG) is a primary priority. Significant questions remain about what market structures and tools are needed to support sustainable investing 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.
We are seeing a once-in-a-lifetime event. The epidemic of COVID-19 has compelled contemplation and has expedited reform. Capital markets will continue to develop, and in order to maintain public trust, they must do so in an open and collaborative manner.