This article is brought to you through the collaboration of The European Sting with the World Economic Forum.
Posted by Matthew Blake, Head of Shaping the Future of Financial and Monetary Systems, World Economic Forum, and Akash Shah, Chief Development Officer, BNY Mellon
- Due to the pandemic and uneven economic recovery, global capital markets are being transformed by a number of interconnected forces.
- The democratization of public markets has brought benefits and challenges, as well as increased access to new wealth creation opportunities in private markets and alternatives.
- Other important issues include concerns about data and cybersecurity, the changing dynamics of financial intermediation, and environmental, social and corporate transparency.
In the wake of the pandemic and uneven economic recovery, several interconnected forces are transforming the way global capital markets work. As the global economy recovers, market participants generally recognize the need for reforms in line with established business practices to increase resilience, remain competitive in the face of innovation, and maintain the trust of their customers.
The World Economic Forum’s Platform for Shaping the Future of Financial and Monetary Systems, in partnership 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 better understand the dynamics shaping the future of capital markets while building confidence in the system. The following six areas will be central to discussion:
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1. Democratizing public markets
In January, a group of retail traders (non-professional traders) on Reddit’s WallStreetBets launched an analogue of market riot, dramatically impacting the prices of several publicly traded companies. These episodes cost hedge funds and professional investors, many of whom were betting against the same stocks, billions of dollars and raised questions about market practice and sustainability.
Historically, access to capital markets has been highly mediated, available only to institutions or individuals who have had the time, money, and resources to manage their assets with brokers and financial advisors. Market data is readily available online today, and new technologies have significantly reduced the cost of trading and other barriers to entry. This means more people can trade anytime, anywhere.
Retail investors now account for about 23% of US stock trading volume, more than double the 2010 volume. Expanding market access is a positive development, but it carries risks. It raises important questions about market and institutional resilience and safeguards for investors, and opens up a broader discussion about financial education.
2. Greater access to new opportunities for wealth creation.
Private market investment opportunities, with their more profitable profitability profiles, have historically been available only to institutional and accredited investors. This exclusive access was based on the perceived level of complexity and risk management experience among these investors. New products are being developed today that enable retail investors to invest in private market alternatives.
And this is where problems arise again when these products open up to the broader investor community. People need to be aware of the associated risks, which are significantly different from investing in traditional stocks and bonds.
3. Blurring of public and private markets.
More companies than ever before are entering public markets around the world, and yet in the United States, we are seeing firms stay private longer and others choosing to go from public to private. This trend is supported by increased disclosure requirements and regulatory oversight of state-owned companies, as well as by investors’ drive to finance private companies. Firms are also exploring other options to raise capital and reduce reliance on equity markets.
More recently, we have seen a growing market for special asset acquisition companies (SPACs) as an alternative to traditional initial public offerings (IPOs). Many companies have turned to SPAC as a means of streamlining the process of raising capital in public markets, but increased competition and potential supervisory regulation have questioned their future.
4. Concerns about data and cybersecurity
Capital markets have become more digital as market participants demand faster execution times and unhindered access to information. These technologies are accelerating industry change, but they also raise concerns about cybersecurity and data protection.
Data is becoming an asset class of its own, and data management infrastructure is a key growth area for traditional financial companies. Institutions are actively looking for ways to leverage analytics to stay agile and drive growth.
The FinCyber World Economic Forum initiative, in partnership with the Carnegie Endowment for International Peace, aims to bring together various industry cybersecurity initiatives. But questions remain about how companies can safely innovate, capitalizing on more flexible use of data while reducing risk.
5. New roles of financial firms
Some functions traditionally performed by large financial firms are now being performed by a new group of competitors. As a result, institutions across the value chain are redefining their roles, taking on new responsibilities, partnering with providers of new technologies, and introducing new ways of working to keep up with the needs of their customers.
As of 2020, 250 of the world’s leading private fintech startups have raised nearly $ 50 billion in aggregate funding. These platforms often provide additional services over those offered by legacy institutions, providing new opportunities for collaboration and integration. While industry stakeholders have made significant progress in understanding how consumer-centric fintech is changing financial services, the role of fintech in institutional capital markets is less well understood.
For example, blockchain and distributed ledger technologies can disrupt basic functions in capital markets, including trading processes, settlement systems, payments, and capital raising. At the same time, regulators and legislators are increasingly raising concerns about cryptocurrencies, raising important questions about their future viability as an asset class.
What is the World Economic Forum doing about digital commerce?
What is the World Economic Forum doing about digital commerce?
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, economic activity continues to grow, and the ability of data to move across borders is at the heart of new business models, leading to a 10% increase in global GDP in the past decade alone.Using digital commerce
The use of new technologies in trade aims to improve the efficiency and inclusiveness of global trade, allowing more small and medium-sized enterprises (SMEs) to replicate its benefits and narrowing the economic gap between developed and developing countries.
However, barriers to digital commerce, including outdated regulations and fragmented governance of new technologies, have the potential to hinder these advances. We are spearheading efforts to apply 4IR technologies to make international trade more inclusive and efficient, from enabling e-commerce and digital payments to developing new technology regulations and trade policies (TradeTech).
6. ESG transparency
ESG is a top priority for financial companies. As investors, asset owners and corporations change their roles in supporting the transition to zero cost capitalism and stakeholder capitalism, including the adoption of agreed ESG reporting standards, serious questions remain about what market structures and instruments are needed to support sustainable investing.
We are experiencing a unique moment in history. The COVID-19 pandemic has given thought and accelerated change. Capital markets will continue to evolve, and they must do so in an inclusive and collaborative manner to maintain public confidence.