SCORE

Today we have summaries of 2 thought-provoking Davos panels. As we mentioned yesterday, all the public presentations at this week’s World Economic Forum meeting are available on the organization’s website (link at the end of this section). They take a while to download (and almost as long to watch), but they’re all there…

The first panel was titled “Automated Markets”, focusing largely on US equity market structure. The participating experts were: 

  • Adena Friedman, President and CEO of NASDAQ
  • Ron Mock, President and CEO of the Ontario Teachers’ Pension Plan Board
  • David McKay, President and CEO of the Royal Bank of Canada
  • William Ford, CEO of General Atlantic and BlackRock board member
  • Andy Serwer, Editor in Chief Yahoo, and moderator

Three key themes from this group:

  • Changes over the last decade in US equity market structure have largely benefited small retail investors. Single-security executions (stocks or ETFs, for example) are fast and low cost thanks to competition among exchanges, ATSs and dark pools. Further, the proliferation of ETFs gives this constituency a wide array of low cost investment options.

    For institutions, it is a different and more complex story. The technology to manage market structure and provide low cost services like ETFs strongly favors industry consolidation to mitigate fixed tech-related expenses. Also, 10% of all US stock trading happens at the close, which can add to volatility during market duress like last December.

  • While passive investing has grown in public equities, the growth of private equity and venture capital over the last 20 years is all “active”. Ron Mock said his portfolio is largely passive for equity exposure, but very active in terms of PE, infrastructure investments and hedge funds. 
  • The panel was split on the question of the future of financial advisors. Bill Ford, who runs a VC firm, saw tremendous opportunity for technology to disrupt human advisors. Adena Friedman disagreed, saying that human judgment must always sit at the base of financial decisions to maintain trust in the financial system. All agreed, however, that a more automated/algorithmic market will remain as volatile as one dominated by humans. 

What the panel did not want to discuss: what happens to US equity market structure during periods of stress longer than just a few weeks like last quarter. There was lots of tiptoeing around the topic and warnings of liquidity shortfalls. But since the current market structure is relatively young, it has not yet been tested. 

The second panel to discuss was titled “Shaping a New Market Architecture”, which centered on questions of industrial scale and scope. The panelists were:

  • Raghuram Rajan, finance professor at University of Chicago Booth School
  • Ning Gaoning, Chairman of Sinochem
  • Steve Schwarzman, Chairman, CEO of Blackstone
  • Brian Moynihan, Chairman and CEO of Bank of America
  • Ruth Porat, CFO of Google
  • Andrew Ross Sorkin, NY Times and CNBC, moderator

The three key themes from this group:

  • The growth of technology drives massive economies of scale and scope across industries and geographic regions. Google’s core mandate of organizing the world’s information is infinitely scalable and also draws top-tier talent interested in addressing that challenge. Chinese industry has been one huge roll-up story for 20 years, and technology only pushes that trend along. Blackstone is investing heavily on China Tech, looking to leverage that trend. 
  • The geopolitical dislocations caused first by globalization and more recently by technology will take decades to address. Steve Schwarzman offered that opinion, and the other panelists reluctantly agreed. About the best they could offer as fixes was the need for grade school education focused on digital skills. And that history is a constant readjustment to new technologies…
  • Regulating technology will be a difficult challenge at best and must be considered in a global context. Rajan highlighted that China and the US think about this question very differently, and the US will have to consider what hamstringing its local companies might do to their global competitiveness. Google’s Porat called for global adoption of privacy and taxation frameworks. 

What the panel did not want to discuss, despite Sorkin’s repeated questioning: how the current US/China trade war will end, or how the rising tide of global frustration over income inequality will begin to recede. At best, the participants were philosophical about being witnesses to a historic sentiment shift. At worst, they seemed a bit deer-in-the-headlights about the scale and scope of the challenge ahead. 

Davos link: https://www.weforum.org/events/world-economic-forum-annual-meeting/programme

Automated Markets & Shaping a New Market Architecture