financial centers are becoming obsolete

Bloomberg – Stand on the steps of The Royal Exchange, in the heart of the City of London, and you can imagine the turmoil of the people 200 years or more ago when the area was fast becoming the world’s largest financial center. Stockbrokers, merchants and financial traders flowed between its great limestone columns with the Bank of England on one side and surrounded by bankers’ offices or business houses and alleys towards the ever-busy coffee shops.

The Exchange was the place where transactions took place, but coffee shops played an equally important role in the life of the markets as information centers. People hung out there to refresh themselves and gossip, but also to have all the details of offers and demands. “The coffee men competed with each other to maintain the supply of a wide variety of national and foreign newspapers, newsletters, newspapers and bulletins, customs entry forms, auction notices, updated price lists, etc.”, according to ” City of London: The History ”by David Kynaston.²

Today, London’s future as a global financial center is under threat. In popular discourse, that is largely due to Britain’s exit from the European Union and the ongoing struggles over trade and regulations. But Brexit is only half the story, and New York faces similar threats. While JPMorgan Chase & Co. is expanding its Paris office, Goldman Sachs Group Inc. is doing the same in Miami and has been looking for space in Dallas.

What links these movements is the way that technology and regulations have dramatically changed the flow of information in the last two decades. The Covid-19 pandemic showed how little location matters now for many jobs and businesses in finance and gave executives confidence that more operations could be managed remotely.

Veterans hardly recognize today’s world.

Until relatively recently, human voices remained the primary vehicle for transactions on the trading floors, and the talks were full of market information. Traders listened to conversations and talked to each other and to clients to absorb the color of the market – that sense of whether investors were confident or afraid, who owned what, and who was interested in selling or buying. Outside of the office, offers, tips, and preferential treatment could be earned at restaurants and bars in a way that is now much more difficult to implement.

The information in all of these conversations has become increasingly tightly regulated or automated in the 21st century, especially since the 2008 financial crisis. Insider trading scandals surrounding acquisitions, currency trading, and rate manipulation Interbank interest, known as Libor, have revolutionized commerce and communication in banks.

Phone calls, instant messages and emails are recorded for posterity. Personal communications are increasingly controlled: Credit Suisse Group AG seeks access to employees’ personal devices, while JPMorgan just received a $ 200 million fine for not recording everyone’s WhatsApp messages. Compliance is critical as a deterrent and as a record of how and why everything was done.

But it’s not just about the scandals, it’s also about the rules designed to ensure investors get good prices and that regulations for risk monitoring across the market are simpler to implement. The effect has been to drive more trading to electronic platforms even in the least liquid securities, such as corporate junk bonds.

This advancement in electronics has enabled banks to manage their own balance sheets more efficiently. Most of the large investment banks have been building core risk functions with algorithms and data systems that generate quick counts of their stock or bond inventories, what they can get from their clients at any given time, and what clients are doing. interested in buying: In other words, a smarter take on the noisy old market.

Speed ​​and risk mitigation are everything to banks in the post-2008, high-transparency, low-yield world. Investment banks are becoming more machine-like and far less reliant on human capital, as Kian Abouhossein, an analyst at JPMorgan, said earlier this year.

Similarly, Mike Mayo, an analyst at Wells Fargo & Co., has predicted that US banks could cut 100,000 to 200,000 jobs over the next decade, as digital technology helps drive efficiency, speed and flexibility. ease of use are the main sources of competitive advantage.

More complex transactions, such as buying and selling entire businesses, will likely always need face-to-face negotiation, but the Covid-19 pandemic showed just how much can be done by video.

Banks like JPMorgan and Goldman still want staff back in the office, but that office doesn’t need to be in New York or London for everyone to know what’s going on. I suspect that the desire to win people back has more to do with motivation, supervision, and control.

For team leaders, there is also human insights that can only be obtained in the office. A head of credit operations I spoke with over the summer said that what they found most difficult to judge about the zoom calls were the emotional states of the operators, whether they were overconfident or fearful.

But a team and its leader could just as easily be in Dublin or Frankfurt, Palm Beach or Austin, as in New York and London. European cities have had some regulatory momentum since Brexit, but those are not their only draws. Milan has great tax incentives as do Florida and Texas.

There may also be lifestyle benefits: cheaper housing, more accessible rural areas, perhaps better schools. And those conveniences seem more important to a younger generation of financial workers, whose jobs often carry less risk and entrepreneurship than in the past. They are heavy duty and less exciting.

Money is still good, but working in tech It could be more interesting, private equity could be better paid, and side businesses could even be viable as major careers. Goldman CEO David Solomon warned in November that New York needs to work hard to stay attractive. Like the banks themselves, large financial centers face increased competition for workers.

The main reason large urban centers persist could be for the benefit of workers: it is easier to change jobs when competitor offices and the people who might hire you are close by (although this process is now being automated as well). The advantage to a large bank of having a campus where no other banks are located is that staff cannot leave the ship without having to move house.

Networks and human relationships are important for the dissemination of knowledge and skills. But the fact that people Gen X and older have always done this face-to-face doesn’t say anything about whether Gen Z will care or need it.

The courtyard and corridors of the Royal Exchange were long ago converted into shops and restaurants. All over the world, open-air trading venues and stock exchanges are mostly museum pieces. Now the banks themselves have begun to divide their operations into smaller groups spread across countries and continents.

Location just doesn’t matter for transactions or information flows like it used to. The financial centers are in the minds and smartphones and terminals of the participants. This is the real challenge for London and New York.

¹The columns of the current Royal Exchange have only been there since it was rebuilt in 1844 after a fire, but the illustrations show that the entrance to the previous building also had large pillars before the doors. An Exchange has been on the site since 1566. The Bank of England, meanwhile, has been on the site across Threadneedle Street since 1734.

²Kynaston cites a 1963 study of London cafes.

This note does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.

This article was translated by: Miriam Salazar

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