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Fidelity National Information Services Inc (NYSE: FIS) published the findings of a survey covering the perspectives of over 1,000 C-level executives in financial services, including 200 from brokerage firms and investment banks.
In an interview, FIS strategy head Pontus Eriksson unpacked some key report takeaways.
Context: In recent months, alongside speculative commentary on online forums like WallStreetBets, shares of highly shorted companies rose as funds looked to reduce their short exposure, buying-to-close positions.
Thereafter, retail market participants — like those that contributed to the speculative commentaries online — added to the crash-up dynamics as they heightened their aggressive stock and short-term call option buying.
The event put pressure on the financial system, forcing brokers to reduce risk by limit trade.
Eriksson, who is focused on capital markets strategy, as well as brokerage trading and position management, said this market dynamic is likely to remain.
“There’s been a huge inflow and volume increase in the retail business,” he said. “It will likely become more and more [common].”
A lot of the activity is the result of participants looking for ways to engage with the outside world during COVID-19.
Additionally, low rates and the digitalization of investing make it easy for people to get involved with complex, leveraged products and, as a result, exacerbate volatility.
“That’s also where social media comes in and you can see lots of activity and opinions,” he said in a discussion on getting ahead of some of the volatility.
“Some people even talk about how it’s going to be more important to have a Reddit account in the future than a Bloomberg account.”
As a result, to withstand turbulent trade and get ahead of regulatory setbacks like FINRA’s $70-million fine against Robinhood in June, the FIS survey finds 37% of brokerage firms looking to accelerate their technology modernization and infrastructure.
The Last Word: “Participants don’t have the skillset and know-how, certainly when it comes to options and more complicated products,” Eriksson said.
Eriksson’s research tells him that regulation in the retail space — against complicated products and training — is likely in play.
“For the broker, they have to have the technology to actually measure all of these risks because they have to report that to the SEC and FINRA,” Eriksson said in reference to a statistic that 40% of brokerage respondents said they would strengthen risk management in the next 12 months.
“The race is relentless on the digitalization and transformation toward making a better client experience.
“But, towards themselves and the regulators, they need to improve risk management.”
Photo: Liza Summer from Pexels.
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