TECHNOLOGY AT WORK

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26 Citi GPS: Global Perspectives & Solutions February 2015 The adoption of digital money can help 220 million individuals enter the formal financial sector, moving $1 trillion from the informal to the formal sector Citi’s Digital Strategy Team in its recent report Digital Money: A Pathway to an Experience Economy estimates a 10% increase in the adoption of digital money can help an estimated 220 million individuals enter the formal financial sector. This translates to an additional $1 trillion moving from the informal economy to the formal economy. The Centre for Economic and Business Research (CEBR) estimates that the cost of cash works out to be about 2.8% of the total cash takings by retailers. Based on this forecast, Citi estimates the adoption of digital money can result in over $125 billion in cost savings from cash handling. Figure 11. Commercial bank branches per 100,000 adults 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 % Chg Spain 98.2 100.1 102.7 105.2 104.9 100.3 97.1 89.6 85.1 74.5 -24.1% Italy 63.5 64.1 65.4 66.7 70.3 67.6 66.5 66.0 64.4 62.0 -2.4% Switzerland 57.4 56.8 55.6 55.3 53.9 52.7 51.8 50.2 48.8 48.0 -16.4% Belgium 57.2 53.7 53.4 51.4 49.7 47.9 45.0 43.4 42.4 41.5 -27.5% France 45.9 44.8 44.5 41.9 41.5 41.2 38.8 38.7 -15.6% United States 32.5 33.1 33.8 34.6 35.0 35.8 35.4 35.2 35.3 33.9 4.2% Japan 34.6 34.4 34.1 34.0 33.9 33.9 34.0 33.9 33.9 33.9 -2.1% Australia 30.7 30.6 31.2 31.4 31.6 31.5 31.3 30.9 31.8 30.7 0.2% Denmark 50.1 50.2 50.5 51.9 50.5 45.8 40.9 38.7 34.3 30.3 -39.6% Canada 24.6 24.6 24.5 24.1 24.0 24.1 24.4 24.4 -0.6% United Kingdom 29.1 28.4 26.5 26.5 26.2 25.6 24.9 24.2 22.2 -23.5% Hong Kong 23.6 23.2 23.0 23.3 23.6 23.3 23.6 23.7 23.5 23.1 -2.1% Ireland 35.9 34.6 34.0 33.4 34.1 34.9 28.7 27.7 25.0 23.0 -36.0% Sweden 23.6 23.6 23.7 23.6 24.0 23.0 22.5 21.7 21.8 21.7 -7.8% Netherlands 33.7 28.1 27.7 28.6 27.6 25.2 23.0 21.3 19.6 17.4 -48.3% Germany 21.3 20.2 16.7 16.3 16.3 15.8 15.7 15.5 13.9 14.7 -31.1% Finland 13.2 14.4 16.9 16.1 16.1 15.0 15.5 15.1 13.6 12.3 -6.9% Singapore 11.7 11.5 11.1 10.7 10.3 10.2 10.2 10.0 9.8 10.2 -13.4% Norway 13.1 12.1 12.0 12.3 11.6 10.9 11.0 10.7 9.9 9.1 -31.0% Source: IMF Automation in trading is continuing, leading to headcount reductions and improved operating margins The biggest hindrance to wider e-trading adoption is standardisation… Post-crisis, both regulation and slumping returns have forced banks to take a hard look at each of their trading businesses to look for ways to minimise costs and maximise efficiencies. We believe these forces quickened the pace of automation in both the fixed income and equity markets. While market disclosure is limited, after speaking with industry participants we believe the product automation timeline is quite wide, with cash equities and treasury futures almost fully electronic and cash bonds at the early stages of electronification and still largely voice traded. Below we lay out the percentage of the market that is electronically traded by product, according to a joint report done by McKinsey and Greenwich Associates 54 (see Figure 12). As more trading moves towards a fully automated market, we would expect to see continued headcount reductions and improved operating margins. After speaking with market participants, we believe that the biggest hurdle for more markets to move towards automated/electronic trading is the lack of standardisation among products. For example, investment grade and high yield bonds remain largely voice traded, despite significant attempts to create electronic trading platforms. We believe this is largely due to bond market structure, which lacks the standardisation needed to complete a match-based, electronic market like equities. 54 McKinsey & Company and Greenwich Associates. Corporate Bond E-Trading: Same Game, New Playing Field. Rep. N.p.: n.p., 2013. Web. © 2015 Citigroup
February 2015 Citi GPS: Global Perspectives & Solutions 27 …but if this is achieved, fixed income, commodity and currency products may become more ‘equity like’ The equity market has taken the largest steps to electronically evolve. After speaking with industry participants we believe that currently ~95% of all stock executions are electronic. This is in stark contrast to only 15 years ago when the majority of stock orders were still traded manually on a physical trading floor. The evolution of the equity market has significantly changed the fundamental economics of the equity business, with machines replacing human traders and costs to trade declining dramatically. According to industry participants, the adoption of electronic trading in the equity markets has led to a 50% headcount reduction over a 10 year period. Figure 12. Treasury futures and cash equities are largely electronically traded, while cash bonds are at the early stages Bespoke interest rate swaps Structured credit/rates HY cash CDS single name IG cash Foreign exchange options Standardised interest rate swaps Repos US Treasuries ST interest rate trading Foreign exchange swaps European government bonds Foreign exchange forwards Covered bonds Precious metals Foreign exchange spot iTraxx CDS Index Cash Equities Treasury futures Note: Shaded area represents the percentage of the market that is electronically traded. Source: Citi Research, McKinsey & Greenwich Associates report Financial Services Continue to Move towards Passive from Active Investing William R. Katz US Brokers & Asset Managers Analyst Scott T Chronert US Small/Mid-Cap/ETF Strategist Technological advances have led to the computerisation/automation of many facets of the financial services industry. The emergence of the “exchange traded fund” (or ETF) has, in many respects, been enabled by the evolution of trading technology. Passive and ETF funds now make up 28% of US retail assets under management (Figure 13), up from just 9% in 2000. This shift from active to passive can be seen in the employment numbers of the investment company industry where total assets under management from 1997 to 2013 have grown at a compound annual growth rate of 17.5% while employment over the same period has grown at just 4.8% (Figure 14). © 2015 Citigroup
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