This century a paradox has haunted traders on Wall Street and in the City. On the one hand, markets have moved to electronic platforms and can theoretically be traded anywhere. But financial institutions have also spent lavishly on flashy trading rooms, assuming that humans must sit together to stare at that technology.
Might the experience of Covid-19 help resolve this paradox? Over the past six months, lockdowns have done what digital innovation alone could not: forced financiers to rely on cyber links. Many trading floors have operated with skeleton staff. Even venues that have “reopened”, such as the New York Stock Exchange in late May, have cut the human presence dramatically.
Top executives are now reviewing this experience. And, behind the scenes, they are drawing several lessons that investors need to watch — not least as they could subtly reshape the future contours of finance.
The first is that disaster planning needs to change. Until now, banks assumed that the key to resilience in a shock — say, a cyber attack — was building expensive back-up centres. But these proved fairly useless in the pandemic, and will now be scaled back. Real estate brokers take note.
“Key man” (or person) risk also needs to be widened. When the virus struck, it could infect anyone who sat in close proximity; at JPMorgan’s Manhattan office in March, for example, 20 traders fell sick on just one floor.
This is significant. Financiers working in the same niche usually cluster together and top executives may not know exactly what they do. “Our traditional operating mode was to have all the specialists sitting next to each other, which obviously in hindsight wasn’t great planning,” Charles Bristow, co-head of global rates trading at JPMorgan, recently told a panel at the London School of Economics. The bank now plans to “keep [specialists] apart in a time when there’s stress.”
Then there is the fact that working from home affects liquidity, which can hurt mainstream investors. Jonathan Corpina, who runs an equity brokerage at the NYSE, told the LSE panel that when “human volume wasn’t in the markets” in March and April, “spreads got wider, prices got worked [so] end-customers [got] worse prices than they would normally.” Regulators must bear that in mind.
Canny traders can profit from such dislocations, but they do so better working face-to-face. Daniel Beunza, a finance sociologist who interviewed bank executives about March’s market volatility, says anecdotal evidence suggests in-office teams performed better.
One reason for this, Mr Beunza says, is that what happens within close-knit trading teams matters less than so-called “incidental information exchange” between teams. “The bit that’s very hard to replicate is the information you didn’t know you needed . . . where you hear some noise from a desk a corridor away, or you hear a word that triggers a thought,” notes Mr Bristow. “If you’re working from home, you don’t know that you need that information.”
Losing access to this “incidental information” can undermine corporate culture and make it hard to integrate newcomers. “Random encounters help with creativity and also brings a lot of trust because you can see people face-to-face,” says Kerstin Sailer, a professor in social and spatial networks. Mr Bristow adds: “The best way to set the tone for conduct in financial services is through observation and senior leadership setting the message . . . In a distributed [pattern] it becomes much harder.”
Latest coronavirus news
Follow FT's live coverage and analysis of the global pandemic and the rapidly evolving economic crisis here.
What’s the solution? Financiers are reluctant to force everyone back into the office and suspect some functions may never fully return. Daniel Pinto, head of JPMorgan’s investment bank, observed last week that “depending on the type of business [our staff] may be working one week a month from home, or two days a week from home, or two weeks a month in a ‘rotation’.” Strikingly, he insisted this would “be more or less permanent”.
If this prediction is correct, the challenge now revolves around that “incidental information exchange”. Banks are hunting for solutions: JPMorgan plans to micromanage “rotations” to mix up teams; financiers are also brainstorming their architecture. (Prof Sailer says that “a grid-like [seating] structure” is best.)
Whether this will work is unclear. In the meantime, the pandemic has boosted digital finance while showing that cyber space works best when financiers incorporate the “human factor”. Those office seating plans matter more than ever, and not just to soothe egos.
Get alerts on Financial services when a new story is published