Can Facebook innovation disrupt/crush Wall Street?
Ever since 24 stockbrokers signed an agreement under a Buttonwood tree in 1792, “Wall Street” has enjoyed a money party. Business has been on a growth trajectory with huge margins, with just a few hiccups, from that day in May until the financial crisis. What Wall Street is experiencing now is not a “hiccup” but a structural change that will morphe the “business” into a low margin low growth industry. What is happening is not just a change is business practices. In fact most investment banks still employee the same model that worked for all those years, which is essentially, hire a few bankers, salespeople, traders, and research analysts and with little to no capex, generate huge fees and commissions based on the mystique that they “know more than you” and you “need” their intermediary status to get deals done. This author is a wall street lifer and has personally benefited from this great money run, but has also recognized that the end is “here”.
Technology is the great equalizer and the great destabilizer. Just look at the makeup of wall street trading desks today vs. 10 years ago and it’s obvious that the machines have taken over. Humans no longer have an influence in day to day trading globally. Trading algorithms dominate the minute by minute activity from Shanghai to New York to Istanbul. Executions for even the smallest investors are sent thru machines and executed instantly. The result…substantially lower trading commission margins and revenues. Whats next? Investment research has become a commodity as well. Too much research of low quality hits inboxes every day with little to no readership (yes the banks do track readership but they will never give you the results). Many large firms have turned to AI to “enhance and quant-t-tize” their research offerings and cut headcounts to reduce costs.
So what does this have to do with Facebook?
One of the last few sources of fees and margins that investment banks have are the underwriting and distribution of securities to both large institutional investors and the investment public. Historically Investment banks sold their expertise to corporations and have charged huge fees of up to 5-7% to execute this service. Is this activity really worth the fees being charged? When it comes down to it, the distribution of deals to investors is not rocket science. To get these mandates all they do is have analysts create models that make whatever valuation the company wants, to get the deal done.
Today Institutional Investors have enough independent information available to make most investment decisions. Direct contact with the companies they invest in is more of the norm and not the exception. The investment public has more and more information available to them and is more sophisticated than in recent past. Facebook has over 2 billion people per month using their services. Its reach goes beyond monthly visits. More than 50 million companies have facebook pages, including all of the S&P 500. So what would it take for Facebook to get into the business of financial services and distribution? In this world of ever-increasing FINTECH breakthroughs, it won’t belong. Imagine FaceBook, with its massive outreach and online relationships with most corporations, creating an online ecosystem and theoretically approaching companies and offering the widest possible distribution of any type of security. Large Institutional investors would embrace this as well, as this would result in lower fees and more realistic valuations based on supply/demand rather than Wall Street “projections”. (see Shopify’s upcoming stock offering)
One day Facebook (or Amazon) could mobilize its followers and online relationships to not only give Wall Street a run for their money but disrupt the golden goose.
Sounds ridiculous? Facebook-Amazon-Netflix-Google Did you invest in the IPOs of all of these companies? If not…that’s ridiculous.