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Capital markets are missing the human touch

By Ralph Sinclair
17 Dec 2020

If central bank and government support was the scaffold that propped up the vast amount of funding done in lockdown, then long-held relationships between institutions — between people — were the bolts holding it together. The longer those in markets spend apart, writes Ralph Sinclair, the weaker those links will grow.

“It is starting to feel as if it would be nice to have some more human contact with our teams,” confesses Eila Kreivi, head of capital markets at the European Investment Bank.

It is a view that echoes around capital markets. Working from home in lockdowns aimed at stifling the spread of the coronavirus pandemic began in March. It was a novelty at first — and for many, a relief. 

Review 2020There was joy at not having to commute, at being able to spend more time with loved ones — and for that matter, less time under the boss’s gaze. Meanwhile, many claimed they were just as productive, if not more so, working in their pyjamas with a cat on their lap, or in the garden, as they were in the office. 

Video conferencing stepped in where the international travel industry could not, allowing investors to meet with issuers remotely, and letting teams within institutions communicate while apart.

Since then, there has been talk of the death of the office with firms eyeing savings on the rent they pay, while staff have been keen to keep flexibility over where they work, or to abandon an ingrained culture of presenteeism and, in some cases, the gruelling travel schedules that kept them away from both home and office for long periods.

But after months away from the desk, many in capital markets are experiencing the limitations of not being on a trading floor, or of not being able to see their clients.


Record volumes

It is not that working remotely does not work at all. For much of the year, trading floors have run at 20%-50% capacity and yet markets have stayed open for the most part, allowing borrowers of all stripes to raise record funding volumes despite the economic outlook worsening so drastically.

Granted, it would all have been a lot harder still had central banks not stepped up to buy so much of the new issuance, but it could hardly be said that there has been a short-term need to pack capital markets workers back into offices.

But now there is a growing sense that the disruption and alienation, the lack of physical togetherness, the blurring of the lines between what is work and what is domestic, cannot be good in the long run.

For a start, few home offices can replicate the trading floor environment. The infrastructure and equipment is better, as is the speed of information flow but also the quality and richness of that information. 

Review 2020Operationally, being in different locations also has its draw-backs. “We have to set up conference calls for things we would normally just be able to have a quick conversation about,” says Mark Lynagh, co-head of debt markets EMEA at BNP Paribas in London. “It is not a big hurdle, but over time you realise the efficiencies of all working in the same location”

“To a degree, the flexibility of coming to the office has been an advantage,” says Sean Taor, head of European DCM at RBC Capital Markets, who has not worked from home at all. “The infrastructure is better. It is about the practicalities of doing the best job possible. There can be a material operational risk in relying on domestic broadband to allocate and price a deal.”

Some deals can of course be done from home — but not all. “It’s fine doing a £300m tap from home where you don’t have so many line items in the order book,” says Stuart McGregor, RBC Capital Markets’ head of public sector syndicate. “But you need the team together for the big deals where there are hundreds of orders.”

Aside from the sheer administrative complexity of bond execution, simply knowing whether to do the deal or not in the first place is more of a gamble for staff away from the office. “People who aren’t in the office can see what is going on, but they can’t always feel it,” says Taor. “Especially the wider ebb and flow of the markets.

“Sentiment can drive investment decisions. A deal can work one day and not the next for any number of reasons. A syndicate desk needs to have a feel of what is going on rather than rely solely on screens. On some occasions this year, screen prices haven’t shown where bonds are actually trading.”

Chat rooms have become ever more prevalent tools for traders in recent years but these too have their limitations. “You cannot replicate what you see and hear on the trading floor through chat rooms,” says Taor. “You don’t get the emotion.”

There is also the small matter of that quality that binds relationships in the capital markets: trust. Traders will not put every price they show on a chat, or say it over a recorded line. They have become mindful of putting anything in writing for fear of it coming back to haunt them years down the line, whether they were acting in good faith at the time or not. Moreover, they do not have the time to scribe every move of their working lives in a chat room.

That means that those working remotely from the trading desk do not have the full flow of information that they would have were they there; nor do they see the context in which prices are being shown.

The other aspect of working from home is home itself. It has become harder to draw working days to a close. As much as working at home has removed commutes and offered more time with families — or perhaps just less time with colleagues — it has also caused the working day to run on without end as there is no physical departure from the desk to somewhere else. 

Review 2020Taor says it reminds him of a previous innovation. “A good example is when people got Blackberries,” he says, referring to the first mobile phones to handle email with any degree of competency. “It meant total flexibility at first because you could email from anywhere at a time that suited. But by the time they were standard issue they had become a chain because everyone expected instant replies from everywhere. In that respect working has now become less flexible because you are expected and required to reply wherever you are and whatever time of day it is.”

As much as technology — both the Blackberry and more recent tools — has helped markets to function from unorthodox locations, it has brought its frustrations. Among the biggest is video conferencing.

“I’m not enthusiastic about video conferencing,” says Friedrich Luithlen, head of debt capital markets at DZ Bank in Frankfurt. “The first five minutes of every meeting is spent checking if you can hear each other — and if we can’t, we end up on an old-fashioned phone call. Video technology as it stands is not a permanent solution.”

“We have had some client calls over video but in the end we have stuck to the phone, as it’s easier,” says McGregor. “On video, people seem to find it harder to jump in and say something.”


Junior kick-start

That is a frustration at all levels of staffing. But it perhaps hits the next generation of capital markets professionals the hardest. For those in their first year on the job or taking internships, beyond watching and absorbing, fetching the coffees can be among the most useful tasks they do at the best of times. Now that only those that bear most responsibility are allowed into the office, they cannot even perform that vital function.

Juniors are also the staff least likely to be living settled home lives. In London and New York, in particular, many will be adjusting to life in a new city, or even a new country, without a network of friends and family, or much living space.

Keeping them involved and fulfilling a duty of care has received serious thought from bank management during lockdown. “We have to consider staff mental health,” says Lynagh. “London is a very international city. Many of our juniors do not have family in the UK and live on their own, so an important element has been making sure that everyone is engaged and that they are OK. 

The French bank also let more junior staff work from their home countries during the first phase of lockdown.

RBC Capital Markets instituted a buddy system for its interns, pairing them with a more senior colleague. The firm allowed pairs to share screens so interns could see what was going on at crucial moments — giving them something to learn from at least, if not ideal — but getting better telephony into the homes of junior staff was the biggest improvement.

“The game changer was getting dealer boards sent home,” says McGregor. “Jumping on calls and listening in rather than having to dial into conference calls is such a vital way to pick up on what is going on.”

But the reality is that senior staff who need to mould their juniors are much less able to do so with markets so busy and communication so much more difficult. “Brexit, Libor, doing deals, advising clients, new sorts of deals — I have been involved in things I would not normally have been involved in,” says one senior DCM banker. “No one will call the grads unless they need to call them. They haven’t learned as much. Learning is harder when you are not face to face.”

If junior staff excluded from the office are growing anxious about their lack of career progress, they are not alone. One bank interviewed for this article says 29 out of 30 of its staff in one capital markets department are keen to get back to the office.

“They are less influential and less visible at home,” says their boss. “It is better for people to be visible if they want a path to a bigger job.”

But it is also about keeping connections. “Working practices will be more flexible going forward but you still need to meet internally,” says Lynagh. “Team spirit, culture and innovation relies on it. It is much harder to replicate the social side of work while working from home.”

One positive to come from the pandemic, however, has been how issuers market themselves. One head of a new issues desk expressed alarm at how well virtual roadshows, using video conferencing, had gone. 

Whereas it would once have taken days to arrange five meetings from a shortlist of 10 investors, it now takes a matter of hours. “I’m a bit worried about how well virtual roadshows have gone,” he confides. “It annoys everyone because we hate being at home even more than we hate being on the road.”

But the advantages to everyone else — besides, perhaps, divorce lawyers — are clear. Coverage bankers say that investors’ diaries seem freer than before and that they appreciate no longer needing to allocate a full hour to a physical meeting. This lets them to get to the point without either side feeling like they have to fill the rest of the allotted time.

In one example, an investor agreed to a call that lasted just seven minutes, says one head of syndicate. That investor would not have taken a full hour’s meeting in person as he already knew a lot about the issuer. Instead, a short call allowed him to ask the few, specific questions he had, the answers to which he could take straight to his credit committee.


On the screen again

Issuers have reaped the benefits [of video conferencing] too, especially those that need to reach investors outside the global financial hubs. “If you go outside of New York in the US, investors are spread over a huge area and, if you do arrange a meeting, you might not be able to see the person you wanted to see on the day,” says Kreivi. “A video conference is better.”

It seems unlikely that full-blown roadshows will resume soon, if they resume at all. “In New York, no one is talking about being back in the office before at least the summer,” says one senior SSA banker. “I don’t think we’ll be taking anyone on a roadshow in 2021.”

Kreivi says that the ability to communicate with a broader range of investors has improved too. “Institutions that didn’t have the video technology have upgraded,” she says. “We tried to contact some institutions by video more often a couple of years ago and they said they could not handle it or preferred not to. Those barriers have now gone.”

But again, some insist that this will work only while it is those who already have relationships talking to each other. “Virtual meetings are fine in the interim, but it is unsustainable,” says Luithlen. “New people within institutions will need to meet each other to maintain the institutional relationship.”

However, if vaccines prove effective and infection rates fall to the point where normal life resumes, the capital markets will likely work differently from how they did before. Presenteeism and heroic collections of air miles may not make an instant return, if at all.

Meanwhile, it has become clear that some tasks, such as compiling reports, or as one senior DCM banker put it, “counting beans”, can be done better from home. The trick will be to combine the best of both worlds. 

“The system has evolved well,” says Taor. “Could it work permanently? That will be tricky. I question whether permanent working from home is more productive. There are also concerns around the negative effect on health of working longer hours at home.

“The endgame is more flexibility. We are in no position any time soon to get everyone back in the office but soon people will want that option. 

“I would think that, for many, when working from home was new it was enjoyable and a novelty; however, once that becomes the normality of the job the novelty will wear off as the boundaries of home and work blur. It can be hard to switch off.”

Certainly, the primary bond markets — especially for frequent borrowers — seem best served by trading floors and human contact. “Everything functions well from home but it is not optimal for every situation,” says Lynagh. “You notice the difference in doing anything that relies on real time information exchange — live deal execution, or picking up broader market sentiment.”

Meanwhile, as new people replace departing veterans, and as old issuers need to find new investors, there will be a need for more traditional forms of investor relations to resume. 

Environmental concerns may well prevent the vast amounts of jet fuel burned in the name of investor relations from reaching pre-Covid highs as institutions choose more carefully which events they attend — but they will attend some. “If I do a conference online, I am only there for my panel,” says Kreivi. “I don’t get the other meetings that we would normally organise, or the random meetings during the coffee break.”

There has been much discussion over the future of work since lockdowns began. For some industries, and even some functions or tasks within the capital markets, there are clear advantages to adopting a more flexible approach to working. 

But the capital markets, through the trust they require to operate, rely upon deep, long relationships — not just between institutions but between individuals. 

The pandemic may have forced drastic changes to human behaviour in the short term. But for qualities such as trust and reciprocity to thrive to the extent that they can prop up global markets in a time of extreme panic, a return to the environments in which they are nurtured is essential.   GC

By Ralph Sinclair
17 Dec 2020