In a global debt crisis, an important question is: What is the future of the banking industry? Commercial banks are meant to profit from issuing loans. If there’s a debt crisis -- and thus, a loans crisis -- what happens to the profit centers of commercial banks?
Thanks to the repeal of the Glass-Steagall Act, the distinction between commercial banks and investment banks was erased; the same firms could operate in both industries and mix operations. Banks gained the ability to speculate with customer deposits; greater ability for speculation fueled the rise of new speculative instruments -- such as mortgage-backed securities -- with a fraudulent nature that resulted in the financial markets crisis of 2008 and our current global sovereign debt crisis.
Though the banking industry does have close ties to government, as evidenced by campaign donations made, and benefits greatly from the monetary policy set forth by the Federal Reserve under Ben Bernanke’s chairmanship, the road is coming to an end. As the sovereign debt crisis escalates, new banking institutions will need to arise. Who will they be?
Since the distinction between commercial banking and investment banking has been erased, and since trading has become the most profitable sector of banks, the situation is ripe for a pure trading firm -- a firm that caters to active traders -- to offer its own banking services. This includes active trading brokers like E*Trade (ETFC), and Forex Capital Markets; virtual currency exchanges like FirstMetaExchanges; prop trading firms like Maverick Trading; and even barter networks or auction sites like eBay or Craigslist.
That’s the broad value shift that’s occurring. When we seek to determine what will be the primary basis of competition in this sector, the answer is two words: Big data. The ability to create algorithms that forecast prices in the near term, and then make trading decisions accordingly, is what will drive the profits of these banking and trading firms. The profits of these trading firms will make the foundation for a stable banking institution.
A trading company coupled with a company that can efficiently analyze large data sets to forecast near-term future price movement is well-positioned to disrupt the banking industry and help build the foundation for the next secular bull market in equities. If Google (GOOG) enters the trading business, watch out.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I was previously an employee of Forex Capital Markets and own a website it advertises on.
