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Transcript of © 2007 The Tower Group, Inc. May not be reproduced by any means without express permission. All...
© 2007 The Tower Group, Inc. May not be reproduced by any means without express permission. All rights reserved.
After the Starting Gun:
October 15, 2007Rob HegartyManaging DirectorSecurities & Investments
The Race for Domination in Global Capital Markets is on!
2007 Annual Meeting
© 2007 The Tower Group, Inc.
Agenda
Globalization is all the rage How do we know that globalization
is for real?
Stronger than ever TowerGroup’s annual health
check on the global securities and investments industry
Opportunities and challenges in a globalizing economy
Conclusions
© 2007 The Tower Group, Inc.
Key Take-Aways “Globalization” isn’t just a catch phrase in securities –
it’s a key driver for expansion
The securities industry continues its torrid pace of growth, buffeted by a strong global economy
Technology has moved from supporting role to primary – and required – enabler for growth
The combination of new geographies, new asset classes, and new business lines is creating once unimaginable opportunities for “landlocked” companies
The globalization of exchanges foreshadows a truly global investing marketplace
© 2007 The Tower Group, Inc.
So how do we know that globalization is for real?
DaisukeMatsuzaka
© 2007 The Tower Group, Inc.
The cost of globalization:The Red Sox’ perspective
$14-21 millionAnnual Advertising and Marketing revenue
Annual Tourism Economic boom to Boston $14 million
Cost to speak with Daisuke’s Japanese club $51.1 million
Cost to sign Daisuke to a 6 year contract $52 million
Annual Merchandising boom to the Red Sox $6 million
Becoming the recognized global leader in U.S. Sports Priceless
Annual estimated ancillary Red Sox revenue $10 million
$103.1 million
$44-51 million
© 2007 The Tower Group, Inc.
The drivers of the Red Sox global expansion are eerily similar to the securities industry’s Legal/Regulatory
The new MLB Collective Bargaining Agreement and its “Posting process”– Created the ability for MLB teams to
bid on players in other countries• Payments to post do not count against
the salary cap and are not subject to the 40% luxury tax
Competitive Landscape changes The premium on pitching has
skyrocketed– Elite pitchers now get ~$500,000 -
$1,000,000 per win
Drive for new revenue sources Look to new geographies
Back to RealityGlobalization in the Securities Industry
© 2007 The Tower Group, Inc.
The market is stronger than ever, and not just in the United States
Note: (f) = forecast.
CAGR = -9.1%CAGR = 25.2%
Global Securities Industry Revenues by Country/Region (USD in Billions)
Source: Securities Industry and Financial Markets Association (SIFMA)
OTHER LATINAMERICA
OTHER ASIA
CANADA ANDAUSTRALIA
BRICKs (Brazil, Russia,India, China, Korea)
JAPAN
EUROPEAN UNION(except UK)
UNITED KINGDOM
UNITED STATES
© 2007 The Tower Group, Inc.
0
20
40
60
80
100%
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
UNITED KINGDOM UNITED STATES
OTHER DEVELOPED MARKETS EMERGING MARKETS
US share of global capital markets has declined since the early 1980s
US Share = 56%
US Share = 39%
Source: Securities Industry and Financial Markets Association, S&P Global Stock Markets Factbook 2006
Percentage of Global Market Capitalization by Region
© 2007 The Tower Group, Inc.
Growth is in smaller, less-developed markets
Source: Securities Industry and Financial Markets Association, S&P Global Markets Factbook 2006
Market Capitalization (USD in Billions)
0
10,000
20,000
30,000
40,000
$50,000
1980 1983 1986 1989 1992 1995 1998 2001 2004
EMERGING MARKETS
DEVELOPED MARKETS
© 2007 The Tower Group, Inc.
Positive trend in US investors’ cross-border activity (1986–2006)
Source: US Treasury, TowerGroup analysis
Gross Purchases and Sales of Foreign LT Securities by US Residents (USD in Millions)
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
$12,000,000
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
EQUITIES
BONDS
Gross Purchases and Sales of Foreign LT Securities by US Residents(USD in Millions)
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
$40,000,000
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
EQUITIES
BONDS
© 2007 The Tower Group, Inc.
Gross Purchases and Sales of Foreign LT Securities by US Residents(USD in Millions)
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
$40,000,000
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
EQUITIES
BONDS
But it’s nothing compared to foreign investment in US markets
CAGR = 17.5%
CAGR =
14.
5%
Will the US investors be able to catch up?
Source: US Treasury, TowerGroup analysis
Gross Purchases and Sales of Domestic LT Securities by Foreigners (USD in Millions)
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
$40,000,000
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
EQUITIES
CORPORATES
AGENCIES
TREASURIES
© 2007 The Tower Group, Inc.
0
1
2
3
4
5
6
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
ASIA-PACIFIC
EMEA
AMERICAS
Americas led the charge in processing until 2000, when Asia-Pacific assumed the high-growth track
Source: World Federation of Exchanges, Towergroup analysis
Exchange Transactions (In Billions)
1995–2000
CAGR = 67.8%
CAGR = 53.0%
CAGR = 33.6%
2000–2006
CAGR = 20.5%
CAGR = 8.7%
CAGR = 43.5%
CAGR = 29.7%
© 2007 The Tower Group, Inc.
0
2
4
6
8
10
12
14
16
$18
1998 1999 2000 2001 2002 2003 2004 2005
AFRICA
ASIA-PACIFIC
EUROPE
AMERICAS
Although global growth in mutual funds has been very healthy…
CAGR = 4.2%CAGR = 16.2%
Source: Investment Company Institute, European Fund and Asset Management Association, TowerGroup analysis
Worldwide Total Net Assets of Mutual Funds(USD in Trillions)
© 2007 The Tower Group, Inc.
0
20
40
60
80
100%
1998 1999 2000 2001 2002 2003 2004 2005
AFRICA
ASIA-PACIFIC
EUROPE
AMERICAS
…the greater growth has been outside the Americas
Americas CAGR = 7.6%
Europe CAGR = 11.9%
Asia-Pacific CAGR = 10.4%
Source: Investment Company Institute, European Fund and Asset Management Association, TowerGroup analysis
Worldwide Total Net Assets of Mutual Funds, Percentage
Opportunities and ChallengesIn a Globalizing Market
© 2007 The Tower Group, Inc.
Challenge 1: NYSE is forced to expand overseas after losing internal market share
66.2%
32.5%
NYSE share = 88.4%
Nasdaq share = 2.3%
After breaking away from the pack in the early 1990s, Nasdaq has emerged as the only viable US-based competitor for NYSE-listed trading
Source: NYSE, TowerGroup analysis
Percentage of NYSE-Listed Equities
0
20
40
60
80
100%
1975 1980 1985 1990 1995 2000 2005
NYSE PSE CHX PHLX BSE CSE/NSX NASD
© 2007 The Tower Group, Inc.
0
20
40
60
80
100%
Jan-0
4
Apr-04
Jul-0
4
Oct-0
4
Jan-0
5
Apr-05
Jul-0
5
Oct-0
5
Jan-0
6
Apr-06
Jul-0
6
Oct-0
6
Jan-0
7
NYSE NASD CHX PHLX BSE NSX CBOE AMEX
The story for the NYSE is even more dire in recent months
NYSE share = 82.8%
Nasdaq share = 12.4%
66.2%
32.5%
Source: NYSE, TowerGroup analysis
Percentage of NYSE-Listed Equities
NYSE share drop after 12/05 can’t all be blamed on the Hybrid launch, but that certainly didn’t help
© 2007 The Tower Group, Inc.
Challenge 2: Trading without a floor: Floor-based trading continues contraction
4Q05 1Q06 2Q06 3Q06 4Q06 2Q071Q07
UBS cuts 23 employees
(77%) of its floor operation
NYSE Euronext doubles profit.
Is it working?
BofA cuts 83 employees (50%) of its
floor operation
Van der Moolen cuts 55
employees (30%)
Credit Suisse cuts 9 employees (31%) of its floor
operation
Goldman lays off 30 traders as electronic
volumes rise
NYSE Hybrid system begins trading
Source: TowerGroup
© 2007 The Tower Group, Inc.
Drivers of globalization Opportunity
Regulation Restrictions in US are encouraging
migration to non-US capital markets Emergence of the Euro zone
– The sum is greater than the parts
Getting used to post-9/11 travel restrictions Business travel on rise after a 3-year
decline Travel is easier in UK, Europe, APAC
Generational shift From baby boomers to tech-savvy Gen X and Millennial generation
– Each new generation operates in a more borderless world
Borderless technology Web 2.0 makes software (and the data behind it!) More accessible
© 2007 The Tower Group, Inc.
Challenge or opportunity? The lines between buy side and sell side are blurring Buy-side firms are registering as
broker-dealers
Brokers are registering as advisors (because of AND despite the “Merrill Lynch” rule being upheld)
Hedge funds are registering as both
Sell-side analysts are migrating to the buy side, following the route of the traders
DE Shaw becomes the first hedge fund to join the NYMEX
© 2007 The Tower Group, Inc.
ExchangesExchangesExchanges
The rapid globalization of Capital Markets begins at the core – the exchanges
Exchanges
Source: TowerGroup
© 2007 The Tower Group, Inc.
The road to globalization has many obstacles
Information security remains a significant issue Information theft and fraud are far too commonplace Software As A Service (SAAS) will not be fully realized until the
information security threats are all but eliminated
Poor corporate governance leads to over-regulation, lower valuations Lowers firm valuation, making them less attractive to investors
and making it more difficult to raise capital
Cultural differences Although the cultural gaps are slowly narrowing
Politics Always the wild card
© 2007 The Tower Group, Inc.
The new, borderless technology paradigm will continue to drive global expansion Speed of change,
commoditization faster than ever
From process automation to network and community development and use
Once “landlocked” by perceived boundaries, firms are using technology to expand overseas
An entire industry has been borne of compliance Compliance Technology and Consulting The regulatory burdens will contract ever so slowly, if at all – there is too
much money at stake now
© 2007 The Tower Group, Inc.
So who wins and who loses in the race to globalization?
New YorkLondon
The middle tierScale and capital
Regional playersThe global economy
BrokersInvestors
EquitiesDerivatives
Floor-based tradingElectronic venues
LosersWinners
The “hold-outs”Technology-savvy firms
© 2007 The Tower Group, Inc.
Conclusions
The greatest growth opportunities aren’t away from USshores . . . they are on ALL shores
The demarcation between winners and losers is being defined by their global capabilities
New asset classes (e.g., derivatives) and new markets(e.g., Insurance/Securities) pave the road to globalization
The Red Sox are exploiting global opportunities. See what happens when you cross hedge funds and baseball
The foundation for global capital markets is being formed by the exchanges in 2007 . . . prepare for the next wave
© 2007 The Tower Group, Inc. May not be reproduced by any means without express permission. All rights reserved.
After the Starting Gun:
October 15, 2007Rob HegartyManaging DirectorSecurities & Investments
The Race for Domination in Global Capital Markets is on!
2007 Annual Meeting