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6 problems that will shape capital markets in the future

Several interconnected dynamics are changing the way global capital markets operate in the aftermath of the epidemic and an uneven economic recovery. As the world’s economy recovers, market actors generally understand the need for adjustments to the established mode of operation in order to create resilience, remain competitive in the face of innovation, and maintain their customers’ confidence.

In cooperation with BNY Mellon, the World Economic Forum’s platform on Shaping the Future of Financial and Monetary systems will begin a new series of multi-stakeholder dialogues on the future of capital markets. The project’s goal is to assist financial market players in better understanding the processes determining the future of capital markets while also improving trust in the system. The six topics listed below will be key to the discussion:

1. Democratization of public sectors

In January, a group of retail traders (non-professional traders) on Reddit’s WallStreetBets staged the equivalent of a market revolution by significantly affecting the prices of numerous publicly listed firms. These incidents lost hedge funds and professional investors billions of dollars, many of whom had been betting against the same equities, and highlighted concerns about market procedures and resiliency.

In January, a group of retail traders (non-professional traders) on Reddit’s WallStreetBets staged the equivalent of a market revolution by significantly affecting the prices of numerous publicly listed firms. These incidents lost hedge funds and professional investors billions of dollars, many of whom had been betting against the same equities, and highlighted concerns about market procedures and resiliency.

Retail investors now account for an estimated 23% of US equity trading volume, a more than twofold growth since 2010. Increased market access is a desirable trend, but it is not without danger. It raises critical issues about market and institutional resilience, as well as investor safeguards, and opens the door to a larger conversation about financial education.

2. Increased access to new wealth-creation possibilities

Historically, private market investment options with higher return profiles were exclusively available to institutional and authorized investors. This special access was granted based on these investors’ perceived degree of knowledge and risk management competence. New solutions are being developed today that will enable ordinary investors to deploy cash to private market alternatives.

When these products are made available to a broader community of investors, other difficulties emerge. People must be aware of the dangers involved, which differ significantly from typical stock and bond investment.

3. Confusion between public and private markets

More companies than ever before are joining public markets throughout the world, but in the United States, enterprises are staying private for longer periods of time, and others are transitioning from public to private. This trend is being fueled by increased transparency requirements and regulatory scrutiny for publicly traded corporations, as well as investor interest in funding private enterprises. Firms are also looking at other ways to obtain cash and minimize their reliance on equity markets.

We have lately observed a growing market for special purpose acquisition companies (SPACs) as an alternative to the standard Initial Public Offering (IPO) (IPO). Many firms have turned to SPACs to simplify the process of obtaining capital in public markets, but rising competition and potential regulatory scrutiny have cast doubt on their long-term viability.

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4. Data and cyber security concerns

As market players seek quicker execution speeds and easy access to information, capital market procedures have grown increasingly digital. These technologies drive industrial transformation while also raising worries about cybersecurity and data protection.

Data is gaining traction as its own asset class, and data management infrastructure is a significant development area for traditional financial institutions. Institutions are continually looking for methods to use analytics to stay agile and encourage growth.

In collaboration with the Carnegie Endowment for International Peace, the World Economic Forum’s FinCyber initiative is aiming to link the industry’s numerous cybersecurity initiatives. However, concerns remain about how businesses may develop securely while benefiting from more agile data usage and avoiding dangers.

5. New responsibilities for financial firms

Some activities that were formerly provided by major financial corporations are now being performed by a new set of rivals. As a result, institutions across the value chain are redefining their roles, taking on new duties, collaborating with new technology suppliers, and introducing new methods of doing business in order to meet the demands of their clients.

By 2020, 250 of the world’s top private fintech firms had raised almost $50 billion in total financing. These platforms frequently offer services that are complementary to those provided by legacy institutions, opening up new avenues for collaboration and integration. While industry participants have made significant progress in understanding how consumer-facing fintechs are changing financial services, the role of fintech in institutional capital markets is less clear.

Blockchain and distributed ledger technologies, for example, have the potential to disrupt key capital market activities such as trading procedures, settlement systems, payments, and capital raising. Simultaneously, authorities and politicians are becoming increasingly outspoken about their worries about cryptocurrencies, creating serious doubts about their long-term sustainability as an asset class.

6. Transparency in ESG

ESG is a major focus for financial institutions. As investors, asset owners, and corporations navigate their roles in assisting the transition to net-zero and stakeholder capitalism, including the adoption of consistent reporting standards for ESG metrics, significant questions about market structures and tools required to support sustainable investing remain.

We are living in a once-in-a-lifetime historical epoch. The COVID-19 epidemic has compelled thought and hastened reform. Capital markets will continue to develop, and in order to maintain public trust, they must do so in an open and collaborative manner.