Two reports describe the current state of capital markets: how Europe's capital markets need to develop and the technological innovations that will change trading in these markets in future.

Investment banking revenues falling by 4% annually

While falling revenues for global investment banks, together with a decrease in underwriting and advisory revenues, put pressure on the banks' role in capital market, technology is also having a marked impact, with innovations including big data analytics and robo-automation enabling some processes to be carried out more efficiently, with the expectation of boosting revenue. These were findings from Medici's report on Innovation in Capital Markets Technology. Some of report's key findings include:

• global investment banking revenues are falling by nearly 4 per cent annually, accompanied by even bigger dips in fixed income, currencies, and commodities;
• the average return on equity (ROE) for the world’s leading investment banks has slipped to nearly half as much as the typical 10-12 per cent cost of equity for an investment bank;
• the future of capital markets looks brighter with companies aggressively innovating to effectively integrate technology in the market and a 12 per cent increase in revenue distribution for capital markets expected by 2020; and
• a powerful ecosystem of companies is contributing to the growth and evolution of capital markets through robotic process automation (RPA), big data analytics, artificial intelligence, distributed ledger technology and the Internet of Things (IoT).

Brexit a threat to European capital markets

And an report by Oliver Wyman - Strengthening Europe’s Position In Global Capital Markets - found that European capital markets are lagging behind their US counterparts, such as in the use of equity to finance firms, the prevalence of venture capital, and the relative share of IPOs – although London has a leading position in derivatives trading, most notably in FX and commodity asset classes. The report warns that Brexit and the rise of nationalism and protectionism across the globe could affect European capital markets: “Without sound leadership and political compromise, Europe’s capital markets could become more fragmented and illiquid, limiting its ability to perform the functions by which capital markets support the real economy and surrendering a competitive advantage to capital markets in other parts of the world.”

The report outlines six principles that should guide the development of Europe’s capital markets:

1. foster economic growth by supplying investment, financing and risk management services;
2. provide access to all participants, regardless of their location or national boundaries;
3. compete effectively for global flows;
4. achieve a level of transparency that facilitates price discovery and financial stability;
5. provide the greatest possible certainty regarding future changes; and
6. put in place an up-to-date and supportive regulatory environment for future changes.