I think it is well understood that operational risk rather than market risk is the biggest challenge facing our industry today. Markets will move, but as the events of late 2008 proved, with the odd exception, they rarely cause substantial damage to a trading business.
The opposite it true of operation risk. Regular readers know that I support the ACI Australia Dealing Simulation Course by helping to run courses throughout the year and probably the number one lesson we try to teach budding salespeople and traders is the importance of being operationally sound. In years gone by we were stressing market risk, and still do, but the number one issue by far nowadays is operational risk.
In the industry this is being highlighted by events in the prime brokerage segment where the inability to risk manage a tremendous number of tickets has led several PBs to cut back their presence. Systems’ robustness has long been an important issue and in general has been dealt with competently by all providers, there is no room for complacency of course, but overall, providers can be content with the “up” time.
One risk that is also ever present was the subject of discussion around the exhibition and conference rooms at Forex Network London last week – the so-called “gap” risk.
It wasn’t so much that people were commenting on the average age of attendees (and a big thank you to the hundreds of you who registered and attended), more that they were pointing out the absence of a certain generation. Put simply, where are the 30 somethings?
A lot of senior roles are filled by people in their 40s, and we have a generation of 20 somethings coming through (thanks in no small part to the aforementioned Dealing Simulation Course), but there seems to be a dearth of people in their 30s.
Of course, there is an element of generalisation about this, so please don’t email me to tell me your ages, rather I am seeking to discuss an ill-defined issue. I asked the question of our Hall of Fame panellists last week, “is FX still a 30-40 year career?”
The answer was it could be, especially in certain segments and roles, but there are issues with success. Specifically, successful people are remunerated extremely well and get to a stage in their career and lives where they want to consider something different. We have seen a spate of departures in the trading business recently, and in most cases I have been told they are leaving to “count their cash” and “look at fulfilling a life’s dream”.
In other words, the FX industry has given them a (largely deserved) reward for their labours and they feel able to go and be that entrepreneur in the field of their dreams.
This means that we have “gap” risk. If those business leaders in their 40s and 50s start to leave the industry, as inevitably they will, we could be lacking the generation to take over. Personally I think the issue is relatively short term because those in their late 20s can probably fill the gaps in a few years’ time, but until then the risk is real and it exists.
Someone asked me why I thought it existed at all and my answer was a combination of the euro and e-commerce. Both took their toll on the industry within a relatively short space of time, leading to the departure of a generation of employees who either did not want to retrain, or were content to do something different (I am an example of that, although I never quite made the next move to write about cricket!) Around the turn of the century these impacts, along with the perception that FX was not “sexy” enough, compared to equities and fixed income, meant we spent five or so years without bringing in any new blood to any great extent.
I think “gap” risk is a cyclical phenomena and I am sure other market segments will face it at some stage, perhaps we notice it in FX because of the culture of the market which lends itself to relationships. It is something you can’t do too much about either, short of some genetic breeding program that issues forth 35-year-old business managers (now that’s a bizarre discussion point for a Monday morning!) from nothing.
The real upshot of this has to be better remuneration for those few 30 somethings that are in the industry and doing a good job. It has been remarked before that the talent pool in FX can sometimes be a little thin not because of a dearth of talent but because of the sheer number of providers looking for good staff to take them to the next level.
If that is the case then we are likely to see salaries rise again in key positions. The good news in this is it will encourage the 20 somethings to stay in the industry and ensure we don’t face it again for a couple of decades at least.