OPINION — The changing world of finance

Four basic positive factors are driving change in the world of finance and will continue to shape events for years to come: technology, globalization, deregulation and demographics.

The most important is technology. In our case, the prime mover is information technology, where most measures of speed and capacity have been doubling roughly every 18 months.

During the past 30 years, the cost of executing a computer instruction has fallen perhaps a millionfold. It’s as if a jumbo jet could now be bought for the price of a good pair of roller blades.

The combination of fibre optics and digital switching technology supports incomprehensible rates of data flow — fast enough, I am told, to transmit the entire contents of the encyclopedia in less than a second. We certainly have not seen the end of these technological miracles. In fact, we’re still closer to the beginning. But we’ve seen enough to make round-the-clock and round-the-globe capital markets not only feasible, but routine. The second key driver of change is globalization. While it has been information technology that has made efficient, global, capital markets possible, the original impetus was more political and economic than strictly technological.

The international capital markets developed initially to facilitate post-war trade flows which were expanding far more rapidly than national economic output. This is still the case. But today, currency trading itself has vastly eclipsed trade in goods, having increased sevenfold during the past 10 years while global trade volume merely doubled.

Today, the principal debt markets are almost perfectly integrated globally. International capital flows have equalized interest rates on comparable instruments through currency and market arbitrage operations. These occur 24 hours per day in trading rooms around the world.

While there is an efficient global market for debt, the same cannot be said for equities. These are still issued and traded primarily on a local (that is, national) level. For example, foreign ownership of U.S. equities is under 7%, a much lower proportion than you would expect if global investors were perfectly diversified. Nevertheless, it seems to me only a matter of time before improved information technology and the growing institutionalization of investment combine to create a genuinely global equity market. But clearly the full realization of that potential is tomorrow’s, not today’s, dream. The third factor, deregulation, has brought the full force of market competition to bear on what traditionally has been a tightly controlled — some would say, protected — industry. The effect of deregulation has thus been to cause a remarkable degree of convergence within the financial industry. Recall that the deregulatory process was really the inevitable consequence of profound advances in computer and communications technology. This technological revolution made truly global markets possible and eventually overwhelmed national attempts to insulate their financial systems. The fourth factor, demographics, is significant because the age structure of any population largely determines aggregate saving and spending behavior and, consequently, the balance of supply and demand in financial markets. Fundamental changes in the financial sector are being shaped by the interplay of technology, globalization, deregulation and competition. These evolutionary forces have created a set of internationally linked financial markets that offer unprecedented choice and efficiency. Combine this with demographic trends which point to an increasing supply of investible savings and you have all the conditions in place for an issuer’s “field of dreams.” — Peter Godsoe is the chief executive officer of The Bank of Nova Scotia. The above is from a recent speech in Halifax, N.S.