IT Spending To Focus On Middle-Office Functions In 2009
One of the difficulties in assessing IT spending needs in capital markets is distinguishing between what people are focused on and what they should be focused on. As we look to 2009, there are key areas on which capital markets players will be focused as well as some important areas that may be overlooked.
Preliminary results from Aite Group's capital markets technology survey indicate a 5 percent average cut in technology spending. One-third of senior technologists surveyed anticipate that the back office will receive the short straw in 2009.
Other key areas identified for trimming include reference data and derivatives processing, which seems counterintuitive given what is likely to occur in the market. Hemorrhaging in the prime broker space means there is room for tier-two and foreign players to make a play. In the custodial space, firms servicing registered investment advisers (RIAs) will be busy bringing on new accounts. 2009 will find that market active as more advisers decide that their brand umbrellas no longer have the value they once held and opt out of wirehouses.
Cutting operations and reference data will make it harder to tackle the corporate actions challenges exacerbated by international trading, M&A activity and the occasional bankruptcy. Further, firms without solid aggregation and management of reference data will have a hard time calling risk management a priority. To avoid more exposure epiphanies, firms will need to rethink cutting reference data and instead build agility into their reference data architectures. The size and scope of the data universe will change in 2009; expect risk managers to want client and counterparty data tied to news feeds, vendor management systems and perhaps even risk indexes that have yet to be developed.
Lastly, cutting operations and derivatives processing could prove problematic given the anticipated regulatory changes. Those cuts likely will take shape in the form of process consolidation efforts, improvements in settlement through clearinghouses and a reexamining of clearing technology arrangements. Expect to see the emergence of a central clearinghouse that will bring about changes in processing.
Investing in the Middle Office
One area in which firms are more likely to actually increase spending in 2009 is the middle office (see related table). Technology plays a significant role in the speed of electronic trading, and current algorithms were not written for a market this volatile. Expect new algorithms to appear, including automated strategies that incorporate unstructured data as part of their execution. With Europe's fragmentation continuing and Asia exerting more control over its trading options, trade processing also needs to be flexible to accommodate global expansion.
Risk management ranks near the top of Aite Group's technology survey every year, but it clearly has been more talk than walk. Expect that to change in 2009. Risk managers may even see their technology budgets increased. Smart risk managers will ask hard questions about the scope and quality of the data being fed into their shiny new systems.
Further, the regulatory environment will bring new reporting requirements, along with the potential for change in measuring capital requirements. Value at Risk (VaR) clearly did not do the job. Expect academics and industry veterans to develop new tools for measuring and reporting risk. In addition, hedge funds could wind up with some regulatory requirements of their own and will be looking for help with reporting.
Speed will be a new demand of risk managers, as end-of-day processing is no longer sufficient for effective risk management. The same engineers involved in creating high-performance trading infrastructures will become involved in efforts to improve risk management. Complex event processing (CEP) engines, computational math libraries, in-memory databases and other tools of the electronic trading environment have demonstrated potential for risk management.
How does one talk about core technologies that will be employed to reduce cost and improve risk management without referring to the most overused term in capital markets history ("straight-through processing")? Dare we say STP will be making a comeback? More than 80 percent of senior technologists anticipate some spending on process automation tools.
Spending on process automation and business process tools supports another top priority: integration. Integration has become an increasing problem in capital markets, exacerbated by growing pressure to articulate immediate value for every project in 2009. Communicating the value of integration to a business is thorny in a good market and will be extremely difficult in the current one. Even so, process automation and improved workflow satisfy the "doing more with less" mantra and improve ties between disparate systems.
Enterprise reporting supports transparency and helps firms better understand their business. There is no room for vague understanding in the current capital markets environment. Expect firms to want answers concerning the profitability of their clients, which products or counterparties offer the best risk profile, and how to stave off the next debacle. Also expect them to want a platform flexible enough to support regulatory and client reporting changes.
Aite Group has seen impressive gains in browser technology to support real-time information. Further, social networking tools foster collaboration and create internal data dictionaries. Expect more firms to examine migrating to a complete thin-client enterprise.
Also expect retail advisers to examine new revenue models. While discount brokers weather the downturn with some revenue exposure to commissions trading, firms that adopted fee-only revenue models just took a roughly 40 percent pay cut, depending on the day. Firms will start billing clients for investment plans and paper statements but will need to strike a balance to avoid losing clients that lost an equivalent amount of personal net worth. Retail will also see integration dollars as firms look to integrate banking and brokerage in both products and platforms.
Aite Group also anticipates increased M&A activity in the vendor community as decreased spending creates a survival-of-the-fittest mode. Active industry associations will help vendors promote their collective niche while competing on merit. The most valuable contribution those associations can make is the creation of trusted metrics for measuring business value. Business managers need help cost-justifying projects.
Hosted software as a service (SaaS) came in last place as a priority for spending on core technology. While it makes sense to commoditize processes in a down market, firms remain reticent to adopt outsourced technology. If hosted processes are going to grow in capital markets, they will have to be driven by a consortium of buyers. Capital markets institutions should dedicate some effort to creating those consortiums and identifying areas of noncompetitive differentiation that are ripe for commoditization.
While 2009 will bring about increased regulatory scrutiny, a market in recovery mode and sensitivity to risk, it will also bring increased access to global trading, the potential mixing of banking and brokerage products, and a continued push into new technical frontiers. While technology spending may be scrutinized, cuts likely won't be as long-term or deep as some predict -- our industry has become too dependent on innovation as a competitive differentiator.