SIA Technology Management Conference
Sell Side Pours Dollars Into Capacity, Connectivity | Market Data Needed--And Faster, Please | Hedge Fund Asset-Class Demands Raise Stakes for Servicers | SIA, BMA Quiet About Merger; Some Open Questions Remain | Matching People and Technology | Elsewhere in Town: Thain, Nazareth at the Big Board's Regulatory Show | Business Is Looking Up, Vendors Act Accordingly | Sybase: Can Breadth Trump Specialization? | Platform's Latest Version Goes Real-Time | Intel: Wanting to Be Noticed--Up to a Point | Smart Searches Find Their Way to Wall Street | Asset Manager Ixis Using Pyxis' mWholesaler | Vendors Combine Real-Time and Historical Analytics | Bracing for MiFID
Sell Side Pours Dollars Into Capacity, Connectivity
June 19, 2006
Over the last several years, a wave of electronic enhancements and innovations has swept across the trading cycle. Automated platforms generated higher trading volumes, which in turn required faster and more efficient processing and analytical solutions. These have bred their own set of challenges, requiring firms to rethink how they are structured and to redeploy their resources.
In a February report, Boston-based research firm Celent observed that securities and investment firms are increasing their investments in consolidation--seeking to rationalize their IT architectures, make better use of the systems already in place and eliminate overlapping and redundant applications and databases. The common denominator of systems most sought by the sell side is straight-through processing (STP): core reconciliation and exception management systems, network connectivity, order management systems, market data, algorithmic trading, advanced execution and portfolio, market and credit risk. Celent also found that "although sell-side firms continue to believe that scale and internal resources provide a competitive advantage ... vendor-supplied solutions are becoming more popular."
"The sell side is focusing attention on high-margin businesses," says Harrell Smith, manager of Celent's securities and investments practice. That IT capital tends to go toward prime brokerage or credit derivatives "and away from lower-margin cash and credit markets," he says, adding, "IT budgets as a whole have rebounded since the post-dot-com fallout. We've seen IT staffs increase: In 2003, securities industry employment was about 755,000. Now it's up to 796,000. That's indicative of the capital that firms are allocating to their IT budget, and it's in line with the increases in IT spending we've seen."
Smith notes that the sell side has many points of focus, including what he calls "usual suspects" such as STP. "Right now, what I think STP really means is that they rationalize their IT architecture and hope to eliminate a lot of overlapping legacy systems, for both the middle and back office," he says. Expenditures are also being concentrated in market data, as firms "have laid down direct feeds for the most part to exchanges, but they continue to implement some serious and highly specialized direct feeds from low-latency providers."
Tom Price, senior research analyst at Needham, Mass.-based TowerGroup, agrees that IT is the fastest-growing expense for the sell side. "What's happened is that electronic trading initially started with smaller orders in highly liquid securities that were routed to a bunch of disparate execution venues," he says. "Sell-side traders were really there to concentrate on larger blocks typically coming in from institutions. The influx of quotes from the various execution venues has led to more electronic trading, and all of this is happening at speeds faster than what the human trader can react to. That, in turn, creates more electronic trading."
The overriding theme is capacity, says George Rodriguez, managing director at Newark, N.J.-based agency brokerage Algorithm Trading Solutions. "By additional capacity, I mean we are anticipating a greater need for messaging, greater throughput," he explains. "Technology dollars are going toward increasing capacity--market-data capacity, messaging capacity and transaction capacity. The bottom line is that with increased technology and greater use of systematic-type trading, the markets will move faster. A number of sell-side brokers are still stuck in the 1990s, early-2000s infrastructure and looking to make some changes to that. Our view of the future is that there will be a greater need for sophisticated analytics and technology tools."
