Wall Street & Technology: Blog

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Yesterday’s steep stock market plunge of 416 points sent a warning of how vulnerable the market structure is to systems glitches and data backlogs when there are unexpected volume surges and rapid sell-offs in an electronic trading environment.

As most of us know, problems began around 2 p.m. when the Dow Jones Industrial Average was already down 200 points –- in part a reaction to the sell-off in Chinese stocks, translated into concerns about the U.S. economy. I was in the car at 2:30 p.m. whenCBS Radio reported that the market was crashing and the Dow was down 250 points.

Northern Trust is winning a great deal of pension business from multinational clients on the basis of its tax-transparent cross-border pooling. To enable international companies to pool the assets of their pension funds from many countries without running afoul of the IRS, the firm developed a tax-transparent cross-border pooling solution in September 2005. In fifteen months, assets in the product have grown from 0 to $10 billion and Northern Trust is seeking a patent on its methods of handling this unique product.

On the list of forthcoming projects for CIOs is updating their systems to handle the changes in daylight savings time (DST) (DST). The Energy Policy Act of 2005 will cause DST to fall weeks earlier this year than in years past. With that in mind, industry analyst TowerGroup has issued recommendations on how financial institutions can deal with what they are calling "more a nuisance than the cause of any significant business outage."

What’s the cost of disorganized data on Wall Street? A portion of our cover package this month on The Cost of Doing Nothing was inspired by former Tower Group analyst and current SVP of enterprise data management software company Golden Source, Tim Lind, who knows a thing or two about the state of data in major firms. He shared some insightful and irreverent thoughts with us recently on the dangers of not managing data properly.

U.K. recruitment firm Joslin Rowe released a notice this week of what it is calling a "recruitment timebomb" for MiFID consultants. With just nine months to go before EU financial institutions are expected to be compliant with the Markets in Financial Instruments Directive, demand is soaring for experts who can help firms reach compliance.

A couple of weeks ago, we wrote about a study that seemed to prove that site-to-user authentication was a broken practice. Well, not surprisingly, the purveyors of such technologies took exception to the notion that their product was ineffective. What follows is a response written by Louie Gasparini, co-CTO of the consumer division of RSA, the security division of EMC that sells Passmark site-to-user authentication technology.

You would think that by now almost every user of the Internet would know not to click on links in emails supposedly from financial institutions -– especially a bank that you have never heard of or have never done any business –- and enter your username or password.

But as this podcast and article from National Public Radio (NPR) points out, Web-savvy individuals are also falling victim to online financial fraud as phishers use newer technology to stay ahead of financial institutions and users.

Buy-side traders that feel comfortable using instant messaging to communicate with and route order flow to the sell-side community can now use IM to sweep crossing networks and dark pools.

The cool technology comes as the result of a partnership between Pivot Solutions, the developer of IMTRADER and UNX, an agency brokerage specializing in direct-market access and algorithmic technology.

With buy-side traders turning to faster execution management systems (EMSs) and installing them on the desktop next to their order management systems, the OMS vendors have been scrambling to provide EMS functionality.

This week, LatentZero a supplier of front-office systems for the buy-side, said it had integrated EMS functionality into its buy-side OMS. The company’s OMS, Capstone Minerva, now has a fully integrated EMS trading module designed for asset managers, said a release.

ING has implemented biometric fingerprint scanning technology on its trading floor workstations. Dutch biometric consultant BioXS developed an integrated solution using matching software from BIO-key International combined with fingerprint readers from Zvetco. The solution is designed to eliminate the need for multiple complex passwords that were formerly required for access to ING's dealer room workstations, and free up technology staff who were constantly changing and replacing access codes.

The London Stock Exchange (LSE) announced that it has begun consultation with member firms on the services it will offer to keep members in compliance with MiFID.

The exchange has built its services on the TradeElect platform, which will utilize preexisting connectivity and infrastructure to offer a familiar market model under MiFID. LSE will extend its market-maker quoting facilities across EU securities to meet pre-trade transparency requirements. Meanwhile, in order to meet post-trade transparency requirements, the exchange will enhance its existing trade reporting services.

Wasting no time reaching out to Microsoft Vista early adopters, Fidelity has released a Market Monitor gadget that Vista-using investors can use to keep an eye on their stocks. Gadgets are always-on mini-applications such as games, live webcams and traffic maps that can be downloaded free at www.gallery.live.com and sit in the miniature portal “Sidebar” section at the right of the Vista desktop screen. (Fidelity also offers its gadget at www.fidelity.com/beta.) The Fidelity gadget provides watch lists and stock charts similar to those at Yahoo Finance, but with Fidelity branding and graphics – stocks whose price has risen a lot, for instance, are shown in bright green, small price increases are darker green, black is neutral and stocks that are dropping are shown in various shades of red. Users pick any 25 securities to follow. For Macintosh users, Fidelity offers similar tools as a downloadable widget.

As part of its ongoing effort to cut costs, Credit Suisse signed a deal today to outsource its entire voice and data network management infrastructure to BT and Swisscom. Under the $1.1 billion contract, 231 employees and 50 contractors will be transferred to BT. The contract has a minimum five-year term with the option of extending the term to seven years and encompasses Credit Suisse's enterprise and financial trading environments.

We missed out on this little tidbit late last week. Deutsche Bank Securities, Inc. (DBSI) was fined $1.275 million by NYSE Regulation in two separate actions involving conflicts of interest in its published research, and an employee who accessed privileged information from a former employer.

At most Wall Street firms, the preparing of quarterly and annual reports is a tense, stressful time of Excel files being emailed back and forth and behind-closed-door meetings at which financial numbers are presented, reviewed and approved. Two products aim to help walk you through this process, automatically routing data to the right people and acquiring their approvals (using electronic signatures), providing the controls that Sarbanes-Oxley and accounting practices require, and producing statements for the SEC in the necessary Word and XBRL formats (as well as PDF and Excel).

Ivy Schmerken, Wall Street & Technology

With the proliferation of alternative electronic execution venues lining up to compete with the New York Stock Exchange and The Nasdaq Stock Market, connectivity to these new liquidity pools is not a topic that gets discussed much. But this week two of the new electronic marketplaces – one an ECN, the other a stock exchange — revealed new partnerships with electronic trading platforms.

NYSE Regulation fined Morgan Stanley $300,000 for a failure to provide sufficient inhibitors and blocks within its trading system that led to a massive botched trade.

According to the regulator, on the morning of September 1, 2004 a Morgan Stanley trader received instructions from a customer to unwind a portion of an existing swap, with an affiliate of the firm acting as the counterparty. To hedge its position, the affiliate took a short position in the shares of common stock underlying the basket. The mistake came about when the trader entered an order to buy 100,000 units of the basket to cover a portion of the affiliate's short position, not realizing that the tool used to create the basket had a built in multiplier of 1,000. The result was a basket with a value of $10.8 billion instead of $10.8 million.

This morning I was invited to the Ernst & Young headquarters in Times Square to tour the firm's Advanced Security Center (ASC). The center, along with a location in Houston, employs a staff of 30 security professionals dedicated to performing assessments of companies' security infrastructure, and focusing on the financial services industry. Through the dually authenticated door-locks and under the concrete lined ceilings of the office were an impressive facility and a team of truly dedicated white hats, diligently probing the defenses of your bank or brokerage and mine.

Recently we caught up with Joe Morant, managing director of Citisoft, a Boston- and London-based consultancy that works with large investment firms, and he shared his views on Wall Street’s data challenges. Here are excerpts from our conversation.

The New York Times reports today (free subscription required) that a new joint study out of Harvard and the Massachusetts Institute of Technology claims that a popular authentication technique is failing its users. Site authentication images — user-chosen images that appear on a Web site when a user logs in to prove the authenticity of the site — are not an effective authentication method.

With the saga of Amaranth’s blowup unraveled in yesterday’s Wall Street Journal story, the wisdom of hedge funds relying on dealers for pricing their derivatives portfolios has come into question. While everyone knows the saga of Amaranth — a hedge fund whose aggressive trader took huge positions in natural gas contracts and then lost $6 billion in one week — there are lessons to learn from this tragedy for other hedge funds and institutions holding volatile derivatives in their portfolios. How about hiring an independent valuation service that is not affiliated with the hedge fund, the investment manager or the prime broker for starters!

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