Bank CIOs certainly have had their hands full dealing with cost containment. Add in the ongoing low rate environment, new regulatory demands on the business, big data/cloud/macro analytics, and the technology executive's plate is full.
For those CIOs at banks focused on capital markets, it's all that and so much more. Those CIOs are also dealing with an institutional trading and servicing business that has been totally transformed: The regulatory process has practically reversed traditional priorities (for the time being), the regulations themselves are focused on the business' backs, and business is demanding the CIO's attention to navigate ever-more-complex interlinked markets (which seem to hit weekly bumps in the road) and keep it out of the headlines.
With internal cost of capital way up, trading desks are slimming down and risk management is staffing up. This is a rather unusual circumstance for most Wall Street CIOs to be in. No longer does the front office rule the IT budget unchallenged. Now it's clear that without renewed focus beyond the front office in previously unflashy areas, the front office won't have a leg to stand on. Perhaps it's the unusual regulatory workflow, which for the first time has reversed the traditional "front-to-back" order by starting with the back office (e.g., reporting, clearing) and putting off the front office to the end (e.g., execution). Regardless, these are tricky waters for a Wall Street technology leader to navigate as front-office demands are no longer paramount by default.
Regulation's IT Innovation Role
The G-20-led regulatory revolution, in particular Dodd-Frank Title VII in the U.S., is at the root of the increased cost of bank capital. For the Wall Street CIO, these regulations have targeted the most demanding businesses that IT supports. Some front-office leaders may have previously been skeptical of their CIOs' understanding of -- or dedication to -- their businesses. But in the current environment, the front office, particularly those trading in over-the-counter derivatives, are looking to their CIOs for renewed support and solutions to thorny new regulations that compel transformation of largely manual voice markets to automated hybrid and electronic markets. For many in IT, this means IT relevance at last.
To meet these mandates, seats on the trading desk for risk and compliance professionals are now commonplace. For the Wall Street CIO, these four areas have never been on more equal footing in their enterprise and the resulting internal politics never so complex.
Notwithstanding the ongoing revolution in OTC markets, "progress" continues in listed exchange-traded markets, with complex market linkages and multiple new order types proliferating in the U.S. 2013 has seen record regulatory penalties and market snafus across multiple markets and products hitting both institutional and retail business. Woe to the CIOs whose lapse in "run-the-bank" IT leads their banks to make headlines, or who don't have a backup plan when a market snafu arises (perhaps this is the "new normal"). There is no opportunity for Wall Street CIOs to rest on their laurels.
[On Deck: The Chief Technology Economist]
Exciting new technologies are always making waves, though rarely will a large enterprise put itself on the cutting edge. After a few years, though, these technologies will find their way into mainstream Wall Street, and some will eventually proliferate quite widely. Big data and the cloud are very au courant, but so too were message busses and service-oriented architecture (SOA) a few years back. However, it's that last one that CIOs are putting to most effective use in their banks. There are many efforts to unify a bank's architecture around a few (or even single) agile internal messaging standards to give multiple disparate business lines' systems the ability to communicate with one another. Multiple trading silos and business processes must now communicate directly for the first time due to regulatory fiat, and getting them all on the same bus is the easiest way. Likewise this provides an excellent on-ramp for widespread in-memory analytics on a scale heretofore only seen in the front office.
While there's still much for CIOs to build, they are also re-evaluating the manner in which they do it, particularly when it comes to deciding buy versus build for most routine IT infrastructure. Today, most smart CIOs are choosing buy so they can preserve their internal resources for the most strategically important projects.
100% In-House No More
Perhaps nowhere is this more evident than in leasing space in third-party data centers. Many CIOs have seen the virtue in outsourcing this previously hard infrastructure foundation to those companies that excel in commodifying real estate, HVAC, physical security and networking. This was unthinkable just a few years ago. Now, however, not having to build data centers from scratch frees other resources in a bank's current cost-constrained environment. One could call these private clouds, though it remains to be seen if widespread adoption of cloud as the consumer knows it will find its way into banks (i.e., as CIOs have had to contend with consumer mobile technology via internal BYOD and external apps).
Survival for the bank CIO in general, and the Wall Street CIO in particular, isn't just working harder with limited funding but working smarter to gain leverage over the budget. The biggest problems most face are entrenched incumbent systems that must be patched together to keep up with regulatory and market environments. Those CIOs who can find the path to either reengineer processes or put in place new systems that have widest application across the enterprise (e.g., SOA) can take the opportunity to propel their banks forward. Furthermore, the technology leaders who can move forward without regard to doing it all internally will be the ones that provide their banks with the technical agility necessary for excelling in today's difficult environment and navigating tomorrow's.
[Check out this case study: Major Online Brokerage Combines People, Process, and Technology to Improve End-User Experience, which will be discussed at the upcoming Interop event in NYC.]
David B. Weiss is a senior analyst with Aite Group covering global listed and OTC derivatives, electronic trading, SEFs and OTFs, global financial regulation, and capital markets intellectual property with a subtle undercurrent in trading technology.