Like nearly every financial crisis in U.S. history, speculation, risky trading practices and over-leveraging were at the heart of the 2008 market meltdown. As the credit crisis unfolded, millions of jobs were lost and retirement accounts were decimated, and Wall Street was called on to explain itself - by the public and by Washington. All of this took place as the government spent billions to bail out AIG and prevent the sector from collapsing altogether.
The impact of the crisis was and still is far-reaching, with only a few sectors of the economy beginning to recover. And the ripples from
the 2008 collapse will continue to be felt for some time. For instance, with the industry facing steep financial losses, technology research and development slowed to a crawl over the past few years, industry sources say, as many software providers saw their margins cut to the bone as clients demanded lower rates.
But Wall Street is reemerging from the rubble of the crisis. The new Wall Street, however, will be much different than the one that was left behind in September 2008. New attitudes toward risk, new best practices and a new set of regulations are just a few of the changes the industry faces.
For starters, today's financial recovery is accompanied by the most sweeping financial reform legislation since the 1930s. Banks no longer will be able to make high-risk wagers with proprietary trading accounts and now face restrictions on their investments in hedge funds and private equity funds. And firms also are being more careful when selecting trading partners, taking greater pains to analyze counterparty risk and the creditworthiness of trading partners before entering into deals.
In addition, in a bid to prevent the sort of domino effect and panic that ensued after the collapse of Lehman Brothers in September 2008, the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in July, stipulates that OTC derivatives must be cleared through central counterparties, or CCPs, which identify the obligations of both parties in a transaction and settle the deal after the final transfer of cash and securities occurs. Under the new guidelines, the CCP takes on most of the risk in a derivatives transaction: If one of the counterparties involved in the transaction were to go belly up, its contracts would be guaranteed by the CCP, which raises money by collecting margins from firms engaging in derivatives trading.
Returning From Technology Deadsville?
Inadvertently, the Dodd-Frank bill's requirement that OTC derivatives be cleared via a CCP eventually may spark technological innovation and help technology providers that have barely survived the IT spending cuts that followed the credit crisis, according to George Michaels, the founder of G2 Systems, a boutique consultancy and software integration firm. The CCP requirement for OTC derivatives, he explains, means that market makers will have to funnel data generated by derivatives deals into a common communications mechanism, which will in turn create demand for software that can extract the information and integrate it into existing technology.
"Then you have the consumer functions: order management systems, execution management systems, back-office portfolio management systems, accounting systems," says Michaels, whose firm also provides programming and customization services for hedge funds, brokers and fund administrators. "Everybody is going to need that data, so that's a heck of a lot of opportunity for us as well - building all the pipes that pull this data and integrate it."
But such opportunities remain down the road, concedes Michaels, who acknowledges that the post-crash climate for financial technology firms, including G2 Systems, has been brutal since companies drastically cut spending during the recession. "Technology [spending] has been stagnant," he relates. "Nobody has been developing anything. Everybody is just trying to survive, and I count myself lucky that we got through it without having to do any layoffs.
"As a technology firm that caters to hedge funds, we've done awesome to survive," he adds. "But the fact that it's awesome to survive means there's nothing going on. It's Deadsville." As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio