June 28, 2012

Regulations are increasing, transaction volumes are down, assets are flowing out of investment managers and technology budgets are tightening. At the same time, the industry continues to depend on technology to develop smarter analytics and strategies, to provide fast and intelligent access to expanding global markets, and to perform those mundane, but critical, functions that keep the wheels turning. This dichotomy places our collective technology infrastructure under the microscope.


Two years after Dodd-Frank became law, the financial reform package appears to be dying a slow death, and many experts suggest that the Volcker Rule — perhaps the most important and controversial aspect of financial reform — will never work. Advanced Trading's July digital issue looks at what, if anything, on Wall Street has changed since the credit crisis and examines the challenges regulators face in enforcing the ban on proprietary trading.

Simply put, we look to technology to help us stay ahead — of where we were yesterday, of where our competitors are today and of where the new challenges will be tomorrow. With budgets constrained, our smartest technologists are aggressively seeking solutions that improve efficiency and reduce cost, freeing up precious budget dollars for the more unique value-adds that differentiate the best in the business. Institutions have now found more occasions to reduce their technology setups in favor of externalized solutions that reduce their technology footprints. The industry is operating with a reduced technology infrastructure every day, using less expensive sourcing models to run its data centers. As many institutions' profits languish under uncertain market conditions, can we get to a point where we have zero infrastructure? This was the theme of a panel session at Tabb Group's recent Market Tech 2012 event.

[Volatility, New Regs Demand Better Data Management .]

We have been moving toward a reduced technology infrastructure for years. Ten years ago very few firms moved core systems into the cloud. But, when our capabilities improved, giving us the ability to trade at ultralow-latency speeds, we saw the explosion of high-frequency trading, and, as panelist Brennan Carley of Thomson Reuters noted, HFT demanded colocation. This became the tipping point for firms to accept outsourcing of their infrastructures.

Meanwhile, the pace of innovation has increased significantly, encouraging new business models, methods and partnerships with companies that have complimentary capabilities in order to optimize the overall IT strategy. Networking capabilities, too, have improved to become more reliable and far less risky, meaning that you can access your core technology just as readily from an outsourced data center as you do running it in-house. As a result, panelist Scott Ignall of Lightspeed noted, financial firms must focus their best and brightest on technology that provides a genuine competitive advantage and trust others to manage their infrastructures.

3 Steps to Zero

While the industry has made strides in reducing infrastructure, it stops short of truly broad adoption of cloud infrastructure. The next hurdle can be cleared only if we drop our resistance to sharing technology that we deem to offer us a competitive advantage and reconcile our uncertainty over the security of a shared environment. These barriers are the final obstacles to severe reduction of infrastructure. Nonetheless, we can point to a definitive three-step progression of infrastructure reduction across the industry:

Step 1. Table Stakes. Everyone in the industry offloads commoditized solutions such as backup processes, accounting and nearly all latency-insensitive applications to a managed service.

Step 2. "Money Ball." An outsourced infrastructure helps level the playing field. Shared data centers and infrastructure allow smaller firms to increase their focus on the things they need to compete with the bigger firms.

Step 3. The Vision of the Future. Some firms go to the leading edge, such as adopting mobile applications for trading.

Amid these new times, when lower profits may be the "new normal," our strategies must evolve to leverage technology's capabilities not only to generate new revenue opportunities but also to strike a balance between lowering costs and enhancing competitive advantage. Even though reaching true zero infrastructure is unlikely for most in the near future, we can still reduce our infrastructures -- through investments in mobility and acceptance of the cloud for services such as risk management and even for latency-insensitive trading. We are headed to zero.

Robert Iati is a partner and global head of consulting with New York-based Tabb Group. Iati manages the firm's client engagements, which range from trading technology strategy and selection to competitive analysis.