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Capital Markets to Broaden Use of Hosted Software in 2010

Still-tight budgets and small IT staffs will drive Wall Street firms' preference for renting software rather than buying it.

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Why It's Important: A small revolution has taken place over the past two years in the way capital markets firms, especially buy-side firms, buy and use software. Rather than purchase and install programs, they've grown increasingly willing to rent applications from the software vendor or a third party and to let someone else host and support it for a monthly subscription fee; users log in and access the software over the Internet. This is variously called "software as a service" (SaaS), "hosted software" or the "application service provider model" (although some say "ASP" is an old-school '90s term), and it changes the game for internal IT departments. A major force behind this trend is Marc Benioff, chairman and CEO of, whose hosted customer relationship management software is used by 63,200 companies, including Cowen and Company, Daiwa Securities, E-Trade and Forex Capital Markets. The upside of SaaS is that IT staff should be able to spend less time supporting these platforms; on the other hand, they represent one more reason to keep IT spending and staffing levels low.

Where the Industry Is Now: Wall Street firms are using ASP models now "for certain components of their business, especially around reconciliation, trade processing, trade settlement and collateral management," according to Paul Migliore, CEO of consultancy Citisoft. For such middle- and back-office functions, it makes sense to farm out the technology platform yet still do the actual processing work in-house, he says.

Even the largest Wall Street powerhouses are turning to hosted software for non-core functions. Morgan Stanley, for example, uses SaaS for e-mail archiving and certain human resources and sales applications.

Focus in 2010: Buy-side firms will continue to make heavy use of hosted software in 2010, according to Migliore. "In the last year, assets under management have dropped dramatically because of the depression in the marketplace," he points out. "With the increased pressure on margins, there's a much bigger pressure on operational efficiency, especially in the middle and back office, which leads to more discussions around outsourcing and application service provider models, as well as FSP models -- full-service providers," Migliore says, referring to outsourcing models -- for instance, a firm contracting State Street to do all its accounting.

Sell-side firms also have plans for software as a service. Morgan Stanley, for instance, plans to grow its use of SaaS. "SaaS for a while was still slideware," notes David Reilly, CIO of enterprise infrastructure at Morgan. "Now it is real." But Reilly's not planning to put hosted software everywhere. "There's always going to be a need for proprietary software that we feel is a competitive differentiator or that we need to provide a service to a particular client," he explains.

Industry Leaders: Morgan Stanley was one of the first Wall Street firms to go public with its use of Salesforce, the hosted CRM pioneer, and has since escalated its use of hosted software.

Technology Providers: Hosted (SaaS or ASP) software is available from Calypso, Fidessa, Sky Road/Marketcetera and Codestreet for trading; SR Labs (market data feed handler); Thomson Reuters (market data); Eze Castle/NetAge and Navatar for customer relationship management; Wall Street Systems for treasury management; and SunGard for a variety of applications. This is by no means a comprehensive list -- it includes merely some of the software companies we've spoken to this year that offer hosted versions of their products.

Price Tag: Varies tremendously by type of application and size of installment. The enterprise edition of Salesforce CRM is $125 per user per month.

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