October 02, 2013

Innovate or die may be an often touted mantra in corporate circles but perhaps tellingly it is a favorite saying of Microsoft founder Bill Gates. Investment banks, albeit creative in their own right, could learn a lesson or two from their technology colleagues in inventing a new wheel. If they don’t follow their lead, then these firms could steal a march on their territory.

Take Google Glass. It may be easy to dismiss the wearable computer but pundits beware. Remember the skepticism that greeted the mobile phone 20 years ago. Fidelity Investment has already taken the plunge and recently launched an application on the eyeglasses that shows stock quotes from the major US indexes. The fund management giant envisions a future where investors – through voice commands and eye movements - are able to flip through financial articles, watch a news anchor discuss the markets, and even scan a company logo in his line of sight to immediately pull up a stock quote. Technology adoption of innovative ideas like Google Glass, drove down the transaction cost of an equity trade to a third of what it was in less than 10 years.

Investment banks may not adopt this type of technology overnight but declining broker commissions, lower equity trading volumes and more onerous regulations are forcing them to consider a new model. It is no longer viable to use technology to simply drive near-term revenues and profits by automating the way things have always been done. They should incorporate characteristics that are usually indicative of the most technologically innovative companies, such as speed and agility, collaboration and intuitive design. This will not only reduce cost and improve efficiencies but also sharpen their competitive edge. The flow business of an investment bank or broker dealer should run much like the traditional web property transactions which process significantly greater volumes every day.

The front office has traditionally been the beneficiary of technological innovation especially on the algorithmic front. First used to automate simple orders, the new generation of tools have come a long way and are expanding into new asset classes. Gone are the days when volume weighted average price was the benchmark of the day, now there are a host to choose from ranging from target price, market close, percentage of volume, arrival price and interval volume weighted average price.

[IT Is The Business]

However, there is always room for improvement. Buy side traders want to have a better understanding of the routing strategy and how orders are transactionally modeled. As a result, algorithms have gotten smarter in order to improve performance, client workflow and finding liquidity. Firms are also offering switching strategies which enables traders to move more effortlessly between different algorithms during the trading day as well as bespoke offerings which can help them better react to market movements. This is a great use of technology, but it is not enough. The hidden cost of these firms often lie in the middle and back office where inefficiencies due to poor user experience design, legacy technology stacks and brittle integration create slow processing, reduced productivity and retention issues in keeping the new generation of worker.

Success of course hinges on the quality of data and risk management systems in the middle and back offices. Once the non-glamorous end of the industry they have moved center stage in the post financial crisis era. It is not just about having the latest processing systems and market infrastructure but adopting a new integrated way of thinking.

Given the challenging environment, it is easy to see why investment banks need to move towards the Google model, which is driven by innovation, data and automated transactional processing. The company’s cost base is three times less than a bank’s and they rely more on cutting edge technology and less on an army of people to move the business forward. The transformation of the trading divisions is a step in the right direction, but banks need to re-examine the way they allocate skills and resources in order to better meet client demands throughout the transactional lifecycle. If they don’t, then their reflection might not be looking back in the Google Glass. Jeffrey Wallis is a managing partner with SunGard’s Consulting Services.