September 12, 2013

The financial services industry has embraced the adoption and use of open source software at the infrastructure level, and is moving steadily up the stack to the application layer and beyond. Yet progress, as in many other industries, has been slowed in part due to a lack of institutional political will, and in part due to reluctance to abandon old paradigms and legacy systems.

Jamie Hill, NYSE Technologies OpenMAMA
Jamie Hill, NYSE Technologies/OpenMAMA

Tim Yeaton, Black Duck
Tim Yeaton, Black Duck

In turning to open source, financial services is following a path being trodden by other regulated industries -- health care and government IT, for example -- which are attracted to open software development models by promises of cost control, increased innovation and developer satisfaction. These industries embrace agile methodologies and community-led development methods to attract top talent and spur innovation.

Both commercial and community-led (e.g. OpenMAMA, the Lodestone Foundation) organizations are working to help financial services firms embrace ever-greater use of open source software (OSS) to address cost pressures while adopting a managed approach which leverages the power of community and the availability of community-sourced OSS components. With increased traction for OSS building in financial services it's important to understand what is driving change, how change is rolling out, and which groups and organizations are behind the impetus for change.

Regulatory Compliance Cost Forcing Change

Historically, IT has been a market differentiator in financial services. In the 1980s, firms invested heavily in proprietary trading platforms, messaging protocols and data structures, creating siloed systems and lock-in. Bloomberg, Thomson Reuters and other organizations offered free access to global financial data -- as long as firms agreed to brand their platforms with the data provider's logo. Financial data was free; systems to deliver it were not. What worked in a relatively unregulated industry is no longer sustainable in today's heavily regulated markets.

[To learn more about how open source is changing financial services, register for Interop here and check out the session that features an update on Open Compute, "Why You're Paying Too Much For Data Center Technology (And What You Can Do About It)" on October 2 in NYC.]

Today, the financial services industry's primary IT cost driver is regulation. More than 14,000 new regulations were enacted in 2012 alone, most of which affect IT and data management. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, for example, includes more than 30,000 pages of text covering more than 280 rules, with more coming. Sarbanes-Oxley, by comparison, contained 16 rules when enacted in 2002.

Dodd-Frank and Sarbanes-Oxley have hit IT hard. Today, 59 percent of CapEx expenditures in firms are driven by storage demands fed by the need to retain ubiquitous regulated data for ever-longer periods. With capital spend in the neighborhood of $29 billion slated to maintain data, legacy infrastructure, data models, messaging models, trading platforms and more, the industry is at a crossroads, and many -- including Deutsche Bank's CIO Tony McCarthy -- are calling for disruptive change to shift financial services players serving capital markets away from viewing IT as a differentiator towards IT as an enabler. The first move is to help firms to abandon siloed, locked-in systems for more open systems, supported by the global open source movement, and even by industry peers.

How OSS Is used On Wall Street

Linux is the great success story in financial services, used by many exchanges. Also in use are leading OSS projects such as Eclipse, Apache, JBoss and SpringSource, adopted to solve specific challenges like faster messaging to support trading platforms.

By leveraging open platforms, financial services firms can realize significant savings, which can then be redeployed to fulfill core business strategies. Areas in which financial services firms consume and benefit from open source and open standards include:

  • Linux, FIX (open standard), AMQP (started by JPMC), OpenGamma (RISK), and OpenMAMA (abstraction layer)
  • Within firms' development organizations: CVS, SVN, Git, Bugzilla, Eclipse, etc.
  • Front office uses: Swing, Asterisk (VOIP) <.li>
  • Back office uses: Postgres, MySQL, OpenOnload

The cost of operating legacy platforms and keeping up with changing regulations is crippling many firms, an additional reason why it makes sense to leverage OSS and its communities of scale. The future of the industry calls for less complexity and reduced costs, which can be realized through open source and OSS platforms such as OpenMAMA.

Barriers to success with OSS

Open source use in financial services allows enterprise architects to optimize activity along the dimensions of cost, functional depth, and schedule. Where financial services trails other industries in OSS adoption is in its acceptance of open development models and community participation. Additionally, unmanaged, ad hoc OSS consumption (where developers select components without reference to policy) is prevalent, reflecting a lack of internal governance surrounding OSS-related technical standards, as well as legal and security requirements.

When firms avoid OSS, it's often due to a misunderstanding of perceived risks in adopting open source technologies, such as security risks and lower quality. But those perceptions are changing. The 2013 Future of Open Source survey, an annual survey conducted by Black Duck and North Bridge Venture Partners, shows these traditional barriers to adoption have fallen. Respondents to the survey put quality at number one on the list of factors driving adoption of OSS, with superior security following freedom from vendor lock in, flexibility, and scalability. Additionally, nearly 90 percent of respondents to the survey cited innovation as the most important trend leading OSS adoption.

While OSS has made inroads, in many cases, firms aren't even aware they're using OSS. And perhaps most significantly from a community perspective, when firms do use OSS they rarely contribute back or collaborate with industry peers. OpenMAMA and other initiatives were formed, in part, to change this pattern.