This past year has been characterized by the need to spend on technology to meet regulatory obligations. Information technology departments across the industry were able to get budgets approved by rallying around the flags of risk and compliance. The threat of a collateral squeeze resulting from the new clearing requirements for OTC derivatives not only gave the middle office new systems, but also brought some of those operations into the front office as margining requirements became integral to trading strategies.
U.S. regulators led the push to introduce new processes and reporting regimes that will continue across the globe as their counterparts in Europe and Asia catch up in their efforts to increase transparency and fairness in the markets. Market participants will have to continue to anticipate these rules as they look at their technology budgets for the coming year, but the lines of business are once again becoming the primary driver for spending on new systems, applications, and infrastructure.
Technology trends on Wall Street continue to be divided into real-time applications and everything else. Trading still dominates the real-time space and technologies such as complex event processing, machine learning and in-memory databases will continue to be pushed to their limits to gain a competitive edge. Vendors from industries as diverse as aerospace and oil drilling are coming to Wall Street to either shave a few microseconds off a trading algorithm or provide a new technique to anticipate a market move. The acquisitions of Apama by Software AG and Streambase by TIBCO demonstrate the growth of real-time big data applications as part of basic market infrastructure. What is new is that these technologies are just as likely to be used in surveillance applications to monitor the very same trading activities that they make possible.
Firms will have to anticipate new regulation as they look at their technology budgets, but the business is the primary driver for spending on new systems, applications and infrastructure.
However, automated trading failures are still grabbing headlines and firms, trading venues and regulators are looking for solutions to maintain confidence in the markets. The SEC's MIDAS system is giving the public a view into exchange order books and NASDAQ has just announced a testing facility for algorithms. Both are built on technology coming out of high frequency trading firm Tradeworx. Even firms that don't consider themselves to be high frequency trading participants are looking to implement applications that can warn of impending scenarios that could put their strategies, reputations and in some cases, survival, at risk.
Newsfeeds and social media are working their way into both the trading and surveillance arenas, primarily through sentiment analysis for generating signals. While still in the early stages, social media's influence throughout the investment industry is growing in the areas of trading and research. Underneath it all, the race for the lowest latency infrastructure is not slowing down. Rooftop real estate is now at a premium as network providers are trying to provide the shortest distance between New York and Chicago market data centers by planting their microwave dishes and laser repeaters on any space available. There is even talk, though not yet taken seriously in public, of floating laser repeaters on balloons and dirigibles to link markets across oceans.
[For learn more about all of the topics that will shape the business technology landscape next year, download the November Digital Issue: Capital Markets Industry Outlook 2014.]
On and away from the trading floor, cloud-based services and big data technologies are providing firms ways to both reduce cost and increase revenue. Firms are moving their historical tick databases to the cloud realizing that old data, while good for testing trading algos, doesn't make them more competitive. Along with tick data, firms are looking at other datastores and operations that can be moved to the cloud or shared with other participants. In September of this year, Markit and Genpact announced "a partnership to develop the first centralized service for end-to-end management of client onboarding and other know-your-customer (KYC) requirements in the financial markets." Later that month DTCC announced that it signed a memorandum of understanding with a group of global banks "to jointly develop a comprehensive service to collect and manage client entity reference data necessary to meet regulatory requirements and other normal course of business activities."
In that light, 2014 looks to be the year for shared services. For instance, everyone is looking to monetize the data that they aren't going to outsource. Across the industry, broker/dealers, investment managers, service providers and other vendors are looking at all their internal data and seeking ways to repackage it for sale. Technologies that can provide semantic-based enterprise indexing and search will be essential for bringing both structured and unstructured data together across business silos. The firms that can integrate all of a trading partner's data and provide a complete picture of that partner's activity and exposure will be at a competitive advantage over those who can't. Service providers are looking at ways to anonymize and aggregate their customer data to create new product offerings. Firms are feeling pressured to be able to demonstrate that they are not falling behind their competitors in utilizing big data to find more sources of revenue.
Falling revenues and the costs of complying with a barrage of regulation forced many firms to squeeze all they could out of every IT dollar. The result has been a re-evaluation of what operations are core to the firm's competitiveness and strategy and what can be outsourced or shared. The regulations brought with them a new focus on data and information. As the often tactical rush to meet the regulators' requirements subsides, firms are now using that new found focus to put data and information to use strategically.
About The Author: Robert Stowsky is a senior analyst with Aite Group's S&I team, covering capital and commodity market structure, operations, technology, and regulation. Stowsky brings to Aite Group 25 years of capital and commodity markets experience. He has worked with buy-side and sell-side firms, custodians, trading and clearing venues, service providers, and software vendors on implementing business processes and technology for front-, middle- and back-office operations for nearly every asset class.