Trading on the Future: A Brief Look at the Future of Financial Markets IT

Change is funny " it seems to happen when no one is looking. Time seems interminable, but then you turn around and wonder, "What happened to the world I knew?" While in many ways the industry seems much the same as it ever was, but in reality our industry re-invents itself at an incredible pace. Since 1996 we have gone through no less than five major technology transitions: from client/server adoption to the Internet revolution, the millennium challenge, the portal wars, and for the past few years " somber rationalization.

Trying to prognosticate the future is tricky, but The Tabb Group has looked at our industry and has tried to project what will be, five years out. This is a summary of our findings. The full research is available here.

Our industry is going through another transition as the traditional broker / dealer value proposition is shifting. Decimalization has changed the economics of the U.S. equity markets. Regulation is applying greater boundaries. Electronic trading is leveraging standards and straight-through processing gains made over the past decade. Enhanced electronic trading will drive firms' efforts to enhance customer relationships to support electronic transactions with a rich human experience. And technology rationalization, enabling firms to do much more with much less, will continue to push firms' technology budgets lower.

Automation continues to be critical as trading desks will operate with fewer front-end staff working more efficiently but in a much more critical capacity. We will also see the wave of automation and standardization that has swept over equities hit the exchange-traded derivative, FX and fixed income markets over the next five years, leading to radical changes, higher volumes, lower spreads, and a flight to fee-based services. Regulation and compliance will remain hot for years to come. Reporting will become a matter of automation and extensive data management as the STP infrastructure enabling product innovation and price competition will be extended to better manage operational risk, real-time risk profiling, anti-money laundering (AML), and know your customer (KYC) regulations. As electronic and algorithmic trading escalates, the velocity of market data will continue to increase, forcing firms to upgrade their market data platforms. The traditional screen-based market data provider value proposition will break down as electronic-trading efficiencies will reduce traders and salespeople (i.e. paying customers) while increasing the quantity, complexity and importance of data.

Web services, has been the most widely anticipated emerging technology as firms look to componentize their infrastructure and extend it to their clients. We are beginning to see this being employed by algorithmic trading desks where firms are extending their trading technology to their customers. Web services will drive grid computing which in turn will drive data virtualization as the deployment of Web services hinges on the ability to manage a heterogeneous technology and data architecture. Linux, over the next five years, will become critical and will be driven by low cost, high performance hardware. Advances in technology manageability, Intel-based processor performance, price / performance ratios, and the liner scalability of Linux-based clusters are pointing to an accelerated use of Linux.

Technology management is the final issue and probably the most important change in the winds. While technology for technology's sake has a certain allure, technology is and will continue to be run more like a business than a personal playground for the deep-pocketed. Looking five to ten years out the winners in this world will not be the ones that develop the best toys it will be the ones that best align their technology to the business. And while technology business value management is not sexy, it certainly will be our future for years to come. Larry Tabb is the founder and CEO of TABB Group, the financial markets' research and strategic advisory firm focused exclusively on capital markets. Founded in 2003 and based on the interview-based research methodology of "first-person knowledge" he developed, TABB Group ... View Full Bio