The cyclical nature of broker-dealer IT expenditures is once again in the spotlight as the credit crisis is set to pull large brokerages down for another several quarters. Celent projects that brokerage IT spending in North America for 2008-2011 will move forward at a tepid CAGR of 1.3%, down significantly from a CAGR of 8.5% during the 2004-2007 period, according to a new report, Brokerage IT Spending and Priorities: Finding a Way Through Lean Times from Celent Analysts David Easthope and Chermaine Lee.
Easthope and Lee found:
The credit crisis has now seen three consecutive quarters of writedowns of almost $150 billion, and there will be more to come. Projections for continued weakening in the markets are set for another six quarters at least. To combat the current and expected hit on revenue and profits, brokerages are adjusting their technological priorities in the short run and possibly in the long run.
With a 2004-2007 CAGR of 9.7%, Europe's sell side IT spending has outpaced its North American counterparts. Sell side European IT spending will reach $21.3 billion by 2009. The projected CAGR for 2007 to 2011 is 5.6% for European regulatory spending.
Despite the weakened environment, long-term IT priorities remain. In the front office, brokerage firms continue to be focused on achieving best execution for their buy side clients because best execution standards have been rising steadily due to heavy regulatory implementations in both the US and Europe. In the back and middle offices, the long-term focus will be on greater integration and consolidation of applications and services and an overall streamlining of processes. Areas like risk management, compliance, and portfolio valuation continue to be high on the IT list. Regionally, MiFID's role in influencing IT expenditure and strategy for Europe will be an important one for the next few years.
With IT becoming more of a strategic driver rather than having a pure support and operations role, technological priorities tend to be more recession-proof. However, to be well positioned for the short and long-term, IT vendors will have to meet the sell side's needs for cost-efficient and flexible services and systems in these lean times. Flexibility in software and services delivery will be an important differentiator for vendors in the years to come.