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Terrorist Alert Will Prompt Higher Financial Services IT Spending

Last weekend's elevation of the terrorist-threat level will cause financial firms to boost IT spending on operational resiliency by nearly 10 percent a year.

The recent terrorism alert based on the discovery of "unusually specific" plans to target five financial-services institutions -- including the New York Stock Exchange (NYSE) and Citigroup in New York -- will trigger increased IT spending by those threatened locations and other financial institutions watching from afar.

In 2004, TowerGroup estimates that the global financial-services industry will spend nearly $4 billion on the field of operational resiliency -- which encompasses protecting people, processes and infrastructure based on the notion that there should be no disruption in businesses in the event of a terrorist attack or outage. Spending will grow by 9.4 percent annually over the next three years, rising to $5.23 billion in 2007, TowerGroup estimates.

"IT spending on operational resiliency, unlike any other area, is susceptible to spikes after an event," says Virginia Garcia, senior analyst, financial services strategies and IT investments at TowerGroup in Needham, Mass. Garcia says that after the World Trade Center attack she saw a 19.2 percent increase in spending on operational resiliency, and after the blackout of 2003, spending shot up 12 percent.

Most of the five financial institutions mentioned in the terrorism threat, including the Citigroup building in midtown Manhattan; the NYSE; the Prudential Building in Newark, N.J.; and the International Monetary Fund and World Bank in Washington, D.C., are fully resilient in the back office, says Garcia. Citigroup can perform load balancing across the globe, she adds.

Still, there is the view that securities and investment firms that are still heavily concentrated in New York are vulnerable to an attack, says Garcia. On Sunday night, other Wall Street firms, including the American Stock Exchange, Bear Stearns, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Nasdaq, were briefed about the terrorist warning and security measures by police officials from the counter-terrorism bureau and the intelligence division.

In a release on Monday, Donald Donahue, president and COO at the Depository Trust Corporation, who is also sector coordinator for banking and finance and chairman of the Financial Services Sector Coordinating Council for Critical Infrastructure Protection and Homeland Security, stated: "Financial services firms are putting in place special security precautions -- over and above the strengthened procedures we already follow -- in light of the new information."

The largest firms have made considerable investments in systems and infrastructure, such as those made in back-up systems, storage and remote mirroring technologies, Garcia notes in a comment piece. "The concern is greater for smaller institutions that have so far not been able to fund high-tech back-up facilities. More frequent testing is required [every few months], and that is not cheap, and it factors into IT spending growth," she says.

Even though Wall Street firms have shored up their back offices, there are still vulnerabilities in the front office, such as enabling employees to work from remote locations, and dispersion of key executives to different locations, as well as cyber security, which can open the door to terrorism, warns Garcia. Other financial centers in global markets, such as London, will be watching what securities firms do to secure their buildings, and the same goes for Asian cities as well, she says.

With the NYSE building singled out as a target, one concern is the resilience of the stock market. Though the NYSE reportedly has a backup trading facility for floor brokers and specialists located in one of the other boroughs, one advocate of electronic trading says the Nasdaq marketplace would be able to takeover trading of NYSE stocks in the event of an attack. "It would be very difficult to take Nasdaq down because there are so many nodes of the distributed network," says Steve Swanson, chief executive officer and chairman of Automated Trading Desk in Mount Pleasant, South Carolina.

Swanson lumps electronic communications networks (ECNs) with the Nasdaq model of having a distributed infrastructure and being fully electronic. "You are less dependent upon individual traders that are on the floor," he says. Though Swanson says he's "heard the NYSE is prepared to flip a switch and anything can run electronically," he's not sure that's the case. On Monday, NYSE CEO John Thain announced plans to increase automated trading in a filing with the Securities and Exchange Commission. "If a terrorist event did occur, they could go to their super-secret location and just turn it on as a giant ECN/exchange," he says. "But I don't think that transition is going to occur until the next 18 months," he adds. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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