A contributed piece by Jocelyn Cunningham, Partner, Securities Consulting Practice & Michael Urkowitz, Senior Advisor DeloitteConsulting, Securities Consulting Practice
A few Wall Street graybeards can recall the back-office crisis of the late 1960s, when securities industry processing capacity--until then an afterthought--was suddenly front-page news. Like Mickey Mouse cast in the role of the Sorcerer's Apprentice, firms found themselves overwhelmed by unprecedented transaction volumes. Exchanges implemented half-day holidays to help firms catch up; even that did not suffice. In the end, at government urging, a few had to be taken over by larger firms.
Another serious technology crisis is now brewing. The problem this time is neither lack of investment, nor a failure to understand how quickly transaction volumes can increase. The problem, quite simply, is the siloed structure of most firms and the incompatibility of their systems.
Why are incompatible systems becoming so dangerous? Start with the increasing volatility of global markets and the necessity of improved risk management. Right now, few firms have the ability to produce accurate mid-day flash reports on the extent of their market exposures; many can't even do it by day's end. Yet the markets increasingly demand that firms be able to deliver and analyze complete, accurate and robust real-time information about all of their exposures across products, regions, customers and counterparties--and at a moment's notice.
Mounting PressuresImportant market changes like globalization, decimalization and the spread of after-hours trading increase trading volumes and add to the pressure for processing efficiency. Decimalization was barely introduced last year in the U.S. stock markets, yet it accounted for an estimated 215 percent increase in Nasdaq equity volume by year-end.
Additional pressure for improved processing will soon come from the introduction of T+1--next-day trade settlement. Firms will have to do more than merely enhance their current infrastructure to meet the performance standards almost sure to be mandated by the Securities and Exchange Commission in areas like trade confirmation.
Nor are the pressures coming solely from regulators; customers are making demands as well. With the rise of the Internet and the growth of direct capital markets participation, both individual and institutional investors are insisting on better account access, better trade execution and information on demand. As a result, efficient processing is becoming essential to effective marketing and customer service.
A final consideration is cost. As online trading drives down commissions and profit margins, no firm can hope to remain competitive without highly efficient processing.
Despite all of these pressures and the addition of capable, highly paid technologists to every firm's payroll, the situation on Wall Street continues to head towards chaos. As trading days lengthen and volumes swell, more firms must work nights to process the day's activities. All the same, they are struggling to keep up.
Decentralized Silos The culprit at most firms is a systems infrastructure based on architectures that were developed in decentralized, product-based silos--silos that discourage integration and harmonization. Most of these existing infrastructures rely on batch processing and multiple data sources that are inefficient, costly to maintain and very expensive to replace.
Among the inefficiencies now common on Wall Street:
- Debt and Equity Markets groups that maintain separate processing systems with numerous redundancies. These siloed systems make data sharing difficult and frustrate teamwork. - Acquisitions that rarely result in the kinds of synergies originally predicted--in large part because the acquired company's systems can't be harmonized with those of its new parent. - Firms that engage in widespread manual interventions and ad hoc reporting, which drives up costs and prolongs the trade-processing life cycle. - New product development that is frequently delayed because of the different accounting rules and business logic embedded in each business department's product systems. - Databases that are neither easily accessible nor shareable across different business areas.
Wall Street firms must clear a path through this labyrinth of inflexible, redundant processing environments. They need to align transaction and information processing with the demands of the emerging securities marketplace--and they need to do it with minimal business disruption and implementation risk, which is a significant managerial challenge.
Strategic Processing Environment The good news is: It can be done. Firms can create what we call a Strategic Processing Environment (SPE), using Enterprise Application Integration (EAI) technology, middleware and operational data stores. An SPE makes it possible for firms to make their myriad processing systems work in concert without having to replace them--and at significant cost savings.
By skillfully combining business processes and information systems, it is possible to create a robust internal-processing environment that allows data to flow freely--horizontally as well as vertically. Moreover, a SPE can be phased in over a two to three year period--well ahead of the industry-wide GSTPA project that is not expected to be complete until at least 2004.
Although implementation of such an environment is a complex undertaking, firms cannot afford to stand still. They must start now to establish a customer-centric approach to managing data and information and to streamline the trade-processing cycle for greater speed and efficiency.
As with any radical business transformation, changing from a fragmented, decentralized processing environment to an SPE must be approached as a significant management initiative, not as a mere systems replacement. Business units as well as operations and technology must take responsibility for the change. The prize, however, is certainly worth the effort: An environment that delivers faster, more accurate processing; greater flexibility and scalability; lower transactions costs; and reduced risk exposure.
Only by eradicating all vestiges of a "back-office" approach and replacing it with strategic processing that is truly at the heart of the business will Wall Street escape the next technology crisis.