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Larry Tabb
Larry Tabb
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Financial Markets Must Invest In Their Technology Infrastructure To Survive

The financial markets industry is so IT-dedicated these days that organizations cannot function without a strong, scalable and flexible technology infrastructure.

It's another June and time for another SIA — well, SIFMAnow — Technology Management Conference. This year, the conference theme is, "Tech Be Nimble, Tech Be Quick!" And if you work in financial markets IT, the follow-up statement would be, "Tech jump over the candlestick." And the truth of that last statement isn't that far off, as today the industry is so IT-dedicated that organizations cannot function without a strong, scalable and flexible technology infrastructure.

When I started in the industry (1980 — back when dinosaurs roamed), technology was important. But when things went wrong, people still could trade, process and even settle transactions. During one of my stints at a major IB running a back-office fixed-income operations area, the batch systems would consistently die on Monday nights, leaving us totally manual the whole week until Saturday, when we finally caught up.

We would process billions of dollars a day in U.S. Treasury securities — all trades were written by hand, prefigured on a Monroe Bond Calculator, manually input into our clearing bank systems, accounted for manually and reconciled by hand. We would manage the clearing and settlement manually during the day, and update our processing systems at night (when they came back online). This went on for what seemed to be a full year, but it was probably more like four months. Although just thinking of those days brings back cold sweats, at least when technology failed we could still somewhat manage.

Today, the businesses, products, volumes, speeds, operations and technologies are too complex to do virtually anything without technology. How can one trade manually when orders are being executed in five milliseconds? How can a human trade when peak quote volumes are measured in tens of thousands per second? How can an individual — without the aid of IT, high-speed data feeds and significant computational power — find arbitrage opportunities when comparing an index against its 500 component parts or price a complex deal that may involve simultaneously valuing equities, corporate bonds, Treasury bonds, credit default swaps, futures and options?

While this may be great for IT folks, it places ever more pressure on technology to be nimble and quick, and jump high — in other words, be more responsive.

So what does this mean for the IT organization?

Flexibility and time to market become critical as the ability to prioritize, spec, implement and deploy a technology means the difference between reaping the profits of being first to market or being a laggard.

While being first to market means greater profitability, fewer products and business can be launched using spreadsheets to trade, book and settle products. That means that technology is needed before firms can determine how successful and profitable the business will be. This is a challenging issue. How do firms determine their start-up investment in a product if they can't anticipate revenues? To lower this risk, firms need to reduce the start-up cost so that the level of investment is minimal — until the success is more certain.

The first step in moving toward a more fluid IT organization revolves around business and IT planning. The IT planning cycle must change. Many organizations develop yearly plans. This process entails gathering business priorities and attempting to cost-justify both the technology and operational investment. From this starting point, organizations select the most beneficial projects and begin the year-long task of development and implementation. While this is laudable, by the time most firms have finished prioritizing, the plans are obsolete, and depending upon how cast-in-stone the plan is, getting new projects into the queue can be as painful as pulling teeth.

This process needs to be accelerated. In a technology-bound environment, virtually every new initiative needs IT support. From the addition of a new client, to the trading of a new product, to the development of a new channel, to the integration with a new order management system, most every function within an investment bank is technology-bound. Firms need to be able to reallocate resources more frequently. Firms need to develop prioritization technologies that allow IT resource reallocation on a semi-annual or even on a quarterly basis.

To accommodate this the business must have an easy way to highlight new needs; operations must have a way to determine support costs; and technology must be able to more easily determine scope, scale, prerequisites and resources. In addition,

IT projects must be smaller, and more value must be delivered in a shorter period so they can be inserted, shifted and rearranged fairly quickly.

IT infrastructure also must change. Firms must adapt mechanisms for componentizing and reusing various generic and even more-specific components or services. These services must be cataloged, documented and warehoused so that developers can find them, enhance them to fit their needs and implement them. While I am not so naive to think that all services are reusable and that all service can be reused exactly as initially written, starting from even 50 percent is better than starting with nothing.

In addition, vendor-based services must become easier to acquire, integrate, upgrade and swap out as part of the flexible new technology infrastructure. Not everyone can build every service, every piece of middleware or every application all the time. No firm has the bandwidth, technology staff or budget to do everything, all the time.

IT groups also need to rethink how they manage IT. Projects must be short in duration, well-focused, leverage existing components and infrastructure, and can't be tied up in bureaucratic over-process. That said, ensuring that the applications don't misbehave becomes even more critical as testing and quality assurance becomes the critical backstop against which the business relies.

Given these issues, it is not so curious that technology has become a greater aspect of the industry's success. However, it has also factored into a greater percentage of cost and challenge.

As you go through the booths over this three-day industry gala, one needs to think not only about what these vendors enable, but how they can be flexibly integrated into today's and tomorrow's technology-led existence, and whether your architecture and IT governance structure has the ability to quickly adopt, tailor, integrate and eventually jettison these services, as well. And as the conference theme states (and I so vehemently agree), the success of your business will increasingly be predicated on how nimble, quick and flexible your technology vision and division are.

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
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