After three-and-a-half grim years of spending cuts, the global securities industry is expected to spend $71.5 billion on information technology (IT) in 2004, according to new research from TowerGroup, which is being presented at its annual conference in Boston today.
As the U.S. economy recovers and returns to a revenue-growth mode, buy-side and sell-side firms are ready to spend once again, "at a much more controlled and measured growth rate," writes Robert Hegarty, vice president, securities & investments, at TowerGroup, the Needham, Mass.-based technology research and consultancy.
But the $71.4 billion estimate for 2004 represents only a 1.4 percent increase over the $69.9 billion total spent in 2003. "It's barely increasing," says Hegarty. This is still far below the highs in IT spending, which hit $86.2 billion back in 2000.
In fact, last year, TowerGroup was predicting flat-to-slightly-down IT budgets, but it revised its estimates in April 2003 as budgets began to loosen to predict flat- to plus- or minus-two percent growth, notes Hegarty.
These forecasts are contained in a series of ViewPoints published by TowerGroup this week, which examine IT spending trends across three sectors in the global securities and investments industry: including institutional brokerage, retail brokerage and investment/asset management.
Of the total $71.5 billion, North America is pulling ahead of the rest of the world in IT spending, with 42 percent of the total pie, as compared to Europe (35.2 percent), which is declining slightly.
Meanwhile, the asset-management area will grow two percentage points more than any other sectors in the securities industry. After declining four percent per year for the last three years, IT spending in asset management -- which includes both independent buy-side firms and the asset-management arms of broker-dealers -- is expected to grow seven percent, from 2004 through 2008, whereas institutional trading and sales will grow five percent. Hegarty says this reflects the brokers shifting their model from a transaction-based to a fee-based model.
"As they de-emphasize the trade and emphasize the assets, they're spending more money on the asset-management function," he says. As for the pure buy-side firms, a lot of them didn't jump into the technology fray as fast as the brokers did in the 1990s with the Internet. "They're taking more of a measured long-term growth approach in IT spending," says Hegarty. He estimates that North American investment managers will spend $4.4 billion on IT in 2004. "The good news is they didn't spend as heavily as the brokers [did] in the dot-com days, so when the 'dot-bomb' hit, they didn't get as hit as hard," he adds.
Where is the buy-side spending its precious IT dollars? Investment decision support/analytics will grow the fastest over the next five years, at a compound annual rate of 8.2 percent, while portfolio accounting-custody will grow at a 7.4 percent rate, says TowerGroup. "There's a recognition on the buy side that they need to get back to their core competency and their competitive differentiator," says Hegarty. "They need to deliver superior investment performance and excellent customer service and in the end those are the two things that are going to differentiate them," he says. In order to beef up the front office, they're investing in tools to help them make better investment decisions and technologies to help them increase their customer-service capabilities, he says.
Order management, trading and compliance are forecast to grow at a 5.5 percent rate through 2008, suggesting that early adopter firms have already put those systems in place. But compliance is going to take the lion's share of IT dollars in that category, says Hegarty.
Institutional broker-dealers are projected to spend nearly $50 billion on institutional technology maintenance and development in 2004, according to Robert Iati, director, securities and capital markets, at TowerGroup, in his Viewpoint. As the sell-side feels more positive about the future, the more it will allocate IT dollars to trading and sales technology, notes Iati. Trading-technology spending is growing at a faster rate (4.6 percent) than spending for middle- and back-office systems, he writes.
One notable change is a shift in allocating asset-class spending to fixed-income and derivatives as opposed to the emphasis in past years on equities. In 2000, brokers allocated 41 percent of the IT spending budget to equities while 26 percent went to fixed-income. In 2004, the allocation to equities is 33 percent, while fixed income receives 34 percent, derivatives 21 percent and foreign exchange and commodities is at 12 percent. Now new developments in fixed-income, such as applying the Financial Information Exchange (FIX) protocol to electronic trading and processing," is driving more IT development to the bond business," writes Iati.
Chief information officers are also shifting their budgets toward external providers, as opposed to spending the dollars internally. TowerGroup predicts that by 2008, the industry will allocate 58 percent of their budgets to external providers, versus 43 percent in 1996. "As the industry gets more comfortable buying messaging capabilities, they're not building it anymore," says Hegarty. Similarly with order-management systems, they're more inclined to buy a BRASS or a Royal Blue Fidessa on the broker-dealer side or a Charles River or a Linedata on the buy-side, says Hegarty. Part of the services component reflects the growth of outsourcing, which in turn includes the movement offshore. 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