Industry Analyst Insights & Predictions for SIFMA TMC

Transparency Increases and RIAs Flourish in 2009

Electronic trading will grow rapidly, transparency will increases and consumers will seek out registered investment advisors.

The year 2009 will usher in a heavy focus on change and transparency. The global financial market has taken a beating over the last year, particularly in the hedge fund and private equity sectors. Once the dust settles, risk management and new regulations will rise to the forefront as key initiatives. Budgets for many firms will reflect diminishing profits, and spending priorities will shift, with IT budgets focusing heavily on risk management. Firms will pull back on many new technology initiatives as firms focus to stop the bleeding on their balance sheets as regulatory oversight increases, especially in the OTC markets.

Electronic trading will continue in full force through 2009, and Aite Group sees growth in this space and record-setting volumes exchanging hands electronically. The post-MiFID European market will continue to see drastic changes, and European market fragmentation will continue to grow as new entrants fight for market share. Usage of algorithmic trading will increase in complexity in developed markets and be adopted more readily in emerging ones. Firms will also become more reliant on ancillary data for trading decisions. Sophisticated execution management systems will increase globally to streamline workflow and automate trading. The increase in automated trading will facilitate capital flow and increase the overall quantity of transactions.

Amid unsure markets, the number of registered investment advisors (RIAs) will grow by leaps and bounds. Besides clients looking for advice, a large number of brokers will be going independent. There will be significant changes in the retirement and the retail securities sectors. Retail investors and retirees have seen their lifelong investments and retirement diminish to a fraction of what they were once valued. Consumers will be seeking knowledgeable advice, which means more business for knowledgeable advisors and an opportunity for growth.

Four Tech Trends

Cloud computing, standard application platforms, mobility, and transformation of digital services will shape financial services over next few years.

Over the next few years we expect that four major technology trends will emerge in the financial services sector: cloud computing, standard application platforms, mobility, and transformation of digital services.

CLOUD:
With the ability to harness the power and flexibility of the Internet, cloud computing offers clear economies of scale at a time when the pressures for cost takeout and a return to profitability have never been greater. Yes, concerns over security and compliance remain legitimate, but in an industry marked by a massive wave of mergers and acquisitions and intense cost pressures, the rewards outweigh the risk and the timing is right for financial service companies to begin to migrate some of their applications and infrastructure to the cloud.

STANDARD APPLICATION PLATFORMS:
Just as the ERP and packaged software waves have redefined application software platforms across the front and back office operations in many industries, we see similar standardized solutions becoming mainstream in core banking and insurance. Where once an institution would have home grown a custom platform, we now see the widespread adoption of standard software solutions that enable the enterprise to focus on the differentiation of product and service while gaining operational and total cost of ownership efficiencies.

MOBILITY:
As mobile devices become more prevalent, coupled with the upswing in 3G and 4G wireless network bandwidth availability, the mobile phone is fast becoming a full-fledged channel to interact with customers. We expect that more financial institutions will offer downloadable mobile applications that will allow employees and customers the ability to access complete financial systems and services 'on the go'.

TRANSFORMATION:
Finally, we expect to see Web 2.0 concepts and collaboration technologies take hold in this sector, which will help take cost out of internal and customer-facing processes, while improving the customer experience for both corporate and personal customers. More specifically, there is a huge opportunity for Rich Internet Applications to improve the usability and productivity of web-based financial tools. We expect this will lead to a digital transformation where by financial institutions will dynamically tailor online content and services for each individual client while providing additional services such as remote expertise via web video and chat, integration with social networking platforms, and advanced self-service powered by data analytics.

All Things Cloud Dominates 2009 Technology Needs

Following a disastrous 2008, bright spots in the capital markets technology will be low latency technology, risk management and cloud computing.

Last fall's market collapse tested the technology infrastructure of Wall Street. Trade volumes exploded as investors sought to protect their positions or, worse, cash out. And the post-2008 environment will have profound effects on how financial markets will operate, ranging from the demands from greater regulatory oversight and legislative pressure, to public demand for transparency and accountability in how financial markets operate, and greater focus on risk management. These pressures will drive the choice of technology and services that form the infrastructure and core of global financial markets.

What technology will be top of mind for the securities and financial markets in 2009? Booming trading volumes are driving demand for near zero latency and super-fast trading infrastructures, a challenge in some band-width constrained regions. Much heavier regulation will be inevitable, as regulators seek to introduce greater transparency into former peer-to-peer trading environments, driving demand for governance, risk, and compliance monitoring software and consulting services. Finally and most importantly, bankers and traders will be in major cost reduction mode, and looking to convert capital expenses to operating expenses, meaning a lot more interest and demand for all things "cloud" - infrastructure, platform, and software.

Regulators Take Interventionist Stance

Regulators are moving quickly to identify systemic risk and weak links in the financial markets.

Forward-thinking regulators will put in place proactive risk monitoring and control mechanisms at an industry-wide level. This may not sound new (as most regulators already require detailed reporting from banks), but there are more profound, downstream implications for the banking industry in terms of its ability to provide granular data to national regulators from their risk management and financial accounting IT systems.

Over the progression of the financial crisis, regulating authorities have begun to exhibit a stronger interventionist stance, as opposed to (in hindsight) the relatively laissez-faire approach adopted previously. Forward-thinking regulators will enhance their own risk management mechanisms vis-a-vis a greater flow of information from financial firms -- to capture additional data from banks in order to be able to monitor and control systemic risk and weak links within the financial sector in a coordinated, systematic and responsive way. This has been found wanting up to now -- regulators have habitually captured information, but have not necessarily acted on the information in a well-timed manner.

In addition to reporting conventional statistics related to regulated institutions' accounts, loan loss and capital, this year should see a proliferation of additional metrics and early warning indicators required by regulators at an industry wide level around areas of funding stability, liquidity, collateral, credit/leverage, off-balance sheet exposures/concentrations and other sensitivities, especially around how complex derivatives impact the stability of the overall banking system.

2009 will represent a watershed year where reforms will be executed in earnest following crisis deliberation efforts undertaken last year.

The old adage still holds: it's not merely what you have that matters; it's what you do with it that counts. This is easy in principle -- but the devil is in the details. Execution is key -- starting from the very top downwards.

Data Solutions Get Top Billing at SIFMA TMC

The retail/consumer is going through radical change, as individuals are much more educated about financial planning and expect increased transparency.

Risk and data solutions will be at the forefront of 2009 strategies and discussions. We've seen a lot of vendors talk about how they can effectively control risk through the mining of data. So data couched on the back of risk and risk management will get top billing at SIFMA TMC.

Meanwhile, any increase in IT spending that is occurring, is happening in the front office to support distribution. Of all the new investments being made, this represents the only positive spending increase year over year, albeit only a small increase over last year.

Another trend we've seen that first started emerging 18 months ago is around transparency. This refers to data transparency, but especially customer transparency, and spans both the institutional and the retail side, where firms are looking to provide their consumers and customers with access to the business and business processes. These customers are saying, "We want to understand what's transpiring behind the walls with regards to transactions, assets, etc." Customer reporting will also be top of everybody's mind and will be heavily touted. We see this as a continuing trend.

From the wealth management perspective, collaboration, transparency and reporting are three key things. We first saw this trend emerge 18 months ago, and see it continuing, particularly at the retail level where consumers are taking a much more active and pro-active role in the management of their assets. They are much more educated than they used to be, and are asking questions of advisors and managers, such as "What's the sharp ratio on this product, or portfolio?" Most of them didn't even know what a sharp ratio was five, or even two years ago and may not still, but now know they should be asking. The dynamics of the consumer has undergone a fundamental change, which has affected how the industry delivers products and services to them.

Real Time Information, BPA and SaaS/Cloud Innovation Headline TMC

Although financial executives come to SIFMA TMC with much smaller budgets and a changed financial landscape, speed and innovation are still top priority.

Wall Street technology and IT executives will come into SIFMA this year with a very different mindset than in June of 2008. The deck has been shuffled in terms of staffing, partners and budget. But each institution must play these cards as they are dealt and still compete in the market. In that sense, many of the themes, technologies and market dynamics will build on those of 2008, not depart from them. The three primary areas of interest for IT execs exploring technology to help win in the marketplace are:

Move to Real Time

The "need for speed" that is exhaustively chronicled for trading has permeated to other areas of the enterprise. Whether for risk management, business process improvement, or marketing, it is critical that firms transport accurate data seamlessly and rapidly across business units for analysis and action. This is a message that you will see on the floor everywhere from business applications to technology platforms like Complex Event Processing.

Business Process Automation

Advances in data management and SOA have enabled solution providers to automate an increasing number of manual business processes from compliance to operations to front end customer service. This wave continues in 2009 due to a huge need to do more with less at firms.

SaaS and Cloud Computing

For those execs looking to stay ahead of the curve, there will be great interest in seeing what IT solutions can deliver value with characteristics like "instant on" and "dynamically scalable." It's still early days, but this service delivery model is undoubtedly promising.

The annual gathering will undoubtedly include myriad perspectives on the historic events of the past few months. It would be very valuable to the SIFMA community to get an accounting of lessons learned and mistakes made. But of greater interest is the tremendous innovation and capability on display that will have significant impact on industry operations.

TARP-Free, And a Return To The Partnership Model

Technology will be impacted by the credit crisis, but over the next 18 months, Wall Street will see a return of alpha generation and of private capital.

"The best way to predict the future is to create it." - Peter Drucker

My top two predictions for the next 18 months are predicated upon the fact that the markets are so far outside the normal distribution of probabilities right now that there is bound to be a reversion to the norm. What does that norm look like? Uncle Sam gets kicked out of the banking business and capital formation rises up from the ashes of the credit crisis.

TARP-Free by 2010
First, the global banks of the future will be TARP-free by year-end 2010. The U.S. Treasury will see the capital injections it poured into financial institutions from American Express to the Baraboo Bancorporation fly back into its coffers so fast it will make even your credit-crisis weary head spin. Not only is it extremely costly, in outright equity and preferred obligations, to hold onto this money, it's the death knell for attracting the next generation of innovation, the leaders for the next era in capital markets finance.

Skin in the Game
Second, we will see the return of the partnership model. Remember Solomon Brothers, Lehman Brothers, Goldman Sachs (before it went public) and Morgan Stanley (before Dean Witter)? When you have your own cash in the game, risk takes on a whole new meaning. Playing with other people's money (OPM), whether investors' or shareholders', rewards short-term, stock-price performance and sacrifices long-term viability. PE and VC firms will spring up in the footsteps of the once-mighty Blackstone Group, unencumbered by the strings of public ownership. Professionals with decades of Wall Street experience will pool their significant intellectual and monetary assets to develop the next powerful source of capital markets financing in 2010.

By year-end 2010, TARP will go back to something that keeps your head dry instead of saving your assets. Small companies will find their angel investors, and bridge financiers will deliver the next round of IPOs. Alpha generation will be back, and it will look like the country is open for business as private capital returns to Wall Street.

Hedge Funds, Outsourcing and Private Equity Will Surge

Far more financial firms will undertake outsourcing agreements as offerings improve and pricing becomes more competitive. Price negotiations will be tougher than ever and financial firms will win more fixed price contracts, largely abandoning the volume-driven pricing of the past.

Hedge Funds Look for Good Buys
In the absence of market liquidity, the surviving lot of hedge funds stands to take advantage of greater mispriced and greatly underpriced securities. Further, the market drop has helped weed out the have-nots, which leaves a smaller, potentially smarter hedge fund market. Many funds will lower fees to appease and attract investors. The industry standard 2 and 20 (2% of assets and 20% of any profits above a hurdle figure) might go to 1 and 15 or potentially lower. While the available capital has dwindled to a fraction of historical levels, disciplined managers, smaller hedge funds, and lower leveraged strategies will offer opportunities that will mollify existing investors and entice new investors. Proven managers will continue to generate pulling power and justify fees.

Outsourcing Surge
Far more financial firms will consider and undertake outsourcing agreements as the offerings continue to improve and the pricing becomes more competitive. Price negotiations of all kinds will be tougher than ever and financial firms will win more fixed price contracts, largely abandoning the volume-driven pricing of the past. For transformational IT projects, financial firms are opting for a phased approach that is easier to terminate, rather than complex outsourcing contracts that are large, long-term engagements that cannot easily be unwound.

More financial firms will follow Citigroup and Fidelity Investments in divesting their captive Asia based service providers to conserve capital. In the Asia/Pacific region, outsourcing of transaction processing will grow at slightly under 10%. While outsourcing will also see growth in Europe, it will not reach the headline-grabbing levels of the Asia/Pacific region. A preference to reallocate internal IT resources in countries where redundancies are expensive will place limits on growth.

Boutiques On the Rise
Large corporates are going to be reexamining their relationships, opening up an opportunity for smaller, more focused players to come in and win business. Second and third tier firms will benefit from the glut of top talent now hitting the streets as a result of massive layoffs at most of the top banks. The M&A market is ripe for the smaller firms because they are in a stronger position to capitalize on deals that many of the commercial banks are losing due to their clients' lack of confidence. Investment banks that have sufficient capital can take advantage of the difficulties currently distracting their larger counterparts.

Private Equity
As IPOs become a less reliable route for raising capital, private investment in public equity will become a more attractive solution for firms seeking capital. Similarly, private placement activity in both debt and equity markets will grow.

Opportunities for Supporting Technologies in Low Latency Architectures

Accelerator appliances driven by FPGAs will achieve broader acceptance, and network management will transition from simple network monitoring to sophisticated latency analysis of financial transactions.

The need for speed in algorithmic trading remains a core driver, but the post-credit-crunch drive to save money by reducing the size of server farms -- especially in expensive collocation facilities -- and the 'green IT' agenda are also significant factors. The evolution of hardware accelerators toward appliances has made adoption much more acceptable, but they are still eyed with suspicion by many mainstream IT professionals.

When considering how to reduce latency, the first step has to be to measure it. There are, broadly speaking, two classes of product used to monitor and analyze latency. At the bottom of the stack are hardware devices that capture data directly off the network. On top of this sit a variety of appliances and software platforms that interpret the bits and bytes on the wires as coherent network traffic, often taking the analysis deeper to enable an understanding of the end-to-end latency.

We anticipate that accelerator appliances driven by Field Programmable Gate Arrays (FPGA) will become easier to use and will achieve broader acceptance, and that network management for market data vendors, banks, hedge funds, execution venues and collocation facilities will transition from simple network monitoring to sophisticated latency analysis of financial transactions.

Risk, Regulation and Compliance Top Tech Priorities for 2009

As asset managers take on more trading responsibilities, systems are needed for direct trading, execution of transaction services, transaction cost analysis, and the need to efficiently process trades from front to back, and the ability to effectively manage the portfolio.

At Gartner, we originally forecast 2009 IT spend within the Financial Services Industries in the U.S at a 2.2% compounded annual growth rate. At the beginning of 2009, we had to revise this to a -4% growth rate. The brokerage segment has been most affected, followed by the banking segment. Firms need to prepare for the end of the economic crisis but also be realistic and prepared if it is prolonged.

Still, with that said, there are some positive notes: There are pockets of innovation and growth according to different geographies, and product lines within both the broker/dealer and asset management businesses. We do see select financial services firms taking advantage of these volatile times and making investments in technology in different areas. The top priorities are risk, regulation and compliance.

Specifically, within the market risk area, we?re seeing increasing inquiries concerning operational and credit risk, areas where it is easier to make progress and more immediate strategic decisions while the industry waits for new regulations to unfold. On the asset management side, for operational and credit risk, people are concerned with front to back operational flow. Do you have efficient systems? Can you view the whole breadth of your transactional and your positional data across your investment strategies?

As asset managers take on more trading responsibilities, systems are needed for direct trading, execution of transaction services, transaction cost analysis, and the need to efficiently process trades from front to back, and the ability to effectively manage the portfolio. We?re seeing on the front end a greater focus on execution and order management systems, Alternative Trading Sytems, and DMA not only for equities but cross-products. The front layer for the buy side is of strong interest, increased transparency of the portfolio for the asset managers to see where they are gaining alpha. Additionally Institutional clients want more transparency, and more assurance of credit risk and concentration risk within the portfolio.