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Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
Wall Street Technology Jan Feb 2010 38791[1]
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Wall Street Technology Jan Feb 2010 38791[1]

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Insider Trading: …

Insider Trading:
Can It Be Stopped? Wall Street & Technology

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  • 1. SEC cracks down on Finding the true value IT spending rebounds insider trading p.14 of trade ideas p.19 to $42B in 2010 p.24 January/February 2010 Back-Office Transformation Intensifying regulations and the push for transparency are driving 10 trends that will reshape the back office and its technology in 2010. p.26 Robert DeVault, Director, Transamerica Asset Management
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  • 5. Wall Street & Technology Cover Story Business Lines Trading 19 Alpha Capture Systems To boost their commissions, sell-side salespeople increasingly are communicating trade ideas to clients via 19 so-called alpha capture systems, which attempt to provide performance metrics around the ideas. But who’s benefiting? The Rise 22 Unstructured Data According to Of the researchers and a growing number of Wall Street firms, the avalanche of unstruc- Back Office tured text-based Web content represents the 22 next frontier in algorithmic trading. The With greater scrutiny on how ability to analyze news feeds and social financial instruments are priced media could provide a very profitable and cleared, the beleaguered source of alpha. Photography by Mike Weimar operations manager is about to see his world turned upside- down. Here are 10 trends that will IT Spending 24 Tech Budgets Capital markets transform Wall Street’s back firms will spend almost $42 billion offices in the next year. p.26 globally on technology in 2010, recovering the 5 percent in IT spending Robert DeVault, Director, that was lost in the rubble of the Financial Reporting/Operations, financial crisis, according to Aite Group. Transamerica Asset Management Wall Street & Technology’s 2010 Reader Advisory Board 14 Close-Up John A. Bottega, Chief Data Officer, Steve Rapp, SVP & CIO, Can Insider Federal Reserve Bank of New York AGI Management Partners Trading Be Joseph Ferra, Chief Wireless Officer, Steve Rubinow, EVP & co-CIO, Stopped? Under Fidelity Investments NYSE Euronext pressure to prove it’s on the job, the SEC is John Galante, SVP & CTO, Prashant Sarode, VP Corporate & , cracking down on J.P Morgan Worldwide Securities Services . Investment Banking Technology, Wachovia insider trading with 14 newfound zeal. TABB Joe Gawronski, President, Derek Stein, Chief Technology Officer, Group’s Larry Tabb and Rosenblatt Securities Barclays Global Investors GlobalRMC’s Yvonne Pytlik discuss some of Scott Ignall, CTO, Tim Theriault, President, Corporate & the best practices Lightspeed Trading Institutional Services, Northern Trust firms can employ to Robert Palatnick, Managing Director/ Timothy M. Tully Jr., SVP & COO, avoid being targets. Technology, DTCC BNY Mellon Wealth Management 14 wallstreetandtech.com January/February 2010 5
  • 6. Wall Street &Technology Sections Online wallstreetandtech.com 10 Upfront All Things to All Investors: Intelligent Enterprise: BNY Mellon Taps BI For Customer Insight Nasdaq Reveals Plans For 2010 In this exclusive video interview, Head of Nasdaq Transaction Services Eric Noll discusses the exchange’s drive to make its transparent markets more effective for all users by designing market structures and order types that appeal to everyone — from large institutions to high-frequency traders to retail investors. wallstreetandtech.com/video/nasdaq-noll 10 Betting on Wall Street Digital Bonanza In an effort to make the same invaluable technology news, trends, SWIFT Restructuring Includes Layoffs analysis and industry opinions that you’ve come to expect from the Wall Street & Technology brand as accessible as possible, we’ve 16 Technology Economics created a downloadable version of our 2010 Capital Markets Technology budgets may appear flat for Outlook issue. And throughout 2010 we’ll be rolling out exclusive, 2010, but there’s a tsunami of activity digital-only editions offering an enhanced, Web-like experience in going on under the surface, says Rubin a convenient PDF format. Subscribe to WS&T’s digital editions and Worldwide’s Howard Rubin. download your free copy today. wallstreetandtech.com/digital-edition 34 Industry Voice Winning the Low- Outsourcing Portfolio Latency Arms Race Management Millions of dollars can be made or lost on Systems The tech- the Street in milliseconds. Accelerating nology and capabilities Wall Street — the industry’s first fully virtual of outsourced portfolio data latency trade show — features some management systems of the capital markets’ leading low-latency 34 rival those of their experts discussing the latest technologies installed counterparts, says and strategies that are driving change in Advent’s Michael Lobosco. the ultracompetitive algorithmic and high- frequency trading spaces. Find your edge. Check out Accelerating Wall Street today, Data Management The middle office available on demand at techweb.com/wallstreet-virtual. needs to take the lead in ensuring the quality of enterprise data, according to Keep Running ... Stuart Grant, Sybase. Without Losing a Step 38 Perspectives Business disruptions can be costly. Is your The pay czar, the banker tax, pending firm prepared? Business continuity planning legislation, shareholder lawsuits and a keeps your business processes up and popular revolt all are vying to restrict running when disaster strikes. WS&T’s online Wall Street compensation, notes Special Financial Services Business Continuity Contributing Editor Larry Tabb. But Briefing Center sheds light on how to shrinking executive pay could have minimize the uncertainty of potential business disruptions, from risk assessment harmful unintended consequences. and business impact analysis to developing and testing BC plans. Sponsored by Eze Castle Integration. businesscontinuity.wallstreetandtech.com From the Editor 8 Wall Street & Technology In the Palm of Your Hand Now you can get all of Wall Street & Technology’s unmatched coverage of the capital markets technology sector delivered to your mobile device. Point your mobile browser to wallstreetandtech.com and you’ll automatically receive all of our online content optimized 11 for your handheld device. 6 January/February 2010 wallstreetandtech.com
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  • 8. Volume 28, No. 1 VP/GROUP PUBLISHER John Ecke 212.600.3097 jecke@techweb.com EDITORIAL Editor-in-Chief Greg MacSweeney gmacsweeney@techweb.com Time to Pay the Piper Group Content Manager Les Kovach lkovach@techweb.com Editor-at-Large Ivy Schmerken ischmerken@techweb.com Executive Editor Penny Crosman pcrosman@techweb.com Senior Editor Melanie Rodier mrodier@techweb.com Special Contributing Editor Larry Tabb ltabb@tabbgroup.com Associate Managing Editor Jon Schnaars jschnaars@techweb.com T Contributing Editor Howard A. Rubin howardarubin@gmail.com HE BACK OFFICE. It doesn’t exactly sound like a place where ART most people dream of working, but the back office comprises one Art Director Jim Lawyer Associate Art Director Kristen Terrana of the largest collective parts of the Wall Street machine. Designers Amelia Fabian and Igor Jovicic BigYellowTaxi.com Maybe our perception of the back office is incorrectly influ- ADVERTISING SALES OFFICE enced by its name — it sounds like a place where shady deals occur 11 WEST 19TH ST., 3RD FLOOR NEW YORK, NY 10011 (the “back room”). Or maybe it’s just that nothing can measure up Director of Sales Felissa Kaplan 212.600.3171 fkaplan@techweb.com Midwest/International Brian Keenan 516.562.5145 bkeenan@techweb.com to the glare of the front office, where trades happen and the money is made. West Sue Ellen Wohlers 415.947.6146 sewohlers@techweb.com Can you imagine Michael Douglas as Gordon Gekko in “Wall Street” presiding Northeast Robyn Forma 212.600.3118 rforma@techweb.com PRODUCTION over clearing and settlement operations? “We have 80 percent automated processing Account Coordinator Production Manager Amanda Waller awaller@ubm-us.com John Polihronakis polihronakis@ubm-us.com today. I want 82 percent by the end of the month!” It doesn’t quite have the sexiness AUDIENCE DEVELOPMENT of the wheeling and dealing that goes on in other parts of a Wall Street firm. When Assistant Manager Adrienne Farquharson afarquha@techweb.com For article reprints and e-prints, please contact: Douglas wasn’t trying to wring more efficiency out of operations, his remaining time Wright’s Reprints Brian Kolb 877.652.5295 UBMreprints@wrightsreprints.com on screen could be spent lobbying for more funding and resources. List Rental MeritDirect But while lobbying for back-office resources may Anthony Carraturo 914.368.1083 acarraturo@meritdirect.com not be the stuff of box office blockbusters, it is a very INFORMATIONWEEK FINANCIAL SERVICES TechWeb CEO Tony L. Uphoff tuphoff@techweb.com real activity for back-office managers, who will proud- VP and Group Publisher Vice President, Group Sales John Ecke jecke@techweb.com Martha Schwartz ly tell you that the clearing, settlement, transaction Editorial Director mschwartz@techweb.com Greg MacSweeney Event Director processing, cash management, asset servicing and per- gmacsweeney@techweb.com Jennifer Iannucci jiannucci@techweb.com Group Content Manager Event Manager haps a dozen other functions that unceremoniously fall Les Kovach lkovach@techweb.com Mitzi Trafton mtrafton@techweb.com under the back office’s purview make possible almost Webmaster Vitali Zhulkovsky vzhulkovsky@techweb.com Director of Marketing Sherbrooke Balser sbalser@techweb.com everything that happens on the Street. And, as we Associate Business Manager Joe Donnelly jdonnelly@techweb.com Director, Program Management, Vertical Markets Michelle Somers msomers@techweb.com examine in this month’s cover story (“10 Back-Office TechWeb – The Global Leader in Business Technology Media Trends for 2010,” page 26), the back office is undergo- CEO Tony L. Uphoff ing a transformation, responding to new regulatory Chief Content Officer and Editor-in-Chief, TechWeb.com VP, Editorial Director, InformationWeek Business Technology Network David Berlind Fritz Nelson requirements and the business’s needs for more trans- Chief Information Officer VP, Audience Marketing parency, faster processing and a host of other demands. David Michael Scott Vaughan Chief Financial Officer VP/Group Publisher, Vertical Industries Despite these new demands, one back-office John Dennehy John Ecke SVP and Content Director VP, Group Sales, InformationWeek requirement ironically remains the same: the call to Bob Evans Business Technology Network SVP, Light Reading Martha Schwartz do more with less. The complexity of transactions Communications Group VP, InformationWeek Analytics Joseph Braue Art Wittman (think: derivatives) continues to increase, and more SVP, InformationWeek VP, Human Resources Business Technology Network Beth Rivera and more of these complex transactions pass through John Siefert United Business Media LLC the back office daily. Fortunately, Wall Street’s back-office organizations have done an SVP, Strategic Development and SVP, Manufacturing outstanding job meeting business demands, all while utilizing the same — or fewer — Business Administration Pat Nohilly Marie Myers resources. Unfortunately, that recipe may be nearing the breaking point. WALL STREET & TECHNOLOGY (ISSN 1060-989X) is published 6 times per year (Jan./Feb., April, June, Aug., Oct., Dec.) by The only way that the back office can keep up with the changes in the business is to United Business Media LLC, 600 Community Drive, Manhasset, NY 11030; tel. 516.562.5000 United Business Media LLC, is a member of United News & Media. All rights reserved. automate further. Unless firms want to throw bodies at the problem — which is expen- Periodicals postage paid at Manhasset, NY, and additional mailing offices. Member, Business Publications Audit of Circulation. sive and short-sighted — newer technology is needed. And last I checked, technology EDITORIAL OFFICES 11 West 19th St., 3rd Floor, New York, NY 10011 212.600.3000 cost money. While automation may not cost as much as hiring a battalion of clerks, SUBSCRIPTION INFORMATION $85 per year in the U.S., $105 in Canada and $295 elsewhere (payable in U.S. funds). upgrading the back office nonetheless will require a commitment from management. Single-issue requests ($7 each), write to: Wall Street & Technology, P.O. Box 1054, Skokie, Ill. 60076-8054; or call 800.682.8297 or 847.647.4065. Postmaster: Please send changes of address to Wall Street & Technology, P.O. Box 1054, Skokie, IL 60076-8054; OR CALL 800.682.8297 OR 847.647.4065. COPYRIGHT 2001 UNITED BUSINESS MEDIA LLC. RETURN UNDELIVERABLE CANADIAN ADDRESSES TO BLEUCHIP INTERNATIONAL, P.O. BOX 255542, LONDON, ON N6C 6B2 PRINTED IN THE USA Greg MacSweeney Editor-in-Chief 8 January/February 2010 wallstreetandtech.com
  • 9. Financial professionals: carry everything and carry on. The HTC Hero is like an office ™ miniaturizer. It consolidates everything work-related down to fit right in your pocket. And it lets you do work instantly and be more productive than you ever thought possible. Appointments and assets, records and references, securities and statements. It’s all in a day’s pocket. Only on the Now Network.™ 1-800-SPRINT-1 sprint.com/business C He ro ™ HT e Th Available content and services may vary. Coverage not available everywhere. The 3G Sprint Mobile Broadband Network reaches over 255 million people. Offers not available in all markets/retail locations or for all networks. Other restrictions apply. See store or sprint.com for details. ©2010 Sprint. Sprint and the logo are trademarks of Sprint. Other marks are the property of their respective owners.
  • 10. Trends & Analysis Intelligent Enterprise: BNY Mellon Taps BI For Customer Insight O BSERVERS HAVE BEEN predicting for years global strategic sales, away from Oracle to take the BI project that Wall Street would make more use of busi- live. Beck says there were three goals for the project: to bet- ness intelligence (BI) in its customer dealings. ter understand what clients were doing, to better cross-sell But while BI software is widely used in the products and to grow revenue. “We had this great source of capital markets for performance measurement and even for information in ... Siebel, but it was very hard to get that infor- risk monitoring, it has yet to become commonplace in the mation out,” he relates. areas of serving and selling to customers. After meeting with executives and salespeople to find out BNY Mellon, however, has been using BI to augment cus- what types of visualized data would help them do their jobs tomer relationships since 2007. It laid a foundation for BI when better, Beck and Garry’s team built reports and dashboards in it deployed customer relationship management (CRM) soft- the Oracle BI software for the sales teams. “We were thrilled ware from Siebel in 2002, when the financial firm was still Bank with the Oracle product because it integrated with what we already had, but it didn’t provide the specific metrics we need, so we built everything from scratch,” Beck recalls. Not All Things to All People But building one common BI platform for multiple groups requires some compromise. “One of the things you accept when you pursue a [single-platform] strategy ... is that you’re never going to get everything each person wants perfectly,” Beck notes. “If each line of business went its own way on its own plat- form, they could customize the heck out of it and have exactly what they want. But you would miss out on a lot because you wouldn’t be coordinated. ... Our vision was that we’d rather sac- rifice some customization to have everybody on one platform.” This information sharing improves cross-selling and revenue- driving activities, Beck contends. Analytics available in the BI software, according to Garry, include sales rep performance versus goals, customer activi- of New York. “There was a need at our company to better coor- ties versus sales, why opportunities were lost or won and the dinate and understand what our clients were thinking and doing impact of those results on revenue, and success rates/market across our multiple products with multiple sales forces, and share (data is derived from salespeople’s input into the CRM internally there was a need to cross-sell better,” says Erik R. system). Executives view dashboards on the system to under- Beck, managing director, global strategic sales, BNY Mellon. stand who the firm is competing against, what’s in the By 2004, Beck reports, every line of business at Bank of pipeline, why it won or lost particular client sales, and trends New York was using the Siebel CRM platform. Then, in over months, quarters or years, he adds. 2005, business intelligence appeared on the firm’s radar. For the year ahead, Beck and Garry are focused on improv- Illustrations by Kristen Terrana “Business intelligence was always used for risk and rev- ing the system’s ease of use. They also plan to add more charts enue reporting and other systems throughout the company, and graphs and to make the system more interactive. “Our but it was never used for client insight sitting on top of CRM focus in 2010 will continue to be on helping people transform systems,” Beck relates. Meanwhile, Siebel was bought by our business, to do something they didn’t do before, to better Oracle and, after BNY Mellon considered other options, it compete against a competitor, to help offer solutions rather purchased the Oracle Siebel BI technology in 2007. than products,” Garry says. “With the market as tough as it is, A year later, the firm hired Edward Garry, who is now VP, that’s more important than ever.” ✧ —Penny Crosman 10 January/February 2010 wallstreetandtech.com
  • 11. 2005. Cantor’s mobile gaming system was approved by state regulators in October 2008, and in March 2009 it was deployed at Las Vegas’ M Resort. “Our philosophy is to use the applications we’re so versed with in financial trading and apply them to gaming,” Amaitis says, noting that Cantor Fitzgerald first rolled out mobile trading in 2005. “We were the first to put U.S. Treasuries on a BlackBerry in real time.” According to Amaitis, components of eSpeed’s matching engines and the BlackBerry trading application were rolled into the handheld gaming device, known as eDeck. Cantor is the principal on all wagers, so there is risk involved in the venture. But the firm mon- Betting on itors its exposure with a risk management system that is attached to its price making system. “It’s impossible to match every bet against every bet,” Amaitis explains. “But you can manage the probabilities of risk.” Wall Street In sports wagering, the amounts wagered typically are small, and the betting line can be hard to hold, Amaitis says. “The way you do it is, you apply the mathematics of proba- P EOPLE OFTEN REFER to Wall Street as a casino. bility,” he relates. “We put 7 million permutations into our But New York institutional brokerage Cantor pricing model for the NFL alone.” It’s similar to the price Fitzgerald’s Cantor Gaming subsidiary brings a liter- modeling performed on Wall Street, Amaitis adds: Just like al truth to that metaphor. Last year the firm brought the quants who price bonds, the firm performs Monte Carlo the eSpeed trading platform that its brokers use to Las Vegas, simulations to come up with the odds for an event. where tourists can use it to bet on sporting events via wireless devices. This year Cantor Gaming hopes to debut wireless bet- A Market Gamble ting on the financial markets themselves at Vegas resorts. The application that Cantor Gaming hopes to bring to How does a firm make the jump from Wall Street voice Nevada later this year, pending approval from state regula- brokerage to Vegas bookmaker? The force behind the move tors, is called Financial Fixed Odds. Currently operational in is Cantor Gaming CEO Lee Amaitis, who also serves as vice the U.K., it allows people to bet against movements in the chairman of Cantor Fitzgerald’s affiliate, BGC Partners. markets. Cantor makes prices for these bets based on algo- Amaitis began working at Aqueduct racetrack at 16, rithms developed in eSpeed. The amounts that can be eventually becoming a horse trainer. In the 1980s he moved wagered range from $10 to $1,000. “This will allow people in to Wall Street, working at Fundamental Brokers in New the state of Nevada to trade the market without having to go York. In 1995 he joined Cantor Fitzgerald. A year later, he through a brokerage account,” Amaitis comments. moved to Europe to run the firm’s U.K. division, which got Regulations require that Cantor Gaming keep its IT infra- involved in Internet gaming and developing technology for structure — wireless devices and the servers that serve data to betting on the financial markets via spread betting. Spread them — at a licensed operator within the state. “Ideally,” betting is similar to day trading in that you’re betting on Amaitis says, “we’d love to have a giant server farm in the mid- which direction a stock will move in the short term, but dle of the desert to supply all the technology to all the casinos.” there are two major differences: It’s tax-free, and it doesn’t According to Amaitis, slot machine vendors such as require the actual purchase of stock. Bally’s, IGT and WMS view Cantor’s mobile gaming devices In the U.S., spread betting and Internet gambling are ille- as a threat — “Just like electronic trading was somewhat of a gal. Nevada was the first state to pass a law allowing Internet cannibalization of the voice brokering business,” he explains. gaming but never enacted it because of federal restrictions. T o Yet Amaitis says Cantor is meeting the needs of people overcome those restrictions, Amaitis came up with the idea of who want to enjoy the restaurants, bars and shows in Vegas building a wireless network and mobile devices that would and gamble in a more comfortable environment than a casi- enable people to place bets only in Nevada. Cantor wrote and no. “We’ve been able to convert what most casinos call dead sponsored a state bill supporting the scheme that was passed in space into a casino space,” he says. ✧ —P.C. wallstreetandtech.com January/February 2010 11
  • 12. Trends & Analysis SWIFT Restructuring Includes Layoffs A S PART OF A GLOBAL initia- tive to reduce costs and improve operational efficiency, SWIFT began last year a restructuring of its North American Commercial organiza- tion that has resulted in a number of layoffs and other cost-cutting measures. Other SWIFT groups in North America will follow in the restructuring plan. The moves are part of the Lean@SWIFT initiative that aims to make the organization more efficient and remove 90 million euros (more than US$130 million) in global recur- ring operating expenses by the end of 2010, according to Joanne Healy, head of public relations for the Americas at SWIFT. The provider of secure global financial messaging services would not disclose the number of people who have left the organization. The Lean@SWIFT program is designed by McKinsey & Company. “This is an 18-month program,” says Healy. “We have made a commitment to the board to cut recurring operating expenses [by] 90 million euros increase efficiency and to free up costs to expand to additional by the end of 2010. Given that manpower costs are a large part businesses in North America.” of the cost base, there have been some [head count] reductions. According to Pryce, many of the head count reductions Lean@SWIFT is being rolled out in waves across SWIFT, and come from a hiring freeze that has been in place since the we are in the middle of the wave that impacts the Americas beginning of 2009. Many open positions will not be filled as Commercial organization.” the organization finds efficiencies through the Lean@SWIFT Adds Healy, “It is not just about cutting head count. It is process, he explains. Other staff reductions result from early about making the operations more efficient.” Healy declines to retirement packages that were offered to longtime employees. comment on what percentage of the operating cost reductions The remainder will come from layoffs, Pryce acknowledges. could be attributed to layoffs. The New York-based Commercial organization is At the SIBOS conference in Hong Kong in September, SWIFT’s smallest group in North America, with about 60 SWIFT CEO Lazaro Campos outlined Lean@SWIFT to the employees, says Eva Zaeschmar, head of stakeholder relations, audience. “Our target for increased efficiency is 30 percent,” Americas, SWIFT. She points out that other groups, including he reported, according to the transcript of his speech. “Yes, the Technical (IT and operations) group, are much larger. you’ve heard correctly: 30 percent. ... The approach should In addition to the Commercial and Technical organiza- also enable us to improve the service we offer. Twenty percent tions, SWIFT’s North American groups also include a Support will translate into short-term structural cost reductions. The Center organization, adds Pryce. The Technical and Support remaining 10 percent will fund our future.” groups are located in Virginia, he says. SWIFT’s main office in the United States is in New York. It also opened an office in Only the Beginning San Francisco in July 2008. “Of the staff in North America, one-third of the organization “We are halfway through Lean@SWIFT right now, but it Photo: iStockphoto has gone through the Lean process,” says David Pryce, man- was announced earlier in [2009],” Pryce comments. “SWIFT aging director, Americas, SWIFT. “The rest will start later. We is committed to reducing the amount of cost to the organiza- are looking to reduce operating costs so we pass the savings on tion without impacting the service levels. The idea is to lower to our clients. The idea is not to impact services; it is to costs to the industry.” ✧ —Greg MacSweeney 12 January/February 2010 wallstreetandtech.com
  • 13. Insider Trading: Can It Be Stopped? >>> WITH THE SEC UNDER PRESSURE to salvage its battered reputation, the regulator has been acting with newfound zeal to eliminate insider trading. In what has been termed the biggest insider trading ring in a generation, the regula- tor recently brought cases against the founder of the Galleon Group Larry Tabb hedge fund and former directors at a Bear Stearns hedge fund. In a series Tabb Group of interviews, Senior Editor Melanie Rodier spoke with Larry Tabb, founder and CEO of TABB Group, and Yvonne Pytlik, managing part- ner, Global Compliance Risk Management Corp., about what processes and technology financial firms can use to stop insider trading. WS&T: Can financial firms stop insider trading? No one is immune to those trends. Banks and hedge funds Tabb: It is a very difficult thing to catch. [Perpetrators] are and asset managers have to not using corporate telephones, they’re not using e-mail. take much more proactive Yvonne Pytlik They’re working with a surreptitious group of folks to do actions to address those issues. Global Compliance things they know they’re not supposed to do. There are [several] areas Risk Management The issue really is trying to understand who is involved in where they can address this Corp. [corporate] actions, especially on the M&A side and the bank- issue: First, having a single ing side, and to try to keep them cordoned off [from trading view across the organization and truly identifying in a sys- professionals] as much as possible. But the challenge is trying tematic and methodological way the highest risk across the to understand the trading activities and the names you’re organization. One of these [risks] is insider trading. It should focused on on the corporate side and surveilling them. be on the agenda on boards and senior management and As well as ensuring the folks on the banking team are cor- executive committees. And companies should be looking at doned off and isolated from trading folks, you have to make sure their own environments and understanding how insider you’ve got strong agreements with all of your vendors, that trading can be prevented, how they monitor and identify everyone knows that everything is sensitive information. And it’s those cases, and finally, the escalation process and remedia- also about following traditional compliance policies. The prob- tion. From that perspective, [firms need] strong methodolo- lem with catching some of this stuff is that people know they’re gies and standards. doing something wrong, and they do go pretty far to hide it. The second area to be evaluated in light of insider trading is companies’ compliance programs across the organization. Pytlik: The recent cases of insider trading and other com- What types of policies are in place to address insider trading? pliance violations have had a tremendous impact on the What kinds of procedures and infrastructure are in place on industry. A serious compliance violation impacts investors and the business side, and what supervision is there to effectively shareholders and is self-destructive to companies themselves. identify insider trading? 14 January/February 2010 wallstreetandtech.com
  • 14. WS&T: Is the line between information and insider infor- mation different at hedge funds, such as Galleon Group, Major Insider Trading Cases which are known for their secrecy, and other financial firms? October 2009: Galleon Group founder Raj Rajaratnam is arrested along with five others as part of a $20 million Tabb: No, there’s no difference. Insider trading is insider insider trading scheme involving IBM, Intel and McKinsey. trading. The issue has more to do with compliance. Do they take it seriously? Does the organization have pressure from September 2009: The SEC accuses Reza Saleh, an employ- ee of H. Ross Perot’s investment firm, of making $8.6 million the top to gather that type of information and take advantage in illegal trading profits when Perot Systems Corp. announced of it? Compliance starts at the top. If there’s significant pres- its sale to Dell. Saleh reached a deal with the SEC, agreeing to sure at the top to find and take advantage of inappropriate return all the money. But he will not be forced to admit or deny the allegations. information, no matter how many compliance people are in the organization, you’re going to have a problem. February 2008: Hong Kong banker David Li and two oth- ers pay $24 million to settle civil insider trading charges in connection with trading of Dow Jones & Co. stock around WS&T: There’s been a lot of talk in the Galleon case about the time of News Corp’s takeover offer. Li, chairman of Bank Raj Rajaratnam, founder of Galleon Group, and others of East Asia, was a former director at Dow Jones. using expert networks to get inside information. What are March 2007: Fourteen people, including former employees these networks, and how do they work? of UBS AG and Morgan Stanley, are accused of a nearly $15 million insider trading scheme. Eight Wall Street profession- Tabb: Expert networks are an issue for a lot of firms. They als, two broker-dealers, a day-trading firm and three hedge funds participated in the scheme. Former UBS manager are a group of unlinked individuals who have information on Mitchel Guttenberg, a member of the bank’s investment certain aspects of a company or business, industry, or econo- review committee, is sentenced in 2008 to a six-and-a-half- my. I’m a member of the GLG [Gerson Lehrman Group] year prison term. expert network. People call me about different things. There April 1987: Ivan Boesky pleads guilty to insider trading. He are all sorts of reminders the firm gives about what [its pays a $100 million fine to the SEC and spends 22 months in experts] can talk about. I’m not allowed to provide sensitive prison. The character of Gordon Gekko in the 1987 movie “Wall Street” is based at least in part on Boesky. information. There are all sorts of warnings on the GLG site. What a hedge fund asks me is up to the hedge fund, and it’s up to me to stay within the guidelines of what I can say WS&T: How can technology help stop insider trading? and can’t say. For a hedge fund, it’s an invaluable tool. There’s no mechanism to record a conversation. As an indus- Pytlik: T echnology is very critical, especially right now as reg- try analyst, I have access to some sensitive information — ulations and the complexity of the business are increasing. IT but not much. But if I’m a programmer at Microsoft and is the tool that will help identify a number of violations. Insider someone is asking me about the next Windows release, trading is probably one of the most complex areas to identify there’s probably a bunch of stuff I can’t say. Expert networks and detect. There are bigger companies that offer tools, such have come to strength in the last eight to 10 years. They’re as Actimize and [Oracle] Mantas. And there are also more bou- a function of the social media business model, channeling tique firms [that offer solutions]. But we have to remember that requests to the right set of people who have information that information technology needs to be much more sophisticated. funds are looking for. Companies need to do real-time monitoring and really focus on preventive controls as a first measure. They [also need to] WS&T: Has the number of insider trading cases risen monitor on the back end and identify compliance violations. recently because of the economic downturn? Tabb: Generally it’s going to be surveillance-type tools [for] Tabb: Insider trading has always gone on. The ability to spot monitoring the names you’re working with and [checking] for it and capture it has gotten better with the ability to analyze abnormal activity that’s going on — especially on the options more data. The SEC is under tremendous pressure because side if it’s a specific company — and monitoring e-mail and all of its failure with [Bernard] Madoff. So it’s very important for types of communications. It’s a very hard thing to catch. ✧ them to get a couple of wings in their hat — to make a high- profile arrest and prove they’re on the case. We’ll be seeing more fines and more criminal proceedings as the SEC tries to View a video of WS&T’s interviews with Tabb and Pytlik at wallstreetandtech.com/video/insider-trading. reestablish its reputation. wallstreetandtech.com January/February 2010 15
  • 15. The World Isn’t Flat Howard A. Rubin is the founder of Rubin Worldwide, a research and advisory firm focused on the economics of business technology. howardarubin@gmail.com I T IS CLEAR from all of the IT analyst statements that with 2009. However, 2010 has been the most difficult year to forecast ever in if application spending terms of financial services sector IT spending. (maintenance and devel- Forecasts from Gartner, Forrester and others predict opment) and infrastruc- that there will be an upturn in spending later in the year while ture spending (process- the early quarters will be “flat” — along 2009 exit rate levels. ing, networks, desktops, help desk, etc.) are assessed separately, All of these predictions indicate that everything currently is in it is quickly apparent that the 2010 world of financial services flux and can change month by month. But the overarching IT spending isn’t really flat when viewed “under the covers.” pattern is that spending will remain at 2009 levels. Following is an example that sheds light on actual 2010 budg- Unfortunately, the notion of “flat” is particularly hard to et phenomena apparent from recent data. Let’s go back in time interpret at this point in time. Traditionally, IT spending in to 2008 and use an organization with a $5 billion IT budget: financial services (as well as other sectors) has been calibrated The 2008 budget consists of $2.2 billion in infrastructure against revenue and operating expense. But the economic tur- expense and $2.8 billion in applications expense. For 2009 the organization decreased both applications spending (down 12 Although 2010 infrastructure percent) and infrastructure expense (down 16 percent). These numbers are truly representative of the 2009 IT budget pat- budgets indicate continued terns. The resulting total spend for 2009 comes to $4.3 billion compression, the applications — applications at $2.5 billion and infrastructure at $1.8 billion. For the 2010 budget, applications spending is budgeted at an budget tells a story of business- 8 percent increase over 2009 (bringing it to $2.6 billion) while aligned investment. infrastructure spending continues to be squeezed, facing a 10 per- cent decrease (bringing it to $1.7 billion). The total 2010 budget is $4.3 billion, which is “flat” with 2009 spending levels, but the moil of 2008 and 2009, replete with write-downs and credit strategic workings of current spending trends are far from flat. losses, has rendered these two reference points unstable. It is sort of like removing longitude and latitude from the globe and Infrastructure Still Slighted then turning on a GPS — there will be a signal, but one would- Even in these early stages of the economic recovery, the pres- n’t be able to tell where he was. sure on infrastructure costs continues while discretionary An alternative reference point could be absolute spending. spending is returning to applications. An organization can then look at industry trends in terms of On the infrastructure side, the ability to reduce costs is being whether peer spending is going up or down. Surprisingly, enabled by a combination of Moore’s Law, standardization, however, this “benchmark” gives a false reading as well. virtualization and demand management (this is the inverse of Moore’s Flaw, which states that the lower the unit cost of an infra- ‘Flat’ Is Relative structure service, the increased demand increases the total cost). Current December 2009 data from about 80 percent of the At the same time, the focus on demand management is world’s largest financial institutions indicates that, at the high- manifesting itself in every aspect of IT infrastructure. Firms are est level of reporting, absolute IT budgets for 2010 are “flat” driving down ratios of desktops to head count from as high as 2.1 to 1 to under 1.3 to 1 and rescaling their infrastructures in For more on 2010 IT spending, see Aite Group’s terms of mainframe MIPS and physical servers to be better forecast, page 24. aligned for the “next normal” of the financial services business. 16 January/February 2010 wallstreetandtech.com
  • 16. Howard Rubin, Founder, Rubin Worldwide Simultaneously, there is a parallel shift from high fixed-cost the services can be procured regionally. In addition, the servic- structures to more variability. Add cloud services to this and the es have expanded to IBM and Microsoft platforms. Using such next “normal” — which should be evident by the end of 2010 services externally or internally in late 2010 will help define the — begins to take shape. next “normal” as a trade-off of operating expense and capital Although 2010 infrastructure budgets indicate continued expense, a trade-off of variable costs versus fixed costs, and as a compression — along with increased staff productivity, new standard of deployment service levels: servers on-demand. greater use of strategic sourcing and effective demand man- agement — the applications budget tells a story of business- Next-Generation Transparency aligned discerning investment. This is most evident in the At the same time that the flat world is becoming increasingly investment banking segment, which appears to be rebalancing less flat, a next-generation of IT transparency is likely to emerge its IT portfolio. An analysis of absolute spending/budgets for in 2010. An examination of IT organization plans reveals that a 2010 versus 2009 shows development funding moving toward next generation of services catalogs are under development. (in rank order) global equities, foreign exchange, commodi- The current generation has a primary focus on service defini- ties and capital markets. tions with their associated costs to drive unit cost efficiency. The new generation in the works has clear indicators of the linkage of Changing the Competitive Landscape costs and business volumes (how they correlate with each other), There are other phenomena that likely will kick in during 2010 makes fixed versus variable costs and the user influence over them that under the “flat” surface will change the competitive land- scape even more. (By contrast 2009 was typified by an almost In the context of competitive sectorwide playbook: reduce head count, use more offshore labor, renegotiate with vendors, consolidate data centers, cut strategy, 2010 is shaping up to be discretionary spending, reduce applications and outsource a year of diversity and boldness. where possible.) For example, 2010 Wall Street IT plans reveal major thrusts in location strategy — not just adding offshore labor but rather making long-term decisions on business geog- visible, and even shows the time lags of cost changes/shedding. raphy based on talent availability, risk factors and business Furthermore, catalogs themselves are moving away from growth (e.g., which country will be the “next India”). just infrastructure costs to application-based and transaction- In addition, use of private and public clouds is becoming focused transparency. In short, they are migrating to a language real. Look at Amazon’s EC2 as a model of price structure — of business versus a language of technology. perhaps even as the new benchmark. Its unit costs are now down about 12 percent to 15 percent, while at the same time Lessons to Learn If everything stated so far is close to right, there are a few key lessons to be captured: Falling Infrastructure Costs First and foremost, to attain an understanding of technology economics it is essential that subsurface phenomena be under- Plans in place for major companies in regard to unit stood. T echnology is an integral part of products, services, busi- cost changes as seen through the eyes of service cat- ness operations and customer interactions. It is investments and alogs indicate the following reductions: changes at these levels that shape the surface. Quite simply: Even Mainframe MIPS 16 percent if the surface is flat, there can be a lot going on below it. Mainframe Storage 9 percent Second, even in the absence of traditional reference points (e.g., the loss of meaningful and stable data on revenue and Physical Servers: expense), calibration and navigation is still feasible. An organi- UNIX 8 percent Linux 9 percent zation can track its movement against itself and ascertain how Wintel 10 percent peers are similarly moving. And finally (somewhat), in the context of competitive strat- Virtual Servers 15 percent per image egy, while there seems to have been a somewhat standard play- NAS and SAN Storage 5 percent E-Mail 7 percent book that typified the sectorwide cost reductions of 2009, 2010 Desktops 3 percent is shaping up to be a year of diversity and boldness. Perhaps we Networks 5 percent (per port) will see the ripples in the flat surface in the coming months. Hopefully some tsunamis of success, too. ✧ wallstreetandtech.com January/February 2010 17
  • 17. s p e c i a l a dv e rt ising se ct ion Discipline Drives Success in Trading Systems Development E ffective trading systems – for both sell-side and buy-side firms – are critical to achieving high per- formance in the capital markets. Trading systems with features firms to create separate, properly staffed that allow firms to meet their clients’ needs functions, helping confirm that workflows can be a significant source of new revenue. continue and priority projects maintain On the other side of the equation, system their momentum. We encourage separa- defects that make it to the production level tion within development teams, as well, can have a hugely disproportionate impact with the creation of smaller, more agile About ACCeNture units to address tactical issues while prog- on profitability, with corresponding damage Accenture is a global manage- ress continues on high priority, revenue- ment consulting, technology to the firm’s reputation and credibility in the marketplace. generating features. services and outsourcing company. Combining unparalleled experi- Developing effective and innovative trad- With the right metrics, testing process, and ence, comprehensive capabilities ing systems has never been an easy process. structure in place, trading system develop- across all industries and business New market opportunities appear quickly ment can become a more reliable, industri- functions, and extensive research and it is difficult – sometimes impossible – to alized activity. A sharper focus and greater on the world’s most successful get corresponding revenue-generating fea- efficiency help eliminate development back- companies, Accenture collaborates tures implemented in time to take advantage with clients to help them become logs and increase the frequency of releases. of them. That, in turn, reduces the pressure to add high-performance businesses and Accenture’s work with trading system feature after feature to each release, delay- governments. With approximately 177,000 people serving clients in development teams — at both buy-side and ing the development schedule and creating more than 120 countries, the com- sell-side firms, from global investment frustration in the sales force and dissatisfac- pany generated net revenues banks to smaller trading shops — has tion among clients. of uS$21.58 billion for the fiscal enabled us to identify three key elements Trading systems are at the heart of the year ended Aug. 31, 2009. that must be aligned for innovative and effi- global capital markets. Accenture believes Visit www.accenture.com for more cient development: that disciplined systems development with information. 1) Measurement. Many organizations use the right team can provide capital mar- the wrong metrics – or no metrics at all – kets firms with a significant opportunity to when assessing the productivity and effec- establish and maintain a meaningful com- tiveness of trading system development. petitive advantage. By combining our capital While the number of releases per year markets experience, proprietary assets and is important, the number of high-priority knowledge of trading systems applications, features implemented per year is equally, we have developed an approach that yields if not more important. consistently strong results for firms seeking to upgrade this core capability. Our approach 2) Testing. It should be obvious, given the provides the structure needed to establish potentially high cost of defects, that pro- and manage priorities, and to enforce rigor- duction is no place to identify and repair ous quality standards while also providing About the Author: problems. Structured, disciplined testing the ability for faster innovation required in Lloyd Altman is a senior executive in Accenture Capital Markets, lead- at the unit test, integration test, regression today’s environment. ing its Core trading Services offer- test and user acceptance testing (UAT) Selecting an experienced company with a ing in North America. he has been levels should reduce defects found in pro- proven track record can enhance the chances involved in the delivery of solutions duction to the right percentage – zero. of success for any trading systems initiative. for a wide range of buy-side and Please contact Accenture if you would like to 3) Separation of Powers. At many firms, sell-side products and functions, production support and development are schedule a discussion or workshop to explore including credit default swaps, program trading, fixed income intertwined, which means that the pace of how to achieve high performance in trading trading and risk management. innovative development slows when pro- systems. To read more about this topic or to duction problems crop up. We work with contact us, visit www.accenture.com/trading. To read more about this topic, visit www.accenture.com/trading
  • 18. By Ivy Schmerken The Value of Trade Ideas To drum up commissions, sell-side sales professionals increasingly are communicating trade ideas to buy-side clients via alpha capture systems, which provide performance metrics around the trade ideas. W ITH TRADITIONAL WALL Street research analysts focusing on long-term trends, sell-side sales forces are filling the void for short- term trade ideas — including both buy and sell recommendations. To commu- nicate these ideas and prove their value to institutional clients, sales desks are sending their trade ideas through so-called “alpha capture systems,” which enable sell-side salespeople to efficiently communicate with buy-side firms in an electronic format and put performance metrics around their ideas. Thomson Reuters’ StarMine and First Coverage’s Community to share trade ideas with the buy side. An alpha capture system — first used by U.K. quantitative hedge fund Marshall Wace in 2001 to capture profits from short-term trade ideas — allows buy-side clients to manage and filter information while quantifying the value of trade ideas. Stuart Fraser, head of alpha capture at U.K. institutional broker Collins Stewart, conveys trade ideas to institutional clients through youDevise’s TIM. The Web-based system disseminates — in real time — trading ideas on more than 13,000 equities and ETFs generated by as many as 350 sell- “Trade ideas are coming not only from traditional sources, side companies. Buy-side clients can filter which salespeople such as research analysts, but now [they] are originating on sales they wish to follow, as long as they have an existing relation- desks,” comments Paul Rowady, senior analyst at TABB Group. ship with those sell-side firms. According to industry experts, salespeople at the invest- TIM tracks the performance of the trade ideas based on ment banks increasingly are leveraging alpha capture systems their timeframe and market value, according to youDevise, such as youDevise’s Trade Information Monitor (TIM), which is based in London and New York. “It gives the clients The Genesis of a Trade Idea STUART FRASER, head of alpha Focusing on the top 150 But while the cash flow model is capture at U.K. institutional broker European names (out of 350 in his an important part of the firm’s valua- Collins Stewart, leverages the Trade firm’s database), Fraser says he tion process, “It’s not the only impor- Information Monitor (TIM) alpha culls his trade ideas from various tant part of that,” Fraser stresses. He capture system from youDevise to sources, including Quest, the bro- personally visits two or three compa- push out trade ideas to his buy-side kerage firm’s proprietary cash flow nies a week and also obtains ideas clients. According to Fraser, he model. “One looks at cash flow at a from Collins Stewart analysts and enters ideas on U.K. and European long time horizon, and stock prices even clients. In addition, “There’s stocks prior to the opens of the move materially around that in the information in the market [and] London Stock Exchange and the New short run,” he explains, adding that client meetings with the companies,” York Stock Exchange. But where he uses cash flow analysis to gener- Fraser says. “It’s a fairly wide net one does he get his ideas? ate both long and short trade ideas. uses to capture ideas.” —I.S. wallstreetandtech.com January/February 2010 19
  • 19. quarter are profitable, the buy-side client could see that his “It’s a really shorts outperformed his longs or that he is better at picking gold stocks in China than oil stocks in North America. good quantitative Perhaps more important, TIM can be used for compli- way of seeing ance purposes, Berthoud points out. The trade-idea informa- tion could be used in a buy-side broker vote system to justify what value a why a firm rewarded a broker with trading commissions, he broker has added says. “It’s a really good quantitative way of seeing what value a broker has added — it’s there in black and white,” Berthoud — it’s there in says, adding that TIM provides a complete audit trail of what black and white.” was routed to whom. Further, TIM stores all of the informa- tion on the platform forever, so a buy-side firm can provide —Colin Berthoud, youDevise to regulators the precise broker information on which rout- ing decisions were based. Though youDevise has not had any direct interaction with regulators, Berthoud says, the U.K.’s Financial Services Authority (FSA) has paid close attention to alpha capture systems in general. When the FSA reviewed alpha capture systems in 2006, it examined the controls necessary to ensure that ideas disseminated on the platforms do not include a bit more confidence that the salespeople can sift through insider information or other relevant data not generally ideas and reject bad ideas,” says Fraser. available. Because these systems have a complete audit trail, When the salesperson inputs the trade idea, TIM pulls the however, the FSA acknowledged that the risk of conveying latest price for that stock or a volume-weighted price, trade ideas over alpha capture systems might be lower than depending on the fund manager’s request, relates Colin traditional communication methods, though it noted that Berthoud, a director with youDevise in London. The system some risk still might exist. updates the market prices from the moment the author According to Berthoud, youDevise has strong relation- decides to take profits or close the idea. “While the system ships with the compliance departments at large brokerage monitors the trade ideas,” Berthoud explains, “it will gener- houses, which monitor the trade ideas submitted by their ate stop/loss alerts if it passes a certain threshold, and the fund salespeople. “We provide them with real-time access to all of manager can increase or reduce his exposure.” the ideas [originating] within their company,” he relates. According to Berthoud, quant funds and asset managers feed Since brokerage firms have restricted lists of stocks for which the equity trading ideas, along with research notes, directly into they are privy to insider information in some way, the sales- their internal systems. But the buy side is not necessarily trading people are prohibited from commenting on certain stocks, off of the information, asserts Collins Stewart’s Fraser. Berthoud explains, adding that some brokerage firms have Most buy-side clients, Fraser says, are “assimilating the built an authorization loop so that trade ideas are not released information” along with other research reports and market until the compliance department reviews them. information. “The buy side has to have a lot more data points to be confident in the information,” he explains. The Evolution of Alpha Capture YouDevise’s Berthoud concedes that rather than trade After Marshall Wace kick-started the evolution of alpha cap- based exclusively on the sell-side ideas offered in TIM, it’s ture systems, a consortium of four major brokers — Citi, more likely that buy-side firms are using the ideas as addi- Credit Suisse, Dresdner Kleinwort and Merrill Lynch — tional support for current strategies. The buy side, he notes, founded Trade Ideas Limited (TIL) with the idea of creating a typically follows a universe of stocks and already has an idea central routing hub to enable sell- and buy-side firms to send of whether a stock is undervalued or overvalued. “This is and receive trade ideas regardless of their internal alpha capture more to help the buy side time their moves,” Berthoud says. systems. In 2005 the brokers commissioned youDevise to build the back-end platform that now serves as an industry utility More Than a Buy or Sell Recommendation known as the Repository and Distribution Centre (RDC). TIM also can help buy-side firms gauge the performance of TABB’s Rowady explains, “You need an intermediary to build individual sales professionals, Berthoud adds. For example, if this once because for a buy-side player to build the same sys- eight of the 10 trade ideas entered by a salesperson during a tem, you’d have to convince all your brokers to use your [alpha 20 January/February 2010 wallstreetandtech.com
  • 20. Alpha Capture Systems Ever since the U.K.’s Financial Services Authority granted Thomson Reuters approval of their use in 2006, there has been a prolifera- StarMine Professional capture] systems exclusively.” tion of alpha capture systems to objectively track trade 646-223-8593 ideas from investment banks. Here is a partial list of www.thomsonreuters.com Approximately 4,300 professionals system providers whose solutions fit in the category: at 150 buy-side firms and 350 sell-side Trade Ideas Limited firms currently utilize the TIM alpha BNY ConvergEx First Coverage TIL Jaywalk The Community 44 (0)781-801-2580 capture system to access the RDC, 212-448-6080 617-303-0180 www.tradeideas.org representing an increase of more than www.bnyconvergex.com/ www.firstcoverage.com 50 percent in the past year, according companies/BNYJaywalk.aspx youDevise Investars Trade Ideas Monitor (TIM) to youDevise. Brokers pay youDevise a FactSet Research Systems External Alpha Capture/ 44 (0)207-826-4302 subscription fee for the service, but AlphaMetrics Internal Alpha Capture www.youdevise.com buy-side firms receive the service for 203-810-1000 212-269-3796 www.factset.com www.investars.com free if they have an existing relation- ship with the sell-side firm. “The buy side pays commission to the brokers based on performance; lar sector. For instance, youDevise publishes a weekly senti- the brokers pay a small fraction to us based on a fee we charge ment analysis quantifying the percentage of new trade ideas by user,” youDevise’s Berthoud relates. from U.S. and U.K. brokers that are bullish or bearish on Over the past few years other alpha capture systems that stocks or certain sectors. aggregate and value trade ideas have sprung up. Denise But Rowady cautions that there may not be room for sev- Valentine, senior analyst at Aite Group, wrote a research report eral players in the alpha capture space. He doesn’t see the sell in 2008 categorizing vendor solutions as “aggregators” of inde- side committing to the administrative burden of adding pendent or broker research, pointing out that some combined trade ideas — which, he says, largely is a manual process — both types. Valentine noted that the concept of TIM is similar to more than one or two of these systems unless the process to other research delivery mechanisms, such as BNY is automated to some extent. ConvergEx’s Jaywalk, which creates performance metrics Aite Group’s Valentine, however, questions altogether around independent research reports. Other top aggregators the value to the buy side of the sell side pushing sales teams’ include StarMine, which was acquired by Thomson Reuters trade ideas via alpha capture systems. She suggests that the and ranks the accuracy of analysts’ earnings estimates, and First sell-side salespeople have an ulterior motive in promoting Coverage’s Community Web-based platform, which features trade ideas: to generate commissions. “It may be that this approximately 250 sell-side firms that contribute information, helps the sell side more than the buy side,” Valentine com- including research and sell-side trade ideas, to the buy side. (For ments, noting that alpha capture systems also provide sell- more alpha capture system providers, see sidebar, above.) side firms with feedback on how well their research and rec- But Berthoud insists that youDevise’s TIM has become ommendations are performing as well as on the market’s the largest provider of trade ideas transmitted from the sell perception of them. side to buy-side firms. “Because these are community-based Indeed, Collins Stewart’s Fraser confirms the value of systems, the brokers tend to migrate to a single system,” he alpha capture systems to the sell-side business. YouDevise’s says, claiming that 60 percent of the trade ideas that pass TIM, Fraser relates, affords him efficient exposure to clients through vendor alpha capture systems are delivered via TIM. that he otherwise might not have access to. “I do send ideas out to groups,” he explains, adding that the audit trail provid- Who Benefits? ed by TIM also is valuable. TABB Group’s Rowady acknowledges that there is a lot of YouDevise’s Berthoud acknowledges the benefits of alpha value in the aggregation of sell-side trade ideas for pattern capture systems to sell-side firms. “For once it’s the salespeo- recognition and identifying trends, such as a preponderance ple who are [generating] money for the firm, rather than just of buy or sell signals or the movement in or out of a particu- the sales traders who are executing the deals,” he says. But he argues that sell-side sales forces also are a valuable source of “It may be that trade ideas for the buy side. “They’re the sharp point of all the economic briefings this helps the sell they’re getting, and they know the client and put together side more than ideas that are tailored for the client,” Berthoud contends. “They may come out of a morning meeting, hear what the the buy side.” analysts say and then add their own ideas.” —Denise Valentine, Aite Group The question is, do those ideas truly add value to the sell side’s relationship with the buy side? ✧ wallstreetandtech.com January/February 2010 21
  • 21. By Ivy Schmerken Mining the Web For Alpha Researchers and Wall Street firms are analyzing the avalanche of unstructured Internet content — including news feeds, blogs and Twitter posts — to help improve trading performance. F INDING AN EDGE on Wall Street can be worth millions of dollars. And lately, converting text-based information — such as RSS news feeds, blogs and T witter posts — into machine- readable data is a hot topic in trading circles. With the exponential increase in Web- based content and electronic SEC filings, there is an avalanche of unstructured textual data to analyze. “The question is, how can you use it; should you use it?” said Mani Chandy, Simon Ramo Professor of Computer Science at the California Institute of Technology (Caltech) in Pasadena, Calif. Chandy box strategies currently trade off of news feeds. According to a 2008 Aite Group report, only 2 percent of firms that employed electronic trading strategies leveraged unstructured data in a machine-readable format. But there have been advances in the past five years in services that provide structured data based on news feeds, blogs and other unstructured text, Caltech’s Chandy noted. For example, news providers Dow Jones and Thomson Reuters offer products that archive the news and provide machine-readable feeds for use in algorithms. According to the Aite report, depending on the content required, pricing for a structured data news service can range spoke on the topic of “Analyzing Unstructured Real-Time from $4,000 per month to $60,000 per month for low–latency Information for Algorithmic Trading” as part of a panel discus- premium content. Despite the hefty price tag, however, the sion at the Accelerating Wall Street virtual event in late market for unstructured real-time information is growing. November hosted by Wall Street & Technology. [Ed. note: The Aite estimated that global spending on unstructured data for complete event, which focuses on low-latency technology and electronic trading will jump from $75 million in 2009 to more “If you can decide or determine what’s really trustworthy and what’s likely to make an impact, and do that quickly, that is a huge opportunity.” —Mani Chandy, California Institute of Technology managing growing data volumes, can be accessed at than $141 million in 2011. As a sign of the demand for integrat- www.techweb.com/wallstreet-virtual.] able unstructured data, in November the Deutsche Borse “The challenge is being able to produce some alpha from acquired Need to Know News (Washington, D.C.), a provider the news,” added panelist David Leinweber, a well-known of machine-readable news for automated trading engines. quant and founding director of the Center for Innovative Financial Technology at U.C. Berkeley. “This can be done by Uncovering Alpha filtering and categorizing news and combining it with other But gathering the unstructured news sources is just the begin- quantitative analytics.” ning. “The challenge is in designing systems and identifying It’s not clear to what extent hedge funds’ and quants’ black- news events by observing patterns that can be traded upon,” 22 January/February 2010 wallstreetandtech.com
  • 22. Chandy told Accelerating Wall Street attendees. In a research project at Caltech, Chandy explained, he is utilizing OpenCalais, a service from Thomson Reuters that provides structured data based on unstructured information, to analyze the entire universe of English language blogs. The data is heterogeneous and is acquired from multiple sources, including stock tickers, blogs and news feeds, he noted. “We observe an event by observing some type of pattern over time,” said Chandy. For example, an energy trader would look for the frequency of key words such as “weather” and “electricity.” Traders also can look for an anomaly — if the number of blogs about a company is 50 percent higher in the past day than over the past year, that would deviate from the norm and qualify as an observable event, Chandy commented. An on-demand version of WS&T’s Accelerating A system that examines blogs and T witter posts is part of a Wall Street virtual event can be accessed at larger, smart platform, known as a “sense and response sys- www.techweb.com/wallstreet-virtual. tem,” explained Chandy. At the center of a typical system, he related, is an enterprise service bus that routes data from mul- “The higher returns are what we see when we use more strin- tiple sources, such as OpenCalais; a source for acquiring blogs; gent filters, a good indicator of signal quality,” Leinweber a Reuters Data Feed (RDF) parser; a server for metadata told WS&T in a follow-up e-mail. retrieval; a server for time series analysis of stock tickers; and an event engine that determines what action to take. Garbage In, Garbage Out For many trading desks, the use of unstructured data could But both Leinweber and Caltech’s Chandy warned the audi- improve alpha generation, Chandy asserted. But, “Before you ence to weigh the value of sources, indicating that blogs are not commit to using a system, ... you ought to spend some time always written by reputable sources and often are lagging indi- looking at the costs,” he cautioned. T determine if unstruc- o cators of stock price movements (though they can be effective tured data adds value to the trading process, Chandy suggest- for spotting volatility). “Ninety-nine percent of blogs are irrel- ed firms examine five metrics: relevance, effort, accuracy, com- evant for trading,” Chandy asserted. “It may make sense to pleteness and timeliness, or REACT. “If traders get a lot of identify which sites are relevant for a given need.” irrelevant data, they will stop paying attention,” he said. News stories also can be inaccurate, the speakers cautioned. U.C. Berkeley’s Leinweber stressed, “The science of finding Chandy cited the case of a story about United Airlines’ 2002 alpha in news is to define a series of news analytics.” Pointing to bankruptcy filing resurfacing on Google in 2008; the story then current research he conducted against the broad S&P 1,500 found its way onto Bloomberg. News-driven algorithms swung universe of stocks using Thomson Reuters’ NewsScope archive into action, driving United Airlines’ stock price down to $3 per — which provides sentiment analysis to identify if a story about share, from its open of $12.50, before the market realized it was a company is positive, neutral or negative — he added, “News old news. Social media also introduce some possibility of selection skills allow managers to profit, but you have to move manipulation, Leinweber pointed out, though he noted that beyond ‘buy on the green’ and ‘sell on the red.’ ” the SEC is working to weed out this type of activity. Leinweber explained to attendees that he spent a great deal Despite the challenges of analyzing unstructured informa- of time refining event filters and leveraged Spotfire, a visuali- tion, however, both Chandy and Leinweber insisted that zation tool from Tibco, a Thomson Reuters company, to cre- there is an opportunity to generate alpha from mining this ate an interactive, event study explorer. Simple filters, he relat- information. “This is a really exciting opportunity partly ed, could look at the intensity of news events by counting the because of the volume of unstructured data and the range of number of unique stories and alerts on a company. More people producing unstructured data, from the trusted ones to sophisticated measures, he said, would take relevance into the manipulators,” said Chandy. “If you can decide or deter- account, such as whether the company was mentioned in the mine what’s really trustworthy and what’s likely to make an headline only, in the first sentence or later in the article body. impact, and do that quickly, that is a huge opportunity.” According to Leinweber, higher thresholds for news Added Leinweber, “Alpha comes from information and intensity and sentiment around a given company — requiring innovation. Clearly the great tide of new information is two or three stories per day rather than one, for example — unstructured textual information, and that’s a very profitable produced higher returns over the index for the selected stock. place to look for the future.” ✧ wallstreetandtech.com January/February 2010 23
  • 23. By Melanie Rodier IT Spending Makes A Comeback Capital markets firms will spend almost $42 billion on technology globally in 2010, up from an expected $39.7 billion in 2009 and $41.8 billion in 2008, according to an Aite Group study. A S THE DUST SETTLES on the most severe glob- al recession in decades, technologists are cautiously optimistic for 2010, as capital markets IT spend- ing is expected to inch back up by 6 percent, making up for the 5 percent in spending lost in the financial rubble last year, according to Aite Group. Based on a Q4 2009 survey of financial services tech- nology executives, Aite expects capital markets firms globally to spend almost $42 billion on technology in 2010 — up from an expected $39.7 billion in 2009 and $41.8 billion in 2008. [Ed note: Wall Street & Technology helped Aite gather respons- “My budget is flat to modestly up. But it’s a belt-tightening air in the room, not one of free spending,” says Steve Rapp, managing director and CTO, AGI Management Partners. “In 2010 I wouldn’t still use the term ‘cost-cutting’; I would use the term ‘prudent business practices’ and the gain of econom- ic efficiencies that we would have pursued whether or not the economic conditions of 2008-2009 had occurred.” Rapp reports that his IT priorities this year include the implementations of a new trading platform and a new account- ing system as part of an ongoing project to consolidate the applications and infrastructure of three affiliate companies on a es from financial services technology executives.] single platform. The project is expected to deliver cost savings But it is not simply a case of budgets returning to 2008 levels, ranging in the millions of dollars over several years, he relates. as very few companies actually fall within the 6 percent average Glenmede also is focused on strategic initiatives and spending increase, cautions Adam Honore, research director at prudent cost control. Chief Aite Group and author of the report. Instead, some companies technology officer Nicholas may see their tech budget coffers increase more extensively, while Voutsakis says one of the others will still tighten their belts in 2010, he tells WS&T. firm’s priorities this year is Overall, 28 percent of the 30 CIO-level capital markets exec- continued investment in its utives who participated in the survey indicated that they would wealth management platform, receive no budget increase in 2010, while 24 percent said they which encompasses client would see a 10 percent rise. The remaining responses varied reporting, trade order man- “My budget is flat to modestly up. But it’s a belt- tightening air in the room, not one of free spending.” —Steve Rapp, AGI Management Partners widely. Some firms indicated a 10 percent drop, while others agement and post-trade compliance, and integrates fixed expect technology budgets to rise by more than 20 percent. income, analytics and reporting on a single platform. Those reporting the highest budget increases typically are elec- “In the long term, while creating integrated platforms tronic trading firms (proprietary, hedge fund or sell-side firms) requires an investment, it does enhance efficiency,” explains pushing to maintain their positions in the low-latency arms race. Voutsakis. “We are being prudent with IT spending and are try- 24 January/February 2010 wallstreetandtech.com
  • 24. Rank the following business objectives in order of priority as related to IT spending: Organizational Integration 14% 14% ing to spend on more-strategic initiatives. It 4% goes back to the strategy we’ve laid out — to Reducing Cost 14% 11% really evolve many independent systems that Compliance 10% 17% 7% talk to each other into larger platforms with more inherent integration.” Risk Management 7% 14% 17% Growth 10% 17% 23% What a Difference a Year Makes Ultimately, the past year has led to a huge dif- Operational Efficiency 31% 17% 14% ference in IT strategy for most firms, Aite notes. Business Agility 30% 20% 17% Last year cost reduction dominated the agenda Percent of Respondents at most capital markets technology organiza- tions, followed by risk management. Today the 1st Priority 2nd Priority 3rd Priority overall top business objective as related to IT Source: Aite Group spending has become business agility (which ranked last in the 2009 survey), followed closely by operational representing a nine-spot jump over 2009. efficiency, according to the Aite survey (see chart, at right). Cost According to Aite, the primary focus in this area relates to reduction slid from first place to sixth — although several firms terminal usage. Honore explains that firms are looking to cut still listed it as their top objective, Honore points out. their use of high-cost Bloomberg and Thomson Reuters termi- Most CIOs indicated that execution management systems nals for professionals who don’t need the full functionality or are their top IT priority, followed by risk management sys- who have duplicate functionality. Firms also are moving to direct tems, global trading settlement back-office systems, client exchange feeds and/or reducing through colocation efforts the reporting, and pre- and post-trade analytics, according to network footprint required to move market data around. Honore. Most also plan to upgrade infrastructure, taking In order to keep budgets in check, CIOs also expect to advantage of emerging technologies and maturing technolo- squeeze their vendors in 2010, the Aite survey revealed. gies around multicore processing and virtualization, he says. Renegotiating with existing vendors is the top spending reduc- More than 40 percent of CIOs plan to upgrade single-core tion strategy, with new vendor negotiations ranking No. 3. servers to multicore machines in 2010, the report found. In addition, while internal development has been on a slow “In the past companies have focused on specific pieces of decline in recent years, CIOs believe it will make a comeback in technology. This year it’s more about taking care of the middle 2010. As a result, they will rely more heavily on core infrastruc- layer — the core underlying infrastructure, servers and the net- ture technologies to help them embrace modern architecture working layer that everything sits on top of,” Honore explains. — which ranked No. 2 on companies’ cost-reduction radar. Chief technologists also plan to virtualize nearly one- Overall Aite expects 2010 to usher in a host of new IT oppor- quarter of their servers on average, Aite found. And with all tunities, as new markets open to electronic trading; firms open of the physical, virtual and operating system upgrades their doors to new asset classes; and retail firms change their sales planned, Microsoft stands to be a major benefactor of mod- and service offerings and, in some cases, rebrand their efforts. ernization efforts, as it owns roughly 60 percent of the capi- Not surprisingly, the fastest-growing influencers for future tech- tal markets server footprint, the Boston-based firm noted. nology are risk and compliance personnel, Aite found. Cloud computing, according to Aite, still remains a relative- Aite offers several recommendations for technology exec- ly low priority for many CIOs, despite its budgetary benefits. utives who are faced with the challenge of controlling costs in The consultancy reports that 50 percent of respondents current- a technology arms race around electronic trading while ly have no plans to leverage a cloud in 2010, with security cited ensuring their firms stay competitive: as the main concern. Thirty-three percent, however, currently First, CIOs should do their homework on development are exploring the concept. Glenmede’s Voutsakis notes that his options — making sure they know the open source opportu- firm is looking at cloud technology, including cloud-based voice nities, vendor landscape and hybrid development options, over IP, as a way of improving services and containing costs. Honore wrote in the report. Tech executives also should measure the value of internal development against commodi- Trimming the Fat tized processes. Should a firm really support a function that Meanwhile, for the second year in row, Aite asked technol- provides zero competitive differentiation and can be found ogists in which areas they hoped to trim their budgets. In off the shelf from 10 vendors? Further, Aite suggests that 2009 business intelligence solutions were at the top of that technologists should work with industry groups to standard- list. In 2010 market data processing takes the top spot — ize common problems and create commoditized solutions. ✧ wallstreetandtech.com January/February 2010 25
  • 25. 10 Back-Office Trends for 20 0 1 With new regulations on the way and calls for greater transparency into how financial instruments are priced and cleared, the importance of a strong back office is destined to receive a lift this year. “ W Here are 10 developments that are transforming HY DO YOU have so many Wall Street’s operations people?” the operations departments and the manager at a small New York metals trading firm gets asked technology they use. a few times a week by line managers who By Penny Crosman consider his department nothing but overhead. “What are they all doing? Aren’t there some efficiencies or best practices you can put in place to do more with fewer people?” The weary ops manager — who works 13- plus-hour days, six or seven days a week, to ensure that all of the firm’s metal orders get shipped to the right places and that the financial transactions are completed properly — can’t Photo by Mike Weimar think of a good answer. His shoulders hunch, his hairline recedes and his attitude deteriorates further. None of his staff are goofing off; rather, some work even longer hours than he does. >> 26 January/February 2010 wallstreetandtech.com
  • 26. Back-Office Transformation “We don’t want to have a bunch of number crunchers and data entry operators working for us, because that doesn’t make sense to the shareholder or to the risks we’d be taking due to errors.” —Robert DeVault, Director, Financial Reporting/Operations, Transamerica Asset Management w w w. w a l l s t r e e t a n d t e c h . c o m Month-Date 2009 27
  • 27. Back-Office Transformation The fact is, his paper-bound firm is reluctant to spend implemented and the operations manager might (maybe) money on software. And if it did deploy software to auto- finally get some respect. mate some of the data-entry tasks that his operations staff “For the career operations professional, there’s so much perform, he most likely would be forced to lay off many of work involved in knowing how this stuff is run,” says Lind. “It’s his loyal workers. not as celebrated a position as it should be, but these people This is not the glamorous world of the high-stakes trader really do know the moving parts of the organization, how the or investment banker. It’s the often time-capsuled world of information flows and what it means. They’re the ones who the back office, sometimes referred to as “Australia” because can aggregate it and present it to regulators in a lucid way.” of the parallels to a penal colony to which people in other Here are 10 trends that will reshape Wall Street’s back departments who misbehave are sent. offices over the next year (drumroll, please): “The reason we haven’t made more progress in opera- tions is because we’re coming off of 20 years of excessive per- 1. The never-ending requirement to do formance of 10 percent or more a year,” says Tim Lind, more with less. managing director, strategic planning, at Omgeo and a for- “The biggest trend we see is enormous pressure to provide mer TowerGroup analyst. “When a firm is profitable, no one more for less at a quick pace,” says Jami Wysota, VP of par- cares what’s going on in the back office — they can be bet- ticipant solutions at Diversified Investment Advisors, a ting it all in Saratoga. When the firm is losing money, now Purchase, N.Y.-based adviser specializing in retirement they’ve got to be efficient.” plans. “Everybody is under that same pressure: How do you But with new regulations on the way, along with calls for handle more clients and communicate with customers more greater scrutiny and transparency into how financial instru- without hiring. Everybody needs to look at the back office ments are priced and cleared, the importance of getting trade and say, ‘Where can we be as efficient as possible?’ The only transactions right — the purview of the back office — will way to do that is to look at technology. People are working become a little clearer, more-sophisticated software will be as fast as they can, but there’s an enormous amount of work; technology helps you turn out that work much quicker at a more palatable cost.” 10 Developments That Are Reshaping The Back Office 1. The never-ending requirement to do Wysota says Diversified Investment Advisors is consider- ing technologies such as mass e-mail systems that could be used to replace print communications. “Where legislation allows us,” she notes, “we’re trying to embrace things like text messaging.” more with less. One popular way to cut operations costs on Wall Street, according to Ben Keeler, director at consultancy Citisoft, is to 2. The escalating use of software as a service. rethink data acquisition strategies. “Clients are making a sig- nificant move to rationalize where they’re acquiring pricing 3. The adoption of new software and and reference data,” he relates. “It’s not your standard, ‘Can services for new asset classes. we get rid of this interface, can we get rid of this vendor?’ 4. More outsourcing to custodians. They’re looking at their policies and general data trends. Is there a general trend toward disintermediation of data? Can I 5. Preparations for cost basis get data directly from an exchange versus a provider? How do accounting rules. I change my policy to adapt to the changing data landscape?” 6. The automation of collateral Another cost-cutting measure that is picking up steam in the management tasks. back office, according to Lou Maiuri, global head of outsourc- 7. More rigorous cleansing and verifying ing at BNY Mellon Asset Servicing, is outsourcing (see Trend 4). of operations data, and faster delivery of that data downstream. 2. The escalating use of software as a service (SaaS). 8. The development of precise error- and fraud-detection software. “We like to build and own technology where it matters, in areas of core competency such as front-office services,” says 9. The need to prepare to die gracefully. Joseph Noviello, EVP of BGC Partners and technology 10. The introduction of a host of new architect at ELX Futures, an electronic futures exchange regulations. formed in December 2007 by a group of financial services 28 January/February 2010 wallstreetandtech.com
  • 28. Transamerica Finds Back-Office Efficiency, Accuracy Through Insourcing T RANSAMERICA Asset house, “For as many things as we printer, bypassing the typesetter. Management has found possibly could, we tried to use More important, according to happiness going it alone. technology to make straight- DeVault, the software uses a The St. Petersburg, Fla.- through technology sweeps, where mutual fund’s net asset value (NAV) based asset management firm no one touches any data,” he says. to automatically calculate perform- recently pulled out of an outsourc- For instance, Transamerica built ance data (such as total return ing agreement with a custodian a reporting engine around fund NAV), taking into account distribu- bank for financial fund administra- administration automation soft- tions, sales loads, taxes and other tion and found efficiencies by bring- ware from Confluence. Holdings, factors. “We’re still responsible for ing the function back in-house. general ledger and other primary making sure the data is accurate, “When we originally data that Transamerica but we don’t have to worry about outsourced, we thought receives from its someone going in and typing over that maybe by giving it custodian bank are fed a formula,” DeVault comments. “We to the service provider automatically into a built the controls to make sure the we’d get a better level of Confluence database data transfer from the custodian product and could add a in a straight-through bank is all automated.” level of control on top of process, DeVault that,” explains Robert A. reports, adding that Automation Adds Value DeVault, director, finan- Transamerica’s tech- DeVault won’t divulge specific tech- cial reporting/operations, Robert DeVault, nology team built a nology plans for next year. But he Transamerica. “But we Transamerica process to add data says he will keep automating basic found that by outsourcing, we had a from sources other than the custo- functions. “We want our people to loss of control. The determination to dian bank and scrub that data. The be doing the types of things a insource was to make sure we could reports generated by the software computer or database system can’t fully understand where all the risks are compliant with accounting do,” he says. “We don’t want them were within a process and then rules, such as FAS 157, the mark- to be doing the types of things that surround those with controls as to-market rule for fair valuation it can, because they add more necessary to ensure that we could reporting, according to DeVault. value in an analytic position. verify the accuracy of the data we The software has resulted in “The quicker we can get data into were producing.” budget savings by reducing print that almost-done state where some- When the firm discovered errors typesetting costs. “Before, we’d one can look at it critically and say, that needed to be corrected, the prepare spreadsheets and Word ‘Does this make sense?’ the better. outsourcer truly seemed to be a documents and send those out to a We don’t want to have a bunch of thousand miles away and often printer that would turn them into number crunchers and data entry hard to reach, according to financial reports for us,” DeVault operators working for us, because DeVault, who declines to name the relates. Today, the software gener- that doesn’t make sense to the custodian bank. In the process of ates a printer-ready PDF document shareholder or to the risks we’d be bringing the function back in- that goes directly to the financial taking due to errors.” —P .C. firms, including BGC. But for applications that are not of SaaS solutions also is a tremendous benefit, particularly in among the firm’s or the exchange’s primary business, he adds, the current uncertain regulatory environment. The providers “It doesn’t make sense for us to invest a lot of time building can be expected to take care of the modifications needed to these sorts of solutions.” comply with new regulations. Eagle Investment Systems, which began offering soft- ware as a service six years ago, has seen rapid adoption of 3. The adoption of new back-office soft- the SaaS model recently. In the past three years, SaaS solu- ware and services for new asset classes. tions have comprised 80 percent of the vendor’s sales, and Abysmal stock market performance has driven many firms, the SaaS business has grown on average 25 percent per especially smaller buy-side firms, to add more exotic products year, the firm reports. to their arsenals. Where their existing software and outsourc- The fact that providers handle maintenance and upgrades ing providers can’t accommodate the back-end processing of w w w. w a l l s t r e e t a n d t e c h . c o m January/February 2010 29
  • 29. Back-Office Transformation these new products, firms are adding providers and software additional software to price and track them based on the solutions (including SaaS) to get up to speed quickly. market prices of underlying stocks or bonds,” he comments. “Wall Street has struggled to build a single front-to-back, “That software development is always one or two years multiclass, globally aware software platform,” explains behind new product development.” Omgeo’s Lind. “Like the unicorn, it’s a mythical creature. Back For example, Pinedo says, about 200 different types of for- offices were fundamentally built around stocks and bonds; they eign exchange trades now exist. A large FX trading depart- weren’t constructed to manage some of the more complex ment might handle 10,000 trades a day, 80 percent of which aspects of over-the-counter and exchange-traded derivatives. might be automated. But that other 20 percent, he notes, are Often it’s impractical to extend a system created for stocks and products that have been developed only in the past year or bonds to workflows associated with products like derivatives.” two, and the software has yet to catch up with them. “It’s Not only are firms dealing with more asset classes, but important that there’s continuous investment in the opera- within existing asset classes the complexity of products is tions software to keep it up to date,” Pinedo asserts. increasing, points out Michael Pinedo, chair of the The flip side to this trend is a move toward platform con- Department of Information, Operations and Management solidation among those firms that have merged or have been Sciences at the Stern School of Business at New York offering products on different platforms that they are just University. “More-sophisticated products often require now bringing together. “Within BGC over the years we’ve Investment Adviser Saves Millions Through Document Automation D IVERSIFIED Investment them in an envelope and mail participants; the firm sends out Advisors, a Purchase, them off, she explains. “It was a approximately 350,000 welcome N.Y.-based investment labor-intensive, high-cost process,” kits a year, generating an addition- advisory firm that Wysota recalls. “There was no al savings of about $175,000 per specializes in retirement plans, ability to customize the documen- year, she adds. services more than 2,000 plans tation because everything was The software also accelerates for 1.2 million participants. To sitting on a shelf somewhere.” the process. “Diversified keep up with growing volumes of To cut labor requirements and Investment Advisors in the fourth the heavily customized plans — improve service, Diversified quarter of 2009 added 91 clients wherein each client gets its own Investment Advisors automated on the books, which is a tremen- plan provisions, branding and the document-generation process dous amount of volume for us,” messaging — this past August the several years ago using software Wysota relates. “If every client firm streamlined its documenta- from HP Exstream. Now staff needed to change our standard tion process, which is the opera- leverage templates to create and materials just slightly, there tions group’s primary function, print customized documentation would be no way to keep up with according to Jami Wysota, on demand, according to Wysota, that manually.” Diversified Investment Advisors’ who explains that text, photos Wysota sees this type of docu- VP of participant solutions. and other graphics can be easily ment automation and customiza- In the past, enrollment books, swapped in and out and plan tion as a growing requirement in confirmations and other plan documents updated without the retirement services industry. documents that are sent to clients requiring a design department “The big thing we see in the retire- were handled in what was called or technical assistance. ment industry is major demand by the “pick-and-pack” method, As a result of the automation, clients to customize core materials Wysota says. Operations staff the firm was able to decrease its — just taking things off the shelf would go to the shelves and pick operations budget by $1.3 million doesn’t cut it any more,” she says. the 60-page enrollment book, this year, Wysota reports. The new “We’re seeing our competitors privacy notice, account access software saves 50 cents on each beginning to offer the same type brochure and other materials, put welcome kit sent to new plan of thing.” —P.C. 30 January/February 2010 wallstreetandtech.com
  • 30. “We really needed to operated our equity and fixed-income operations on dif- have a global ferent products, and just recently we’ve converged everything globally onto a single product,” relates view of the BGC’s Noviello. “It introduces lots of efficiencies for business.” our organization, but it was no small task.” —Lou Maiuri, BNY Mellon Adds Adam Schneider, principal at Deloitte Asset Servicing Consulting, “We’re seeing a lot of deferred merger integration. Now firms have to do this in a hurry to gain efficiency.” 4. More outsourcing to custodians. In the interest of cutting costs and allowing a third party to worry about complying with impending regulations, more and more firms are outsourcing back-office func- tions to custodians such as State Street, BNY Mellon and Northern Trust. BNY Mellon Asset Servicing formed an outsourc- ing unit in December to accommodate growing demand from clients, putting Maiuri in charge. The group has 54 clients comprising mainly asset managers, mutual funds, institutional accounts, insurance compa- nies and pension plans. “The [sales] pipeline is extremely active,” Maiuri relates. According to Maiuri, one change in operations outsourc- 5. Preparations for cost basis account- ing that he has observed among his customers is a desire for ing requirements. global services to cover operations in several countries consis- “The [accounting] rules that take effect in February are very tently — with disaster recovery. “We really needed to have a specific and different from what anybody’s technology does, global view of the business,” he says. and prior calculations will have to be redone,” says Deloitte’s Calamos Investments, a global investment management Schneider. (This, of course, is good news for accounting firms firm with $30.5 billion in assets under management, recently such as Deloitte). “It’s a big deal, and it’s mandatory, and I’m agreed to use Citi’s investment administration services. Citi not seeing a lot of energy and action in this space.” will handle trade processing, portfolio accounting and recon- Robert DeVault, director, financial reporting/operations, ciliation, performance measurement, collateral management, at Transamerica Asset Management, says he is only modestly and voluntary corporate action services for Calamos’ institu- concerned about cost basis accounting rules since the report- tional portfolios, funds and separately managed accounts, ing legislation is more applicable to transfer agencies than according to a release. Calamos executives said in the state- buy-side firms. In addition, mutual funds already use cost ment that they liked Citi’s technology and its ability to sup- basis accounting for the securities held within their funds, he port retail and institutional lines of business on one platform. says. “The mutual fund industry is already one of the most Transamerica Asset Management, on the other hand, regulated areas that exist,” DeVault comments. recently reverted back from outsourcing to insourcing to get Still, there are a few requirements that he hopes will get more control over data quality and to make processes more dropped because they would require a lot of work for compli- efficient (see related sidebar, “Transamerica Finds Back-Office ance. Nonetheless, DeVault believes Transamerica will be Efficiency, Accuracy Through Insourcing,” page 29). able to use the reporting tools it already has in place to meet BGC and ELX Futures’ Noviello points out a trend the new requirements rather than have people spend time toward outsourced and remotely managed IT operations. dealing with them. “The trend is for less and less emphasis on managing your own desktops, deploying people to service someone’s phone 6. The automation of collateral man- or installing software on someone’s desktop,” he says. “If you agement tasks, such as margin calls. can remotely manage and provide all those services, that Experiences with Lehman Brothers and AIG over the past saves an awful lot of people time and costs. More people are two years have proven to many firms that their casual, ad hoc looking to commoditize the back office around that.” approach to collateral management is insufficient and even w w w. w a l l s t r e e t a n d t e c h . c o m January/February 2010 31
  • 31. Back-Office Transformation dangerous in times of crisis. “Both buy-side and sell-side both sides of a transaction so they can clean up a huge firms need to have an integrated view of collateral,” Deloitte’s amount of disputes.” Schneider says. “Buy-side firms ignored this for many years.” Another company, Algorithmics, also is working on Although some people claim that a central clearing party margin call automation. could solve the problems of collateral management — such as getting no response to a collateral call or the bankruptcy of a 7. More rigorous cleansing and verify- counterparty — the executives interviewed for this article do ing of operations data and faster deliv- not buy this argument. “Firms are going to need a way to ery of that data downstream for risk value contracts, communicate collateral needs to counterpar- management and regulatory purposes. ties and resolve any dispute,” says Omgeo’s Lind. “The use of “Five or 10 years ago we would have had a conversation e-mail in financial services is easy and convenient, but the about straight-through processing,” says Deloitte’s dark side is that we don’t know what people are saying.” Schneider. “But after you achieve straight-through process- Twelve large buy- and sell-side firms have been working ing, bad data causes stuff to fall out on the floor. We’re see- with AcadiaSoft to create a messaging hub that all firms could ing a rise in focus on data management that starts with gov- use to send margin calls to one another. This represents a big ernance, operations and procedures.” This trend should be step up from the current method of sending e-mails to coun- good news for Wall Street data management vendors such as terparties that can be ignored or overlooked. Two firms were GoldenSource and Asset Control. expected to go live on the system by the end of 2009. While many firms rely on centralized data that’s distrib- “What firms learned last fall was that they had no idea uted to different groups, “In the current environment people what the to-the-minute status of their margin calls were,” have different demands for data and the degree to which it’s says Craig Welch, president of AcadiaSoft. “They’d send cleansed, its timeliness, and the ability to audit and back-test margin calls out over e-mail, and they wouldn’t know at any data,” says Citisoft’s Keeler. “There’s a trend toward getting given time what the responses were. Say they sent out 1,000 data closer to internal customers in a timely manner, in a margin calls — if they were lucky, they’d get 1,000 e-mails more customized way.” While Keeler concedes that there’s back from their counterparties. trepidation toward “ivory tower data management strategy “As you can imagine, some counterparties respond projects,” he insists that firms are taking more-tactical quickly, some respond late, some try to game the system and approaches to enterprise data management. respond late at night after the collateral can actually be The ability to confirm trades quickly and detect excep- moved. What they’re trying to do is provide transparency to tions early in the process will be important to the back office of the future, contends Omgeo’s Lind. “Customers’ tolerance for an aged exception is zero,” he says. “People want to know where their “Everybody is positions are immediately [and] get them con- under that same firmed. They want to know who the counterparty was to the trade. They want binding evidence of pressure: How the trade. Traders, portfolio managers and risk do you handle managers don’t want to assume anything is in until they get confirmation.” more clients and About 70 percent of equity trades executed in communicate the U.S. haven’t confirmed the details of the trade by the end of the day, according to Lind. But every with customers analysis of performance or risk that’s conducted more without with missing trade information is flawed, he notes. hiring. ... The 8. The development of sophisti- only way to do cated, precise error- and fraud- detection software. that is to look at “You want to be sure that on whatever open trades technology.” or open positions you have, there’s no fraud, or at —Jami Wysota, Diversified least no human error,” New York University’s Investment Advisors Pinedo says. “People are going to work more on 32 January/February 2010 wallstreetandtech.com
  • 32. Futures Exchange ELX Blends Hosted and that in the future.” Software that match- Homegrown Ops Platforms es data gathered in different divisions E against each other as well as against major LX FUTURES, a U.S. would have taken us a lot of time counterparties’ positions will be a focus Treasuries futures to build something that would of internal operations software develop- exchange in New York, work all the time with all the ment projects, Pinedo suggests. “If you had a technology head functionality we need.” do a lot of trades with counterparties, the start when it launched last July. Many exchanges and exchange daily checking of aggregate numbers is For its main technology platform participants, especially in the healthy for both parties.” the exchange relies on eSpeed, futures space, are using hosted Software that checks a firm’s trade the U.S. Treasury trading platform clearing software and services, data against more generic outside sources that brokerage firm BGC Partners according to Noviello. “New and industry data also will be in demand, — one of ELX’s investors — devel- entrants don’t always need the according to Pinedo, who notes that oped for itself. largest machine, but they also do these solutions can be purchased from But, “Although we have lots of not want to build something on a vendors or built in-house. technology that was leveraged for small environment that doesn’t the trading platform, there are cer- scale,” he explains. “In hosted 9. The need to prepare to tain nuances about the way invoic- environments those things become die gracefully. es and fees are handled in the very easy. You shift the manage- In the wake of the slow and expensive futures community that weren’t ment of those capacity issues to shutdowns of Lehman and AIG Financial among our existing technologies,” somebody else. It’s easy to sit back Products, some institutions have been relates Joseph Noviello, EVP of and have a provider keep up with asked by U.S. regulators to put in place BGC Partners and technology the latest patches, the latest virus “living wills,” or resolution plans for architect at ELX Futures. “I thought protection components, the shutting down in an orderly way. (You it made sense to look for existing planning for capacity growth.” could say it’s the opposite of a business solutions for the necessary fee But rivacy and security continuity plan.) This is much easier said modules. It wasn’t necessary for concerns around SaaS still linger than done, most observers agree. us to worry about all aspects of on Wall Street, Noviello acknowl- “These firms’ operations departments the back-office components when edges. “Anyone who’s dealing have to be able to do a graceful shutdown we had an entire exchange to put with sensitive information will be of the institution, and for a large organi- together. We had enough on our concerned about having their zation that’s an extraordinarily hard task,” plate already.” information hosted and managed Deloitte’s Schneider observes. “The One software-as-a-service by someone else in some other issues are complicated. Most systems solution that Noviello harnessed location,” he notes. “That’s always aren’t designed to self-fail.” for the new exchange is a billing a hurdle to get over. But as firms What happens to deposits and cus- platform from Firm58. Another is get more comfortable with the tomers in one jurisdiction? What do you a notification facility from Send controls in place to satisfy them do with inter-company activity? How do Word Now. “This allows us to send that their information is not sub- you settle trading? “Those are all things broad communications out to our ject to manipulation, and as regu- that matter greatly to technology and user base and groups of targeted lators approve these initiatives, operations types,” who will bear the users,” Noviello says. “This was people will become less sensitive brunt of unwinding the business, not expensive to leverage, and it [to security concerns].” —P.C. Schneider says. “We’re seeing significant energy and focus in this area.” For changes that are reporting-oriented, firms can 10. The introduction of a host of new respond with data management improvements, Schneider regulations and requirements. notes (see Trend 7). Wall Street firms’ ability to prove to reg- “There is a series of regulatory actions already under way and ulators that they are getting the right reference, pricing and being contemplated that are big deals,” Schneider relates. risk data, and using it properly, is bound to come up in the “We’re seeing the emergence of a new regulatory structure in new financial reform rules. Firms surely will be required to the U.S. We’re seeing a change in the tenor of the regulators calculate their exposure to a particular asset or counterparty from ‘Too big to fail’ to ‘What do we do if they fail?’ ” on a dime, observers agree. ✧ w w w. w a l l s t r e e t a n d t e c h . c o m January/February 2010 33
  • 33. Evaluating Outsourcing Options I N TODAY’S complex and competitive business Not All Solutions Are Created Equal environment investment advisers have more to bal- But not all outsourced solutions are created equal. There are ance than ever before. One of the tools that can some important questions to consider when evaluating out- help them find the balance between downward sourcing providers and their solutions. pressure on fees and ever-growing client expecta- 1. What should a firm expect to gain by outsourcing? tions is outsourcing portfolio management systems Through outsourcing, firms should expect to reduce their and associated operational functions. Outsourced technology overall operating risks and costs as well as increase their abil- solutions have advanced to the point that they are capturing ity to focus on managing investments and servicing cus- renewed attention from investment firms, particularly as tomers. These objectives can only be fully realized if the out- firms seek to control risks and costs. sourcing solution meets three key criteria: It must produce a Outsourcing, particularly of portfolio management sys- real reduction in the amount of time the firm spends on tems, has come of age in the investment world. Until fairly managing systems and data; it must reduce a firm’s systems, recently, outsourced portfolio management systems were data and staffing risks; and it must be able to perform the considered lacking in robustness, flexibility and accuracy, delegated functions more accurately and cost-effectively suited only to small firms with lean operations and modest than the firm could itself. requirements. Today, however, the underlying technology 2. What exactly is the provider providing? Firms need and capabilities of outsourced portfolio management systems to understand the details of the services being delivered by have caught up with the original promise. The most advanced the outsourcing provider to be sure they will meet the key cri- outsourced portfolio management solutions offer functional- teria outlined above. Many firms see just the tip of the iceberg when they evaluate a provider’s service. In fact, what takes About the Author place below the surface — not just what is delivered, but the Michael Lobosco, Director of Advent technical and operational details of how it is delivered — is OnDemand, Advent Software the real determinant of the provider’s value and ability to Michael Lobosco currently is director of meet a firm’s needs and expectations. Advent OnDemand at Advent Software. He has 3. Does the provider have critical mass and a proven held numerous roles at Advent within the firm’s professional services, sales, marketing and track record? A key measure of the value of a solution is the business development teams. Prior to strength of the company behind it. Although there are many joining Advent, Lobosco held director-level roles at several venture-backed portfolio factors that influence a firm’s decision to outsource, one management outsourcing companies. constant is the goal of reducing financial, staffing and oper- ating risks. In order to truly reduce risk and add value, a ity that is comparable to their installed counterparts. provider needs to be able to demonstrate strength in the That is one reason why many firms are taking a new and form of a long tenure in the industry, proven and consistent serious look at outsourcing their core systems and back- success, deep financial and staffing resources, and strategic office processes. For firms that are more focused on “high industry relationships. touch” than “high tech,” delegating these duties to third- 4. Is the provider’s solution specialized or compre- party experts enables investment managers to devote more hensive? Within the vast arena of outsourcing, most attention to serving clients and managing assets. And it providers are likely to be specialists in particular areas, such delivers the advantages of current technology while mini- as IT services, application software, custodial or market data mizing the investment in hardware, implementation, main- aggregation, or operational best practices. Only a few com- tenance and IT expertise. prehensive solution providers can demonstrate proven com- 34 January/February 2010 wallstreetandtech.com
  • 34. Outsourcing Portfolio Management Systems petency across the board. For firms that are serious about shifting the focus back to clients and investment decisions, anything less than a comprehensive solution may actually work against your goals, requiring more attention and 9 Questions to Ask When Evaluating Outsourcing Partners 1. What should the firm expect to gain by outsourcing? increasing your risk. 2. What exactly is the provider providing? 5. What is “best practices” expertise, and does the 3. Does the provider have critical mass and a proven provider deliver it? Managing investment operations is a track record? complex responsibility with many detailed nuances. 4. Is the provider’s solution specialized or comprehensive? Developing best practices expertise around managing those 5. What is “best practices” expertise, and does the complexities and details only comes through years of experi- provider deliver it? ence. For a provider to deliver the highest level of value to its 6. Are the necessary quality controls in place? 7. Does the provider control the resources, or is it just customers it must not only perform the delegated functions another middleman? but know how to manage through those complexities and 8. Does the solution offer you flexibility for the future? events that you haven’t even thought of. 9. Does the provider have the resources to invest in 6. Are the necessary quality controls in place? product and service enhancements? Portfolio management systems and the data they provide are the backbone of most investment advisory firms. Advisers need to have a high degree of confidence in the services an long-term commitment. To make sure it works in your outsourcing provider performs on their behalf and the favor, it is important to know that the provider can ensure portfolio information they make available. If they do not, the sufficient implementation and service-level flexibility to provider becomes a distraction and another layer of risk keep pace with your evolving needs. rather than a means of allowing the firm to focus on 9. Does the provider have the resources (and the growing assets under management and serving clients. commitment) to invest in continual product and service The provider should be able to demonstrate best practice enhancements? Does the solution have the flexibility to quality controls covering adjust to changing service every aspect of the solu- requirements and industry tion, including applications, Outsourcing back-office trends? Is there a clear account aggregation, daily reconciliation, performance functions to third-party experts implementation migration path to increasingly measurement, data migra- enables investment managers to advanced versions of the tions and customer service. 7. Does the provider devote more attention to serving system — or even to a fully installed, onsite system, control the resources, or is clients and managing assets. should that become appro- it just another middleman? priate? Be wary of compa- In today’s world of virtual nies that talk only about resources it can sometimes be difficult to know exactly who their outsourcing solutions and avoid the subject of future is performing the functions being outsourced and where migration. The right solution will meet your needs now those resources are located. In order for a provider to deliv- without boxing you in as your needs change. er reliable and high-quality services, it must control the There will always be firms for which installing a portfo- resources supporting the outsourced functions. It is impor- lio management system in-house makes the most sense based tant to know that a provider is not adding risk by further out- on their business requirements. For a growing number of sourcing part or all of the delegated functions to another firms, however, outsourcing is an increasingly viable alterna- third party. This concept applies not only to people but also tive, regardless of the economic climate. to technology and data. Today’s best outsourced systems are capable of meeting 8. Does the solution offer you flexibility for the highly customized requirements and are backed by deep future? As we have seen in recent years, the markets, the expertise in investment operations and processes. Still, there industry and the practices of advisory firms are highly remains a wide gulf of differences in capabilities among out- dynamic. As a result, business and technical requirements sourcing providers. It’s important to know precisely what are constantly evolving. Choosing a portfolio management you’re getting — and the company from which you’re getting system and outsourcing provider is a big decision and a it — before signing on the dotted line. ✧ wallstreetandtech.com January/February 2010 35
  • 35. Our Subscribers Are Your Customers. Reach Out To Them Today. Direct. Advanced Trading: Trading/Exchanges, Trading Infrastructure/Technology, OMS/EMS, Algorithmic Trading, Data Latency, Block Trading, ATS/ECN/Dark Pool, Transaction Cost Analysis (TCA), Derivatives, Market Data, Trading Regulations/Compliance, Cross Asset Trading. Capital Markets: Asset Management, Compliance, Data Latency, Data Management, Data Security, IT Infrastructure, Operations, Risk Management, Wealth Management. : Corporate Management, Business Mgmt and IT Mgmt. Trading/Order Mgmt, Asset Mgmt, Risk Mgmt, Data Mgmt, Compliance, Security. For additional information, please contact Anthony Carraturo at 914.368.1083 or simply email acarraturo@meritdirect.com. For other UBM mailing lists please visit www.ubm.meritdirect.com.
  • 36. Data Management The Middle Office & Data Management T HE RECOVERY IS under way. Banks are strengthening their balance sheets and A lack of transparency and returning to profit. With this encouraging timely data contributed to news, firms have a prime opportunity to restructure technology and strengthen the economic downturn. internal data management capabilities. These improvements will provide banks with the agility with data that is not always completely reliable. Using that required to meet future business strategies and ongoing rapid incorrect or incomplete data is never going to result in analy- changes in market conditions. But without the ability to man- sis that is accurate enough for solid business decisions. For age quality of data with a consistent approach, how can these example, a global organization might have data from Asia- improvements be achieved? Pacific (APAC) but not from Europe or North America During 2008 and 2009 firms and banks witnessed how a because of the time of day; that data will need to be updated lack of transparency and timely data flow throughout an when available and the correct data moved throughout the organization contributed to the economic downturn. The workflow. That change could impact the analysis. events of Sept. 15, 2008 (when Lehman filed for bankruptcy), among others, show that firms need to be able to monitor, An Accurate Workflow assess and react across business lines within the day — and Decisions made throughout the day often are based on inac- they need the correct data to do this. curate data. Firms must put in place a process that enables Maintaining data in silos and duplicating that data across data accuracy throughout the workflow. As data is created, front-, middle- and back-office systems independently has it should be validated and moved with any corrections made limited firms’ ability to maintain an accurate view on their in near real time. positions. They are without the real-time data required to A real-time data flow minimizes the amount of corrections make tough decisions on when to increase or pull funding to needed over an extended period of time with a more consis- a business line. But where does this problem start? tent view of data over the front, middle and back office. The Currently, the middle office accepts data sent from the middle office must be responsible for this process, as often it’s front-office system and external data feeds as being accurate the source of records for auditing or regulatory reporting. and complete. But this isn’t always true. To perform intraday The middle office has a unique position within the firm analytics, the middle office builds a new aggregation platform to provide an environment of record that oversees data quality, metadata and standard analytics across businesses and geographies. The net result would be a simplified data About the Author processing environment with a clear and defined view of Stuart Grant, Financial Services data, which provides much stronger capabilities to the busi- Business Development ness for analysis, faster time to market, and improved and Manager, Sybase consistent understanding of a firm’s position, from the desk Stuart Grant has more than 10 years of experience providing market data and data level to the C level. feed solutions to buy-side and sell-side Firms have a unique opportunity to take a step back and organizations. Having recently joined Sybase from Thomson Reuters, he is focused on look again at how important data management is to support business development within financial services, their business agility, but also to ensure we never end up in an with a key focus on enabling firms to create a holistic data management platform. economic situation similar to 2008/2009. Firms must use accurate data to stay protected. ✧ wallstreetandtech.com January/February 2010 37
  • 37. Larry Tabb, Special Contributing Editor He With the Most Toys W HETHER APPROPRIATE or not, money Representatives recently is how we keep score. The bigger house, the passed its version of cooler car, the more luxurious jet, the most zeros financial reform, in on your paycheck — all of these things have been which compensation critical to attracting the best and the brightest to our industry. was a critical pillar. The Is this right? Is it fair? Are capital markets professionals real- House bill would require financial institution compensation ly the best and the brightest? Who knows ... schemes to be approved by a nonbinding shareholder vote Larry Tabb is founder and CEO of New York-based TABB Group, a financial markets strategic advisory firm. ltabb@tabbgroup.com Nonetheless, industry professionals have commanded high (today it is approved by a vote of the board) and would require salaries, and firms have been able to afford them. Compensation incentive-based pay structures to be reported to financial insti- in this age of the credit crisis, bailouts, takeovers, take-unders tutions’ regulators, which would be responsible for ensuring and general mayhem, however, has become our industry’s third that these structures are aligned with sound risk management rail. Goldman CEO Lloyd Blankfein was likened to DeNiro in strategies and that they do not create incentives to take undue “Goodfellas,” asking his employees to keep a low profile. risk that could threaten the safety and soundness of both finan- Employees at AIG were asked to give back their bonuses after cial institutions and the economy. signing retention agreements. And in general the citizenry has not understood why industry compensation levels have been so Chilling Development high given the level of taxpayer support. While these requirements sound legitimate, just the thought Post-credit crisis, Wall Street compensation models are in that regulators — and by proxy, legislators — might have a say flux as five forces vie to catalyze change: the pay czar, the on pay will send shivers down the backs of financial services banker tax, pending legislation, shareholder lawsuits and a executives everywhere. Will the bill ultimately be passed intact? popular revolt. Each has the potential for varying impact. Who knows? But given the optics of this year’s bonus projec- tions, it may well become law. While shareholders should have the most impact on pay, Sheep get sheared, pigs get fat many times shareholders vote with their pocketbooks and sell and hogs get slaughtered. when things get rough. Unfortunately, the people with the greatest vested interest (the owners) sometimes have the least power. Conversely, many times it’s the squeaky wheel that gets While Kenneth Feinberg has the most prestigious moniker the oil. In this case, the squeaky wheel will be the litigious. (pay czar), now that the major banks have repaid their TARP We’ve already seen at least one lawsuit in which a pension liabilities, he has the least power. The 50 percent tax on fund is suing a major broker because the fund believes the bro- U.K./French banker bonuses over 25,000 pounds (approxi- ker’s pay program was “unconscionable.” While this suit may mately US$40,000) has the most immediate bite, as firms not win, if a similar one does pass muster, there could be a cas- already have announced that they will fund personnel moves to cade of suits that force the industry to change — think asbestos avoid this tax. If the banker tax truly is a one-time tax, howev- or tobacco. The impact could be huge. er, the long-term impact will be minimal. But taxes don’t tend What happens in Congress, London, Brussels and the to be transient, and if the banker tax is kept on the books, the courts on compensation will have a major impact not just on impact would be serious on an already devastated U.K. and our industry but on the global economy. At the core of the European economy. Not only would the bankers move to avoid controversy is optics — if our industry’s management cannot the tax, so would the banks — and their payrolls, which fund a get the optics right, legislators very easily could shift the bal- cascading set of other businesses, such as real estate, the auto- ance of financial power (intentionally or unintentionally) motive industry, restaurants and bars, luxury goods and so on. among firms, nations and geographies. As the saying goes, While popular revolt may have the least teeth, populism and sheep get sheared, pigs get fat and hogs get slaughtered. Let’s political votes go hand in hand. The U.S. House of hope we aren’t the hogs. ✧ 38 January/February 2010 wallstreetandtech.com
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