December 2009

Business Innovation Powered By Technology

 
 
 


   
   
    

    

 
!
Wall Street & Technology
Cover Story: Capital Markets Outlook 2010
16 Software as a Service Still
looking to control costs and maximize
Even as many financial firms realized near-record profits in 2009, productivity, more and more Wall Street
the economy continued to limp along, job losses mounted and firms will consider renting software
banks failed in increasing numbers. So what will 2010 have in store applications rather than buying them.

for Wall Street CIOs? Wall Street & Technology examines the top 10 17 Cloud Computing Nearly half of
trends that will shape the capital markets in the coming year. p.15 Wall Street IT executives surveyed by
SIFMA identified cloud computing as
the No. 1 disruptive technology.

18 High-Frequency Trading
Responding to charges of unfair access,
regulators will closely scrutinize high-
frequency trading, which drives as much
as two-thirds of equities executions.

19 Dark Pools In the push for trans-

parency, the SEC likely will enact rules to
shed light on dark pools, changing the
way the anonymous venues operate.

20 Hedge Fund Automation

To meet investors’ demands for more
transparency while complying with
regulators’ calls for real-time reporting,
hedge funds are automating processes.

21 Risk Modeling With no guarantee

of future bailouts, and with regulators
turning up oversight, financial firms
must improve their risk management
models, processes and technology.

22 Business Intelligence Areas

such as portfolio and risk management
can benefit from the insight provided by
business intelligence tools. But it starts
on a foundation of data management.

Wall Street & Technology’s 2009 Reader Advisory Board
John A. Bottega, Chief Data Officer,
Federal Reserve Bank of New York
Joseph Ferra, Chief Wireless Officer,
Fidelity Investments
John Galante, SVP & CTO,
J.P. Morgan Worldwide Securities Services
Joe Gawronski, President,
Rosenblatt Securities
Scott Ignall, CTO,
Lightspeed Trading
Robert Palatnick, Managing Director/
Technology, DTCC
Steve Rapp, SVP & CIO,
AGI Management Partners
Steve Rubinow, EVP & co-CIO,
NYSE Euronext
Prashant Sarode, VP, Corporate &
Investment Banking Technology, Wachovia
Derek Stein, Chief Technology Officer,
Barclays Global Investors
Tim Theriault, President, Corporate &
Institutional Services, Northern Trust
Timothy M. Tully Jr., SVP & COO,
BNY Mellon Wealth Management
23 OTC Derivatives Clearing
Congress is working on OTC deriva-
tives reform to rein in systemic risk. But
there still is no consensus on exactly
how central clearing would work.
24 Regulatory Reporting With a
wave of new regulations in the works,
firms must establish an effective data
management and reporting infrastruc-
ture in order to avoid costly penalties.
25 Social Networking Companies
in every industry are embracing social
networking to improve communication
among employees and clients. But will
there be a return on the investment?

2 December 2009 wallstreetandtech.com

Wall Street &Technology
Sections Online
26 Special Report
Technology Innovation
CME Group leveraged a pioneering role
in electronic trading and cutting-edge
technology to transform the 111-year-old
Chicago Mercantile Exchange into the
world’s largest derivatives exchange.
For its efforts the firm has earned the
top spot in the InformationWeek 500,
WS&T sibling brand InformationWeek’s
annual ranking of the most innovative
business technology organizations.
11 Close-Up
Paul Wilmott,
7city Learning
Financial risk modelers
don’t care if their
models work and risk
management at capital 11
markets firms is no better today than
it was before the financial crisis, says
Paul Wilmott, researcher, consultant and
lecturer in quantitative finance.
13 Technology Economics
Understanding the economics of financial
services technology and determining the
actual value of technology investments
requires balancing quantitative and
qualitative analysis, asserts Contributing
Editor Howard Rubin, founder of research
and advisory firm Rubin Worldwide.
28 Industry Voice
Though cost basis reporting requirements
have gone largely unnoticed by brokerages
and mutual funds amid the financial crisis,
the legislation will alter the relationship
between client and firm, and Wall Street
has little time left to prepare for compli-
ance, notes Scivantage’s Cameron Routh.
31 Perspectives
According to Special Contributing Editor
Larry Tabb, prognosticating about 2010
is much like shaking a Magic 8-Ball:
“Reply hazy, try again.” Nonetheless, “all
signs point to yes” that a few trends will
dominate Wall Street in 2010.
From the Editor 5
Upfront 6
Product Watch 30
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Financial Services in 2010:
Top Business and Technology Trends
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Driving Innovation in Tough Times
Managing IT during a bull market is relatively easy. Managing
a technology organization through the worst financial crisis in
a generation is a different story. Wall Street & Technology’s
2009 Gold Book recognizes seven IT leaders who have driven
exceptional technology innovation during the past year — while
simultaneously reducing costs and navigating the toughest
financial market in history. The honorees are Rob Goldstein,
BlackRock; Steve Rubinow, NYSE Euronext; Joseph Squeri,
Goldman Sachs; Steve Rapp, AGI Management Partners; David Reilly, Morgan Stanley;
Joseph Ferra, Fidelity Investments; and Richard Hagan, TradeKing.
wallstreetandtech.com/gold-book-2009
Goldman’s Blankfein
‘Doing God’s Work’
In an attempt to heal its image, Goldman Sachs has been giving
newspaper writers access to its top executives. But as WS&T
Executive Editor Penny Crosman notes in a recent blog post, these
executives are neither charming nor in touch with reality. The most
alarming sound bite may have come from Goldman chairman and CEO Lloyd Blankfein,
who reportedly told The Times of London that he’s just a banker “doing God’s work.”
wallstreetandtech.com/blog/blankfein
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while growing the value of assets under management.
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 Volume 27, No. 8
VP/GROUP PUBLISHER
John Ecke 212.600.3097 jecke@techweb.com
EDITORIAL
Editor-in-Chief Greg MacSweeney gmacsweeney@techweb.com

Best Guess 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

D
Assistant Managing Editor Thea Hetzner thetzner@techweb.com
ESPITE THE RETURN to near-record profitability at many Contributing Editor Howard A. Rubin howardarubin@gmail.com
financial services firms, most executives would probably prefer to ART
Art Director Jim Lawyer
put 2009 behind them and start fresh in 2010. After all, isn’t that Associate Art Director Kristen Terrana
Designers Amelia Fabian and Igor Jovicic
what the New Year is all about — turning the page on the prior year BigYellowTaxi.com
and looking forward to something better? ADVERTISING SALES OFFICE
11 WEST 19TH ST., 3RD FLOOR
The problem is that the economy is sending mixed signals. In NEW YORK, NY 10011
Strategic Accounts Felissa Kaplan 212.600.3171 fkaplan@techweb.com
2009 we knew what to expect — job losses, a painfully weak economy and more bank Midwest/International Brian Keenan 516.562.5145 bkeenan@techweb.com
West Sue Ellen Wohlers 415.947.6146 sewohlers@techweb.com
failures. As the industry looks to 2010, however, record banking profits are likely to be Northeast Robyn Forma 212.600.3118 rforma@techweb.com
accompanied by job losses, a painfully weak economy and more bank failures. PRODUCTION
Account Coordinator Production Manager
So how do CIOs finalize 2010 strategic IT plans when some economists are predict- Amanda Waller awaller@ubm-us.com John Polihronakis polihronakis@ubm-us.com

ing a return to growth and other experts warn that a jobless recovery and sluggish busi- AUDIENCE DEVELOPMENT
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ness spending will postpone a serious rebound until 2011? I certainly don’t know what to For article reprints and e-prints, please contact:

expect — except that most 2010 budgets will be based on less-than-certain assumptions. Wright’s Reprints
Brian Kolb 877.652.5295 UBMreprints@wrightsreprints.com
While the editors at Wall Street & Technology List Rental
MeritDirect 914.368.1083 Anthony Carraturo acarraturo@meritdirect.com
aren’t brave (or foolish) enough to try to predict
FINANCIAL TECHNOLOGY NETWORK
which way the economy will move next year, we are TechWeb CEO Tony L. Uphoff tuphoff@techweb.com
VP/Group Publisher Vice President, Group Sales
confident (perhaps foolishly) enough in our tech- John Ecke jecke@techweb.com Martha Schwartz
mschwartz@techweb.com
Webmaster
nology predictions to publish our 2010 Capital Vitali Zhulkovsky vzhulkovsky@techweb.com Director of Marketing
Sherbrooke Balser sbalser@techweb.com
Markets Outlook. This year’s Outlook highlights Group Content Manager
Les Kovach lkovach@techweb.com Director, Program Management,
Vertical Markets
10 topics that will demand the attention of CIOs next Event Director
Jennifer Iannucci jiannucci@techweb.com
Michelle Somers msomers@techweb.com
Associate Business Manager
year. There are four topics for 2010 — risk manage- Event Manager Joe Donnelly jdonnelly@techweb.com
Mitzi Trafton mtrafton@techweb.com
ment, regulation, credit derivatives clearing and
TechWeb – The Global Leader in Business Technology Media
social networking — that we also deemed priorities CEO Tony L. Uphoff
for 2009. Two topics — risk management and OTC Chief Content Officer and
Editor-in-Chief, TechWeb.com
VP, Audience Marketing
Scott Vaughan
David Berlind
derivatives — also made our list in 2008. In fact risk Chief Information Officer
VP/Group Publisher, Vertical Industries
John Ecke
David Michael
management has been one of the priorities we have VP, Group Sales, InformationWeek
Chief Financial Officer Business Technology Network
highlighted since 2005, though most agree that a lot John Dennehy Martha Schwartz
SVP and Content Director VP, Human Resources
of work still needs to be done (see: credit crisis). Bob Evans Beth Rivera
SVP, Light Reading Executive Editor, InformationWeek
One of the largest unknowns heading into 2010 Communications Group Business Technology Network, &
Joseph Braue Executive Producer, TechWeb TV
is what will happen with regulatory reform. Six of SVP, InformationWeek
Fritz Nelson
Business Technology Network
the 2010 Outlook’s 10 topics — high-frequency John Siefert
United Business Media LLC
trading, dark pools, hedge fund automation, risk modeling, OTC derivatives clearing
SVP, Strategic Development and SVP, Manufacturing
and regulatory reporting — are waiting for some sort of regulatory clarification. Until Business Administration
Pat Nohilly
Marie Myers

the final regulations take shape, firms will operate with a wait-and-see approach.
Even when the regulations are finalized, however, 2010 budgets and planning still
will depend on a stable global financial market. I’m not sure if the bull market will con-
tinue through 2010 or if the recovery will continue to be jobless. But I would be will-
ing to bet that at this time next year we’ll still be discussing how firms can improve risk
management procedures and technology. Place your bets, anyone?
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5 December 2009 wallstreetandtech.com

 Trends & Analysis
Gearing Up for Carbon Trading
A
LTHOUGH THE CLIMATE CHANGE bill that would
set the stage for a massive carbon credit trad-
ing market in the U.S. has yet to pass the
Senate (its backers hope to get it passed before
a U.N. climate summit in Copenhagen in December), the
possibility that it will pass has Wall Street firms participat-
ing in and studying existing programs, hiring experts, and
educating customers about the potential new market.
The latest bill, sponsored by Senators Barbara Boxer (D-
Calif.) and John Kerry (D-Mass.), seeks to cut carbon emis-
sions in the U.S. by 2020 from 2005 levels. It does not yet
specify how carbon credits would be allocated.
Nonetheless, at a mid-October debate among potential
market participants and energy market experts on carbon
emissions trading, it became clear that
many are preparing for a U.S. cap-and-
trade scheme. “Customers are allocat-
ing resources to understand carbon
credit trading and how to implement
it,” said Michael Cosgrove, managing
director/head of commodities and energy
brokerage, North America, at inter-
dealer broker GFI, which plans to
build out an electronic trading
platform to accommodate the
many players expected to partici-
pate in carbon emissions trading.
Steve Schleimer, director of energy
and environmental market regulation at
Barclays Capital, said customers have been asking
for information on the timing of carbon emissions
programs as well as on voluntary efforts. “In the last six
months, companies have been taking a pre-compliance view,”
he related. “They’re looking at what they can do now to
hedge their exposure.”
Added Elliott Piggott, managing director of Trayport, the
electronic trading technology vendor that sponsored the
debate, “There has been a steady stream of entrants from the
U.S. into the European markets to learn about carbon credit
trading. These firms are building up information and getting
themselves in position” for the new market.
Setting Limits
So what have firms learned from existing carbon trading
programs, such as the European Union’s Emission Trading
Scheme and the United States’ Regional Greenhouse Gas
6 December 2009 wallstreetandtech.com
Initiative (RGGI)? According to Barclays’ Schleimer, the RGGI
shows a need to set realistic and effective emissions-reduc-
tion goals. “RGGI was a good stab at cap-and-trade, but one
problem is [that] they set their caps in 2003,” he noted.
“Since then there’s been significant reduction in emissions,
and because of economic factors, many of the power genera-
tors have switched to natural gas,” which emits less carbon
than coal-fired plants. Consequently the power companies
aren’t approaching the cap of 140 million tons a year.
The European Union scheme initially also provided for too-
liberal allowances for carbon emissions, noted Praveen Kumar,
faculty fellow at the University of Houston. A key
to success in the proposed U.S. program, he
stressed, will be “having the political spine
to set the right origin point.”
Veronique Bugnion, managing director
of trading analytics and research at Point
Carbon, pointed out that carbon emission
caps won’t significantly affect U.S. polluters
until at least 2014, giving the markets time
to develop. “In 2012 [when the proposed
U.S. cap-and-trade rules would take effect]
we see a market that’s not hard to comply
with,” she said. “In Europe it took all of
Phase One for people to learn how to trade.
Those that need offsets [e.g., power companies] will
[need to] know how to trade; those that receive
credits they don’t need will need help
learning how to trade. In 2014 the
caps will start biting, and prices for
carbon credits will go up.”
Bugnion did point to a signifi-
cant contribution pioneered by the
RGGI: the use of auctions for selling
carbon emissions. According to Bugnion,
the auction model is now a successful option in several
emissions-reduction programs.
But not every aspect of existing programs has been as
successful. One problem evident in the European system is
Illustration by Amelia Fabian
that approval of offset programs takes too long and too
many ideas have been rejected, suggested Trayport’s Piggott.
According to Keiron Allen, marketing and communications
director for European carbon credit exchange BlueNext, it’s
not clear what offset initiatives will count under the cap-and-
trade program in the U.S. “There’s debate around this,” he
said. “It’s a bit fuzzy.” ✧ —Penny Crosman
 Trends & Analysis

Lonely Forex Traders Get Company

C
URRENSEE CEO Dave
Lemont describes his new
forex social trading site,
which emerged from beta
mode into live status in late October,
as Facebook meets Quicken in foreign
exchange. The site, currensee.com,
provides social trading tools, trading
through online brokerages and aggre-
gated information about forex markets.
Currensee is not for voyeurs or pre-
tend investors, Lemont stresses, noting
that the site is restricted to people who
have an active foreign exchange trading
account and who link that account to the
Currensee site. Then users can “friend”
other users Facebook-style and let them
see their trades and comments, as well
as view their friends’ trading activity
and ideas. Users are encouraged to give
their actual names to keep it real.
According to Lemont, more than 40
forex brokers already have relationships
with Currensee, and the site is eager to
add more. “Brokerages are not builders
of social networks,” he says. “We’ll
never be a broker, but a deci-
sion-making tool.”
Why are Currensee users
— about 1,000 people joined
the site by invitation during
its beta mode — willing to
share their live trade data?
“In foreign exchange the mar-
ket is so gigantic — $3.2 tril-
lion worth of trading takes
place a day — that two
traders sharing their strate-
gies won’t move the euro,” Thanks to Currensee’s new social network for foreign
Lemont notes. Collaborators, exchange traders, “Trading alone is a thing of the
he adds, share ideas through past,” according to a video posted on YouTube.
live chats and messages.
Currensee aggregates the trades of makes money by setting up FX accounts
its users to create graphs illustrating for visitors who don’t already have one
overall market trends, such as the and receiving an introducing broker fee
percentage of traders who are long vs. when those customers execute trades.
short in the U.S. dollar and historical But Lemont expects the site to grow
volatility indicators. It also provides along with the boom in the forex mar-
news from Thomson Reuters, economic kets. “Foreign exchange is recession-
event information from Econoday and proof,” he contends. “If the economy
“social widgets” such as Bloomberg TV. goes down, there will always be a way
The site is free; so far, Currensee only to profit from currency pairs.” ✧ —P.C.

Wall Street’s Quants Feel Misunderstood

P
ITY THE MISUNDERSTOOD Wall Street
quant. More than four out of five quants feel their
supervisors have the same or less understanding of
the job of a quant than they did a year ago, accord-
ing to a survey of 400 quants and risk professionals released at
the beginning of November.
The survey asked respondents about the relationship
between quants and their managers. Results included the fol-
lowing findings:
• 64 percent of quants feel that their supervisors either do
not at all understand or only somewhat understand the job of
a quant.
• 86 percent of quants feel their supervisors’ level of
understanding of the job of a quant is the same or worse than
it was a year ago.
• 70 percent of quants feel that the level of understand-
ing of the role of quants within their institutions has decreased
or has not changed at all from a year ago.
The survey, which was conducted by London-based 7city
Learning, a global financial services training company,
sampled a random selection of alumni from 7city’s Certificate
in Quantitative Finance. Respondents work mainly for global
financial institutions in the areas of quantitative finance and
risk management.
Perceived failures by quants and risk managers have been
pointed to by many economists as one of the principal reasons
the global financial crisis escalated so precipitously. Dr. Paul
Wilmott, course director for the CQF, finds the survey results
to be especially troubling, not least because the start of the
global financial crisis took place 12 to 18 months ago.
“These numbers are alarming,” said Wilmott in a release
announcing the study’s findings. “They indicate that even with
the events of the past year, financial institutions are still not
taking the importance of financial education seriously, espe-
cially as it pertains to improving relationships and understand-
ing between quants and their managers.” ✧ —P.C.

7 December 2009 wallstreetandtech.com

 Trends & Analysis
NYSE Shines Light
On Dark Pools
D
ARK POOLS ARE becoming less dark. NYSE
Euronext has begun to enable broker-dealers to
report dark pool trades to a central Trade
Reporting Facility that will post the venues’ daily
trading activity at NYSE.com.
Goldman Sachs Execution & Clearing, Barclays Capital,
Getco, Knight Equity Markets and UBS Investment Bank vol-
unteered to begin reporting their respective venues’ activity to
the facility beginning in November. According to NYSE
Euronext, other firms also have indicated an interest in the
exchange’s transparency initiative and are establishing the nec-
essary technology to begin participating in the program.
The initiative appears to be a response to regulators’ con-
cerns about dark pools. In an October speech, James A.
Brigagliano, co-acting director, Division of Trading and
Markets, at the SEC, said, “Although [dark pools] report their
trades in the public trade stream [through FINRA], the public
reports merely indicate that the trade was OTC and do not
identify the trading center that reported the trade.” This “makes
it difficult for the public to assess ATS trading and to identify the
ATSs that are most active in a particular stock,” he explained.
Noting that “In recent years dark pools have increased their
percentage of total U.S.-listed trading volume to approximately
8.5 percent,” Brigagliano added that one of the SEC’s three main
concerns about dark pools is “inadequate post-trade transparen-
cy, rendering it difficult for the public to assess dark pool trading
and to identify pools that are most active in particular stocks.”
He continued, “The Commission has long been an advo-
cate of post-trade transparency and has encouraged the mar-
kets to enhance the information made available to the public
regarding transactions effected on exchanges and in the OTC
market. As the Commission has stated in the past, transparen-
cy allows all market participants to assess overall supply and
demand. Transparency substantially counteracts the effects of
fragmentation that necessarily characterize a decentralized
market structure, without forcing all executions into one mar-
ket. In addition transparency can reduce the information gap
between investors with differing degrees of sophistication.
Broad public disclosure of market information is necessary to
assure the efficient pricing of securities, to maximize the
depth and liquidity of the securities markets, and to provide
investors with the opportunity to receive the best possible
execution of their orders.”
Meanwhile Brigagliano expressed concern that requiring
the alternative trading systems (ATSs) to disclose trades in a
8 December 2009 wallstreetandtech.com
way that identifies which dark pool did what would upset large
investors by providing too much information about the parties
to a transaction. But in an October press release, several dark
pool executives expressed support for the NYSE’s new dark
pool reporting facility.
Industry Support
“We’re looking forward to the launch of NYSE Euronext’s
ATS transparency initiative,” said Greg Tusar, head of elec-
tronic trading in the Americas at Goldman Sachs, which runs
the most active dark pool in the U.S. “By publishing trading
volume on its Web site, NYSE Euronext has spearheaded an
industry-driven solution which provides a public source for
evaluating broker-dealer ATS volumes.”
According to Frank Troise, head of equities electronic
product at Barclays Capital, “This initiative is an important
step toward the standardization of trade volume reporting
across ATS venues. Industry participants will be able to make
more informed order placement decisions and thereby
improve their execution quality.”
Jon Ross, head of Getco Execution Services, said, “We
need to maintain the right balance between vibrant public
price discovery and individual execution preference. This ini-
tiative is an important first step in collecting the data critical to
analyzing and preserving that balance.”
Charlie Susi, head of direct execution for the Americas at
UBS Investment Bank, added, “The way the industry has adver-
tised non-displayed volumes and crossing rates has been highly
Illustration by Amelia Fabian
inconsistent, which makes it very difficult for clients to get a
clear picture of liquidity. This initiative is something we’re
pleased to see, because it will establish better objectivity and clar-
ity. We encourage all of our peers to join us in participating.”
According to NYSE Euronext, the daily trading activity vol-
ume published by its central facility will be based on trade
reports that will be single-counted and matched only. ✧ —P.C.
 Trends & Analysis
Scottrade Slapped
With $600,000 Fine
F
INRA’s actions against Scottrade
provide a warning to all online
brokerages: If you don’t provide
automated surveillance of account
activity, you too may be punished.
FINRA fined Scottrade $600,000 at the
end of October for failing to establish and
implement an adequate anti-money launder-
ing program as required by the Bank Secrecy
Act and FINRA rules. FINRA requires bro-
kerage firms to establish and implement AML
policies, procedures and internal controls rea-
sonably designed to detect and cause the
reporting of any suspicious transactions that
could be related to possible violations of laws
or regulations — regardless of whether those
transactions are associated with suspicious
movement of funds into or out of accounts.
“Each firm’s AML program must be tai-
lored to its business model, including the tech-
nological environment in which the firm oper-
ates,” said Susan L. Merrill, FINRA EVP and
Illustration: iStock Photo
chief of enforcement, in a statement. “Despite
the large volume of online trading at Scottrade,
the firm failed to establish any systematic or
automated surveillance until 2005. Then, the
automated system the firm implemented
remained inadequate because it focused only
9 December 2009 wallstreetandtech.com
on suspicious trading that was accompanied by
suspicious money movement.”
Specifically FINRA found that between
April 2003 and April 2008, Scottrade failed
to establish and implement an adequate
AML program tailored to its business model,
which consists primarily of providing cus-
tomers with an online platform to trade secu-
rities. In 2003 Scottrade handled about
49,000 customer trades per day, and its vol-
ume grew to about 150,000 daily trades by
2007. According to FINRA, among the risks
inherent to Scottrade’s brokerage model and
substantial trading volume are an increased
risk of identity theft, account intrusions, and
the use of customer accounts to launder
money using securities or other financial
instruments or to violate securities laws.
FINRA has advised firms that their AML
programs should consider factors such as
their size, location, business activities, the
types of accounts they maintain and the types
of transactions in which their customers
engage. FINRA also has instructed online
firms such as Scottrade to consider conduct-
ing computerized surveillance of account
activity to detect suspicious transactions.
According to FINRA, from April 2003
through January 2005 Scottrade used a man-
ual system that relied almost exclusively on
internal personnel to monitor accounts for
suspicious money movement or securities
transactions and refer that activity to the
firm’s risk management department for fur-
ther review. FINRA found that the sheer
volume of online trading, along with
Scottrade’s reliance on inadequate internal
resources, rendered the lack of an automat-
ed system to detect suspicious activity unrea-
sonable. FINRA also found that Scottrade’s
AML procedures failed to provide adequate
written guidance to its employees as to how
to review transactions and failed to provide
adequate written guidance to its AML ana-
lysts for detecting and investigating suspi-
cious trading. ✧ —P.C.
FINRA to Look
At Facebook
W
ALL STREET regulator
FINRA is working to
become more profi-
cient at fighting fraud,
said FINRA CEO Rick Ketchum during
SIFMA’s annual meeting in October.
“We have enhanced our examination
programs, procedures and training ...
to help us better detect conduct that
could be indicative of fraud,” he said.
Efforts cited by Ketchum include
gathering more information prior to
each exam regarding a firm’s owner-
ship and affiliate relationships; identi-
fying indications of problematic behav-
ior concerning the opening of invest-
ment advisory accounts at a broker-
dealer; examining the relationship
between broker-dealers and feeder
funds or master funds that utilize feed-
er funds; and examining for material
misstatements in financial reporting,
unusual money movement, and appar-
ent red flags involving a firm’s auditor
and off-balance sheet items.
In addition FINRA established in
March an Office of the Whistleblower
to handle high-risk tips, and in October
created an Office of Fraud Detection
and Market Intelligence, which will
review incoming fraud allegations.
FINRA also is examining social net-
working tools, Ketchum said. “Social
networking sites such as Facebook or
LinkedIn provide new ways to connect,
inform and interact with customers,”
he said. “They also raise new regulato-
ry challenges. For example, ... they may
not allow you to archive and maintain
the communications.” FINRA formed a
Social Networking Task Force to look at
“how regulation can embrace techno-
logical advancements in ways that
improve the flow of information
between firms and their customers
without compromising investor protec-
tion,” Ketchum added. ✧ —P.C.
 Trends & Analysis

Regulators Blame Risk Woes on Poor

Data Integration
A
N INTERNATIONAL GROUP of regulators is
urging financial firms to improve their risk manage-
ment infrastructure. The Senior Supervisors Group,
which comprises senior financial supervisors from
seven countries (the U.S., Canada, France, Germany, Japan,
Switzerland and the U.K.), issued a report in October on the risk
management lessons to be learned from the 2008 banking crisis.
The report reviews the funding and liquidity issues that
caused the recent crisis and explores areas of risk management
practice in need of improvement across the financial services
industry. In a section on IT infrastructure, the group called
attention to the need for better data integration and for firms to
be able to boost processing capacity during times of stress. echoed this view, reporting that certain products and lines of
“Firms are constrained in their ability to effectively aggre- business have not been included in data aggregation and analy-
gate and monitor exposures across counterparties, businesses, sis processes. A third firm reported that having two systems for
risk strands and other dimensions because of ineffective infor- the same business results in duplication of processes.”
mation technology and supporting infrastructure,” the report On the issue of IT scalability, the report says, “Another criti-
states. “Many firms ... said they are making considerable invest- cal infrastructure concern during recent market events was the
ments in risk management infrastructure. Many projects, how- ability of firms to process record-high volumes of product trans-
ever, are in the planning stages or in the infancy of execution, actions during periods of market stress. Transactions in equities,
with significant work remaining. One challenge to improving foreign exchange, government securities and other instruments
risk management systems has been poor integration resulting spiked sharply during the market disruption, taxing some firms’
from multiple mergers and acquisitions. One firm suggested systems. Proactive firms are responding to this challenge by
that acquisitions over the years have produced an environment adding capacity to key system platforms to ensure that they can
in which static data are largely disaggregated. Another firm process volumes well in excess of previous peak levels.” ✧ —P.C.

OTC Derivatives Should Move On-Exchange

S
TANDARDIZED OTC deriv-
atives should trade on regulated
exchanges and clear centrally,
according to the CFA Institute.
The global association of investment
professionals cosigned a letter to
Congressional leaders containing recom-
mendations on the Over-the-Counter
Derivatives Markets Act of 2009.
The recommendations for derivatives
reform originated from the Investors’
Photo: iStock Photo
investors. The IWG issued a July 2009
report on the need to improve regulation
of OTC derivatives.
Although OTC derivatives are legiti-
mate vehicles for managing financial risk,
they spread throughout the economy,
causing great financial harm in the current
crisis, according to IWG, which pointed
out that the global OTC derivatives mar-
ket is enormous (US$592 trillion in
notional amount as of December 2008) yet
and price discovery, excessive leverage,
rampant speculation, and lack of adequate
prudential controls, the group concluded.
In addition to recommending on-
exchange trading and central clearing,
IWG said OTC derivatives trading should
be strictly limited and subject to robust
federal regulation. The SEC and the
CFTC should have primary regulatory
responsibility for derivatives trading, IWG
urged, adding that the U.S. should lead

Working Group, a panel of industry and
market experts created by the CFA
Institute and the Council of Institutional
Investors to study and report on financial
regulatory reform from the viewpoint of
was exempted from virtually all federal
oversight and regulation by the
Commodity Futures Modernization Act of
2000. Problems plaguing the OTC deriva-
tives market include lack of transparency
global efforts to strengthen and harmonize
derivatives regulation. ✧ —Ivy Schmerken
The IWG report can be downloaded at
tinyurl.com/iwg-report.

10 December 2009 wallstreetandtech.com

 Nothing Has
Changed
>>> According to Paul Wilmott, a researcher, con-
sultant and lecturer in quantitative finance, risk
management on Wall Street today is no better
than it was before the financial crisis. Founder and proprietor
of the quant magazine Wilmott and cofounder and course
director for the Certificate in Quantitative Finance at 7city
Learning, he says financial risk modelers don’t care whether
their models work. But it would be foolish to paraphrase
Wilmott, who has strong opinions about the Street’s risk man-
agement practices, a sharp wit and a way with words. So here’s
a lightly edited version of his exclusive interview with WS&T Paul Wilmott,
Executive Editor Penny Crosman, in which he discusses how Cofounder and Course Director,
Certificate in Quantitative Finance,
to fix the financial services industry’s risk problems. 7city Learning

WS&T: How are you?
Wilmott: Tired. I’ve got a crazy Dutch film crew following
me around; everything’s a bit manic, and I’m exhausted.
WS&T: Concerns about risk management have been grow-
ing on Wall Street post-crisis and pre-regulation. How might
Wall Street firms change the way they perform risk manage-
models care what happens? Of course they don’t.
WS&T: So there should be a direct link between the risk
modelers and ...
Wilmott: Prison, I agree. There are people who think we
should go after these people. There should certainly be more
lawsuits going around. Someone I know moved to a new bank

“People hide risk rather than hedge because that allows them to
trade bigger and bigger, and if they’re lucky they get a big bonus.”

ment? Are there new metrics, models or methods that will be
or should be considered? For instance, some say Value at Risk
is no longer relevant as a measurement of risk.
Wilmott: There are plenty of good models out there, it’s
just that nobody’s incented to use them. If you used the
wrong model to design airplanes, you’d kill passengers and
end up in prison. But do the people using financial risk
recently. He was doing a risk management procedure and the
traders came up to him to say, “You’re telling me the risk is too
big — can you just fudge the figures and make it smaller?”
Nothing has changed. I don’t know why anybody thinks it has.
That’s why no one with half a brain has ever liked VaR,
because it can be used to hide risk. I’ve been talking for years
about how people hide risk rather than hedge, because that

11 December 2009 wallstreetandtech.com

allows them to trade bigger and bigger, and if they’re lucky
they get a big bonus. If they’re not lucky, nothing happens to
them. The more sophisticated your tool, the greater potential
for pretending there’s no risk.
WS&T: Do you think Value at Risk should be thrown away?
Wilmott: No. VaR is fine for day-to-day activities. But
there are lots of other things people should be doing. For
example, worst-case scenarios. I don’t believe in trying to
refine the probability of crashes happening. People are sur-
prised that crashes are happening every few years that
according to theory are only supposed to happen once every
10,000 years. Who cares whether it’s once every few years,
once every six years or once every 7.3 years? What matters
is taking steps that will protect you when there’s a crash,
because there will be one.
Did you expect anything was going to change because of
the subprime crisis? People say that’s the end of everything —
quantitative analytics is dead, CDOs are dead. I say it will be
business as usual, and faster than you think. Nothing’s chang-
ing. People deserve everything they’re going to get in the
next crisis because they’re not complaining enough [now].
But there are really good models out there.
WS&T: Such as?
Wilmott: The trick is to not have models that are too sophisti-
cated. Don’t get too caught up in the details of the mathematics.
One of the main culprits in all this has been the master’s
in financial engineering courses. They’re sold by universities
to 22-year-olds who have no experience in life and banking.
Professors who never worked a day in their life in the real
world are teaching all of these poor, unsuspecting fools who
are paying $80,000 a year for the degree because they know
they can get a job in a bank and they’ll be making millions.
They’re happy to pay $80,000. I’m not happy because I know
the education they’re getting is substandard, to say the least.
It may be fantastically mathematical, but it’s got nothing to do
with finance in the real world.
So there are swarms of these people out there — many
tens of thousands of people have come out of these degree
programs and are put in charge of derivatives, valuation and
risk management, and they’ve never seen the real world. This
is where I plug the Certificate in Quantitative Finance. [Ed.
note: Visit cqf.com for more information.] CQF is the only
financial engineering course in the world that hasn’t had to
rewrite any lecture notes because of the recent crisis. We’ve
been warning about these things since we started in 2003.
WS&T: Have the graduates of your course performed better
than the average quant?
12 December 2009 wallstreetandtech.com
Wilmott: Sadly, we haven’t reached the critical mass where
my CQF alumni could save the planet. Had we started the
CQF five years earlier, then we would have saved the world.
But we haven’t. Maybe we’ll stop the next crisis.
WS&T: Do you focus on common-sense thinking in your courses?
Wilmott: Everything we do is real-world. Everything is
practical, based on data, common sense. When did common
sense disappear from the planet? We try to knock some com-
mon sense back into these people. We try to instill confidence
that they can do their own modeling and think for them-
selves. Another one of my pet peeves is how sheep-like peo-
“The more sophisticated your
tool, the greater potential for
pretending there’s no risk.”
ple who work in banks are. They copy each other so much.
We teach skeptical thinking — to question assumptions, to
figure out if the model is wrong.
WS&T: What about the data itself? One of the problems with
the subprime mortgage mess was that for many years prior,
housing prices hadn’t dropped and U.S. homeowners had a
history of paying their mortgages and being unwilling to
foreclose. So if someone was analyzing the past four years of
historical data, they wouldn’t have any indicator of trouble.
Wilmott: Why are they using the last four years’ worth of data?
WS&T: How far back do they need to go? No historical infor-
mation really tells you what’s going to happen in the future.
Wilmott: I’ve owned some properties — I bought my first
house when I was 25 — and in my experience, there’s a one-in-
three chance of losing money from property. You do have to go
back a few years, but not a long time, to see falling house prices.
When you go through bubble after bubble after bubble in
every single walk of life, what a lack of imagination a person has
to have to think house prices never fall. I have to hit myself in
the head with a hammer to get into that frame of mind.
WS&T: But are models like that used in financial firms?
Wilmott: 2010 I hope will be the year in which people final-
ly start taking moral hazard seriously. People have an incentive
to say house prices will keep on rising if it means they can do
the trade. But you’re also right that there are people who
believe in all of these models and the idea that house prices
don’t go down. I’m incredibly blessed or cursed by always
questioning everything. You have to do constant rethinking. ✧
 Howard A. Rubin, Contributing Editor

Examining
The Patient
Howard A. Rubin is the founder of Rubin Worldwide, a research and advisory firm focused on the economics of business technology. howardarubin@gmail.com

A
PROFESSOR in a medical school once told me that
a key lesson for his students was to get them to not
just perform their diagnoses based on the data they
had for a case but to “look at the patient,” too.
This important message is one that should be applied to many
areas in which the foundation for interpreting a situation, arriv-
ing at key insights and developing intelligent foresight is based
on a combination of quantitative and qualitative information.
For example, such a balanced outlook is essential for assess-
ing the interaction of technology with the global economy,
national competitiveness and policy, and company perform-
ance. This balance is critical to the use and interpretation of
industry technology data and benchmarks.
Although technology spending represents approximately 5
percent of revenue and 7 percent of operating expense across all
business sectors worldwide and is as high as 10 percent to 12
percent of net revenue and 16 percent to 18 percent of non-
interest expense for the world’s most technology-intense finan-
cial services institutions, its dynamics — the interactions of
technology investment and the creation of value — are unchart-
ed. They haven’t been calibrated and are misunderstood.
We can learn a lot by looking at both the “numbers” (key
measures relating to technology investment patterns and
expense) and the “patient” (the performance and strategic plans
of the business itself). Such a multidimensional context is essen-
tial for companies to consider as they look inward to under-
stand and evolve their technology strategies and look outward
to benchmark and compare themselves to peers and attempt to
discern applicable best practices from other sectors.
The importance of
this approach is clear
against the backdrop of
the global “technology
economy.” At the most
macro of analytic levels,
the global technology economy is huge. As a reference point of
initial calibration, 2008 global technology spending was approxi-
mately $4.2 trillion dollars. This is the equivalent of $701 for each
person on the planet, or the equivalent of one personal computer
(or 3.5 iPhones) per year for every inhabitant of the planet. If the
$4.2 trillion dollars of 2008 technology spending was treated as a
gross domestic product (GDP), it would rank behind only the
United States, Japan and China (in 2008 terms) as the fourth-
largest economy of the 186 tracked by the World Bank.
The Financial Services Technology Economy
And the technology economy of the financial services sector is
the largest of any of the non-governmental sectors. With perhaps
$40 billion of IT spending among just the top 5 largest financial
services institutions in the world, this alone would rank above the
GDP of 108 nations. In terms of technology “intensity” — a
measure of technology spend in the context of revenue and oper-
ating expense simultaneously — the financial services sector is at
the top of the charts: four times that of construction and engi-
neering, three times that of consumer products, twice that of
pharmaceuticals, and one and a half times that of media, which is
the No. 2 sector in terms of total technology spend.
At this early stage of knowledge in the field, it is highly like-

Introducing: Technology Economics in Financial Services

The financial services industry
spends billions of dollars on tech-
nology each year, but very few
executives actually know what
return they are achieving on their
IT investments. Technology
economics can help companies
accurately determine the value of
technology so they can use it
to drive measurable change and
continuously enhance perform-
ance. Each month Howard Rubin
— the founder of Rubin World-
wide, a professor emeritus of
computer science at Hunter
College of the City University
of New York, an MIT Center for
Information Systems Research
affiliate, a Gartner senior adviser
and a former Nolan Norton
research fellow — will explore
how the discipline of technology
economics can help firms gain a
competitive advantage.

13 December 2009 wallstreetandtech.com

ly that those companies that can understand the workings of and operating expense just can’t stand on their own. The prob-
technology economics and take charge of their own internal lem is with the denominator. “Revenue” is unstable and not
technology economy microclimates today (and get it right) by tightly coupled in the short term to IT spending. “Operating
mastering the balance of expense and value before such learn- expense,” or “non-interest expense,” has similar inherent
ings are documented and taught in the standard business school problems as a denominator. While IT spending hopefully has
curricula will be in the best position to leverage technology for a more direct impact on business process costs through
extreme competitive advantage. automation-driven cost reduction and cost avoidance, such
And in no sector is this “taking charge” more critical and changes in profile are more typically a lagging effect of IT
evident than in financial services, which is the most technolo- spending with those intended consequences. Therefore, from
gy-intense sector worldwide. This is not only true because of a technology economy vantage point, you need to switch from
the absolute dollar amount of technology spending; it also is a snapshot view to a dynamic view to consider how these met-
true because of the high stakes associated with effective tech- rics interact and change over time.
nology investment. Technology economics in financial services For top-performing financial services companies, IT spend as
is about more than just the commonly used taxonomy of “Run a percentage of net revenue typically declines as “Grow and
the Bank” and “Build the Bank” expense and investment — it Protect Revenue” strategies yield results, while IT spend as a
is about leveraging technology to grow revenue, protect rev- percentage of non-interest expense declines. The latter is a result
enue, reduce cost, avoid cost and manage risk.
Perhaps the old RTB-BTB terms should be
thrown away because they mask the linkage 2008 Average IT Spend Per Employee
between technology and the “patient.” While banking and finance spends more on technology per employee than any
Similarly the most commonly used other business sector, tech expenditures within financial services vary widely.
benchmarks of technology investment — IT
spending as a percentage of revenue and IT Banking & Finance $24,391
spending as a percentage of operating
Professional Services $17,153
expense — obfuscate some of the most criti-
cal dynamics that companies need to under- Healthcare $13,444
stand and manage. For example, widely used
Information Technology $13,359
high-level financial services industry data
shows that for banking and financial services Hospitality and Travel $10,498
the average IT spending as a percentage of
Utilities $10,356
revenue for 2008 was 6.9 percent with an
average spend per employee of $24,391. Energy $4,441
But within financial services, the most 0 $5,000 $10,000 $15,000 $20,000
technology-intense business segment, invest-
Source: Gartner IT Key Metrics Data 2009
ment banking, is characterized by spending
levels of 10 percent of net revenue or more,
with IT spending per employee averaging close to $60,000 per of the impact of technology as a lever for automating processes
year and peaking at $120,000. At the other end of the microcli- and driving down operational costs. Therefore, over time it is
mate spectrum in financial services, retail and “card” business- likely that IT becomes an increasingly larger component of the
es typically spend less than 5 percent of net revenue on technol- cost of business operations because automation is driving operat-
ogy with spending levels of $18,000 per employee. ing costs down at a faster rate than IT spending is increasing.
Effectively using benchmarks of IT spending clearly
Benchmarks in Context involves looking at the numbers as they move through time in
Again, by looking at the “patient” and going beyond the num- alignment (or misalignment) with business strategy. Using
bers, the basic “technology economy” phenomenon evidenced these numbers effectively also requires an understanding of the
by this data is simply that, in the context of IT, not all financial technology economic microclimates of business with which
services are created equal. So not only are these benchmarks they are associated. It also demands having insight into the time
hard to interpret because of the vagaries of revenue trends and lags associated with getting results from technology invest-
head count, to be useful they must be interpreted in the context ments. But more important, it is essential that one looks at the
of the movement of business and markets. numbers in the context of the “patient” to discern patterns and
Static measures of IT spending in the context of revenue completely understand the overall health. ✧

14 December 2009 wallstreetandtech.com

D
URING the first few months of 2009, many financial services executives
believed that it would be a lost year — most expected the markets to
continue to tumble, or at best tread water, and anticipated more bank
failures, job losses and pain. 2010 couldn’t get here fast enough.
In the end, 2009 surprised everyone. Since March the continue to increase on the Street next year. Hosted software
financial markets have been on one of the strongest bull runs can provide cost savings and enable faster time to market than
in history. Many financial firms have returned to profitability, in-house deployed technology. And cloud computing is gain-
and some are reporting near-record profits. Still, the global ing acceptance as providers increase security and many large
economy is only limping along, job losses continue to mount financial institutions create private, internal clouds.
across financial services and almost every other sector, and In the front office the use of dark pools and high-fre-
banks continue to fail (more banks failed in 2009 than in 2008). quency trading (HFT) will continue to attract attention,
So 2009’s mixed bag leaves many in the industry scratch- and regulators will explore further the value they provide to
ing their heads when it comes to predicting what will happen the market. Although HFT and dark pools are not new
in 2010. The uncertainty likely will limit increases in tech- market innovations, politicians and regulators have focused
nology spending, though budgets shouldn’t be as tight as on them as they seek to restore investor confidence.
they have been. New regulations designed to protect Investors, meanwhile, aren’t waiting for regulators —
investors and secure the economy are just starting to take they’re demanding more transparency from asset managers
shape and surely will be front-page news for most of the and hedge funds now. Similarly, investors are demanding
coming year. And hiring likely will remain slow, except for in improved risk management procedures. And in order to attract
certain specialties, such as risk management, quantitative and retain investors, many hedge funds are automating report-
analytics and the trading of multiple asset classes. ing processes and increasing transparency into operations.
So at the top of most CIOs’ 2010 priority lists will be deal- These trends, along with an increased use of business
ing with regulatory reform and improving risk management, intelligence, changes in the clearing of OTC derivatives and
as well as efficiency initiatives. Wall Street & Technology’s the adoption of social networking technologies, will shape
Capital Markets Outlook 2010 offers some valuable insight many banks’ 2010 technology strategies and spending. >>
into these goals and other priorities for the coming year.
As companies keep a tight lid on costs and the technologies Wall Street & Technology’s Penny Crosman, Ivy Schmerken
mature, the use of hosted software and cloud computing will and Greg MacSweeney developed the 2010 Outlook.

15 December 2009 wallstreetandtech.com

 KETS
CAPITAL MAR
OUTLOOK
2010
No Slowdown for SaaS
CHALLENGE Still-tight budgets and small IT staffs will drive Wall Street firms’
preference for renting software rather than buying it.
Why It’s Important: A small revolution has taken place
over the past two years in the way capital markets firms,
especially buy-side firms, buy and use software. Rather
than purchase and install programs, they’ve grown
increasingly willing to rent applications from the software
vendor or a third party and to let someone else host and
support it for a monthly subscription fee; users log in and
access the software over the Internet. This is variously
called “software as a service” (SaaS), “hosted software” or
the “application service provider model” (although some
say “ASP” is an old-school ’90s term), and it changes the
game for internal IT departments. A major force behind
this trend is Marc Benioff, chairman and CEO of
Salesforce.com, whose hosted customer relationship man-
Sound Bite: “There’s always going to be
a need for proprietary software that we
feel is a competitive differentiator.”
—David Reilly, Morgan Stanley
agement software is used by 63,200 companies, including
Cowen and Company, Daiwa Securities, E-Trade and
Forex Capital Markets. The upside of SaaS is that IT staff
should be able to spend less time supporting these plat-
forms; on the other hand, they represent one more reason
to keep IT spending and staffing levels low.
Where the Industry Is Now: Wall Street firms are using
ASP models now “for certain components of their busi-
ness, especially around reconciliation, trade processing,
trade settlement and collateral management,” according
to Paul Migliore, CEO of consultancy Citisoft. For such
middle- and back-office functions, it makes sense to farm
out the technology platform yet still do the actual pro-
cessing work in-house, he says.
Even the largest Wall Street powerhouses are turning
to hosted software for non-core functions. Morgan
Stanley, for example, uses SaaS for e-mail archiving and
certain human resources and sales applications.
16 December 2009 wallstreetandtech.com
Software as a Service
By Penny Crosman
Focus in 2010: Buy-side firms will continue to make
heavy use of hosted software in 2010, according to
Migliore. “In the last year, assets under management
have dropped dramatically because of the depression in
the marketplace,” he points out. “With the increased
pressure on margins, there’s a much bigger pressure on
operational efficiency, especially in the middle and back
office, which leads to more discussions around outsourc-
ing and application service provider models, as well as
FSP models — full-service providers,” Migliore says,
referring to outsourcing models — for instance, a firm
contracting State Street to do all its accounting.
Sell-side firms also have plans for software as a service.
Morgan Stanley, for instance, plans to grow its use of
SaaS. “SaaS for a while was still slideware,” notes David
Reilly, CIO of enterprise infrastructure at Morgan. “Now
it is real.” But Reilly’s not planning to put hosted software
everywhere. “There’s always going to be a need for pro-
prietary software that we feel is a competitive differentia-
tor or that we need to provide a service to a particular
client,” he explains.
Industry Leaders: Morgan Stanley was one of the first
Wall Street firms to go public with its use of Salesforce,
the hosted CRM pioneer, and has since escalated its use
of hosted software.
Technology Providers: Hosted (SaaS or ASP) software is
available from Calypso, Fidessa, Sky Road/Marketcetera
and Codestreet for trading; SR Labs (market data feed
handler); Thomson Reuters (market data); Eze Castle/
NetAge and Navatar for customer relationship manage-
ment; Wall Street Systems for treasury management; and
SunGard for a variety of applications. This is by no means
a comprehensive list — it includes merely some of the soft-
ware companies we’ve spoken to this year that offer host-
ed versions of their products.
Price Tag: Varies tremendously by type of application and
size of installment. The enterprise edition of Salesforce
CRM is $125 per user per month. ✧
 KETS
CAPITAL MAR
OUTLOOK
2010
Securing
The Clouds
Why It’s Important: Cloud computing — loosely defined as
software, hardware, storage and/or networking as a service —
is building serious momentum, on Wall Street and everywhere
else. Claus Mortensen, IDC’s principal for emerging technolo-
gies advisory services, predicted earlier this year that IT cloud
services will form 25 percent of all incremental global IT
spending growth by 2012. Merrill Lynch analysts estimate that
by 2011 the cloud computing market will reach $160 billion,
including $95 billion in business and productivity applications.
In a survey of Wall Street IT executives conducted by SIFMA
and IBM in June, the number of respondents predicting that
cloud computing would force significant business change more
than doubled from 21 percent in 2008 to 46 percent in 2009,
making it the top disruptive technology (ahead of even opera-
tional risk modeling and mobile technologies).
Where the Industry Is Now: Large financial services firms are
using public clouds (such as Amazon’s or Google’s) for applica-
tion testing and for basic applications, such as customer rela-
tionship management. But they have been reluctant to store
sensitive data in a cloud. “If you use Amazon, you share its cloud
with many different companies,” points out Madge Meyer,
EVP of State Street. “Security is still a challenge every day for
all companies.” Smaller firms, with fewer internal IT resources,
use cloud computing for CRM and beyond.
As with hosted applications, the primary business driver for
cloud computing is cost cutting. “IT departments are always
looking for ways to save money and costs, and cloud comput-
ing services are a way to potentially save money,” says Mike
Barba, manager, information risk management, at SMART
Business Advisory and Consulting. “If you use the cloud, you
don’t have to purchase all the hardware and licenses required
to do a project, [and] you don’t have to maintain a lab. You can
simply purchase a number of months’ worth of hardware time
from Amazon. So the cost savings can be dramatic.”
Barba warns, however, that there may be a hidden cost to
cloud computing, especially if using public clouds. “A lot of
times information security concerns are overblown, in that
often cloud service providers do things better than an IT
department in a small to medium-size company; they have
economies of scale to help them,” he notes. But, “From a lit-
17 December 2009 wallstreetandtech.com
Cloud Computing
CHALLENGE The obstacle to large financial
firms’ use of public clouds has been security, but
industry groups and vendors are working to fix this.
And internal clouds, protected within a firm’s own
firewalls, are under construction. By Penny Crosman
igation perspective, what happens if sensitive data in a cloud
is compromised?” Barba asks.
Many cloud services contracts stipulate that data protec-
tion is the customer’s responsibility — even though the cloud
provider manages the data and the client often has no control
over it. Wall Street firms need to carefully examine such con-
tracts and be certain they’ll be able to comply with data pri-
vacy and security rules even as the cloud provider makes
changes, such as moving data from one facility to another.
Further, IT staff need to manage this relationship, which can
be a job in and of itself, Barba says. “The provider is ... not
going to think clearly for you or think from the business per-
spective,” he says. “It’s a changing role for IT — you need
business and IT knowledge, and you need to be very flexible.”
Focus in 2010: Public cloud providers such as Google and
Amazon are beefing up cloud security. The Cloud Security
Alliance (cloudsecurityalliance.org), a group of information
security professionals, is working on a set of best practices
and an information security standard for cloud providers.
Cisco recently bought cloud security company ScanSafe,
which it will use to help the networking giant figure out how
to make its cloud offerings more secure.
Large firms, such as Merrill Lynch, Morgan Stanley and
State Street, are building internal clouds within their own data
centers and firewalls. State Street’s Meyer calls this “capacity
on demand.” “When you need it, it’s there,” she says.
Sound Bite: “What happens if the service
provider has a problem — whose fault is it?”
—Mike Barba, SMART Business Advisory and Consulting
Industry Leaders: Morgan Stanley, Merrill Lynch, State Street.
Technology Providers: Amazon, Google, IBM.
Price Tag: Varies by type of service and size of institution (e.g.,
how much storage, how many application users). Amazon’s fee
schedule ranges from 10 cents to $2.88 per hour. ✧
 KETS
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OUTLOOK
2010
High-Frequency Hot Button
CHALLENGE Regulators are scrutinizing high-frequency trading, which accounts
for as much as two-thirds of equities executions. Charges of unfair access likely
will continue to drive the HFT controversy in 2010. By Ivy Schmerken
Why It’s Important: High-frequency trading firms — mainly
proprietary trading firms and hedge funds — are responsible
for as much as two-thirds of U.S. equities daily trading volume
and are the major source of liquidity for retail and institution-
al investors, according to many experts. Critics contend that
HFT firms that colocate their black-box trading strategies at or
near exchange data centers have unfair access to execution ven-
ues and can front-run slower traders. Concerns over flash
orders and unfettered sponsored access, or “naked access,”
have prompted the SEC to review these strategies, but any rule
changes could dramatically impact market liquidity.
Where the Industry Is Now: Low-latency automated trading
has exploded among electronic market makers and statistical
arbitrage players seeking to eke out small profits by capturing
the spread across multiple execution venues. According to
Larry Ryan, HP’s chief technology officer for worldwide finan-
cial services, automated high-frequency trading is responsible
for 50 percent to 70 percent of equities trading volume.
To accelerate trading,
HFT firms typically co-
Sound Bite: “High-frequency locate the servers that
trading is simply the leading house these strategies in
edge where trading in the a data center at or near
capital markets is going.” the major equity venues.
“Everyone is trying to take
—Graham Miller, Marketcetera latency out of their sys-
tems — the trading ven-
ues, the ECNs, the exchanges are trying to trade faster
because the broker-dealers are directing order flow based on
the [venues’] response times,” explains Ryan.
Focus in 2010: Regulation will be the focus as Sen. Ted
Kaufman (D-Del.) has called for a broad review of market
structure by the SEC. The regulator already has proposed a
ban on flash orders and is examining high-frequency trading
as well as sponsored access, colocation and dark pools. Risk
management gateways on the exchange side or plug-in risk
controls on the broker infrastructure will come into play as
18 December 2009 wallstreetandtech.com
High-Frequency Trading
tools to rein in naked access. Meanwhile, HFT shops will
focus on expanding their strategies to markets in Europe
and Asia and moving into other asset classes.
Industry Leaders: The big HFT players are electronic
market makers, including Getco, Tradebot, Citadel and
QuantLab, and hedge fund managers such as D.E. Shaw,
SAC Global Advisors and Renaissance Technologies.
Proprietary trading desks of Goldman Sachs, Morgan
Stanley and Deutsche Bank also engage in HFT. Lime
Brokerage is a key provider of colocation services and mar-
ket data to hundreds of low-latency trading firms. Clearing
broker Wedbush Morgan is a major provider of sponsored
access to HFT shops and reportedly clears trades for Getco.
Technology Providers: HFT depends on advanced trading
technology, high-performance computing systems, colocation
and low-latency networks. “HFT firms need low-latency mar-
ket data, usually direct feeds, connectivity to the execution
venues, smart order routing technology and a FIX engine,”
comments Sang Lee, managing partner at Aite Group. Some
of the top providers of these technologies include FTEN,
Quanthouse and Lime Brokerage, which offer infrastructure
to HFT firms including market data and connectivity to exe-
cution venues, according to Lee. Colocation/proximity service
providers include British Telecom and Savvis, along with
7Ticks, Equinix, and Switch and Data.
Alpha generation platforms such as Alphacet are designed to
help quants develop strategies quickly, and Marketcetera
launched an open source software platform for building auto-
mated trading systems. Complex event processing (CEP)
engines speed processing of real-time streaming data. And firms
also need low-latency messaging middleware, tick databases
and feed handlers from providers such as 29West and Tervela.
Price Tag: HFT technology is expensive, but analysts say the
barriers to entry have fallen. TABB Group senior analyst Kevin
McPartland estimates that entry costs are a few hundred thou-
sand dollars. But as HFT firms scale up, the costs escalate. ✧
 KETS
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2010
Transparent Goals
CHALLENGE Dark pools provide
a valuable venue for block trades.
But new regulations may change how
participants interact with anonymous
trading venues. By Greg MacSweeney
Why It’s Important: Dark pools provide liquidity and help
institutional investors trade large blocks of securities anony-
mously, which is valuable to asset managers who are worried
about exposing their large orders and moving the market ahead
of their trades. But politicians and regulators have focused on
dark pools (along with high-frequency trading and flash orders)
as they look to restore investor confidence in the U.S. markets.
“The SEC is under a lot of pressure, rightly or wrongly, to
restore confidence in the U.S. markets,” says Cheyenne
Morgan, analyst with TABB Group. “At the very least, it is a
good reason for the different participants in the industry to get
together and discuss what is best for the markets.” Most partic-
ipants expect dark pools, through either regulation or voluntary
reporting, to increase transparency for investors in 2010.
Where the Industry Is Now: Since dark pools do not report
trades “to the tape,” as other, traditional trading venues are
required to do, it is hard to get an accurate estimate of their
influence on the market. “We can’t accurately gauge the mar-
ket,” says Sang Lee, cofounder and managing partner at Aite
Group. “We estimate the size [i.e., trade volume] of the dark
pool market at about 12 percent. Brokers think that dark
pools hold 20 percent of the market. Some venues overreport
volume, some underreport and some don’t report at all.”
The opaqueness of the dark pool market is one reason
politicians are examining the way dark liquidity providers
operate. During an October Senate hearing on dark pools and
other market structure issues, market participants debated the
value of dark pools. One theme emerged: More transparency
is required. Peter Driscoll, senior trader at Northern Trust and
chairman of the Securities Traders Association, said he was
concerned about the ways orders are routed through the
opaque venues and believes that it is important for the SEC to
investigate dark pools. “We are sending orders to dark pools,
and it is our right to know how they are handled. Transparency
in the order-handling process is extremely important.”
But too much transparency would hurt many investors,
warned Dan Mathison, managing director of Advanced
19 December 2009 wallstreetandtech.com
Dark Pools
Execution Services at Credit Suisse, which runs its own dark
liquidity network. “Dark pools are beneficial for investors,”
he said at the hearing. “Those who would compel dark pools
to display orders would be helping [high-frequency] traders.”
Focus in 2010: Much of the work to regulate dark pools will
seek to balance the needs of investors. Regulators will try to
determine how much transparency is needed to make sure all
investors — institutional and retail — are treated fairly, with-
out providing too much transparency, which would render
dark pools useless (by providing information to traders who
may front-run the market). “There will be more scrutiny,”
says Dave Csiki, managing director at INDATA, a provider
of buy-side trade order management, compliance and port-
folio accounting software. “Our clients say that dark pools
are valuable and provide liquidity. More oversight might be
healthy, as long as it doesn’t stifle innovation.”
Dark pool competitors, such as exchanges and brokers, that
must display trades also are lobbying for more transparency as
they look to even the playing field or gain a competitive advan-
tage in the hypercompetitive U.S. equity markets. “The dis-
played pools view the dark pools as a threat,” says Aite’s Lee.
Even ITG, which runs its own dark pool, POSIT, wants
more openness. “We support efforts to improve transparen-
cy, as long as [they are] applied fairly across the markets,”
CEO Bob Gastro said at the Senate hearing.
Industry Leaders/Technology Providers: Some of the lead-
ing dark pools, according to TABB Group’s 2009
LiquidityMatrix, are Crossfinder (Credit Suisse), Knight
Link (Knight Capital), SigmaX (Goldman Sachs), Liquidnet,
MSPool (Morgan Stanley), Millennium (NYFIX), Getco,
LeveL, Barclays and Instinet.
Price Tag: Most brokers help asset managers connect to dark
pools, and since trading in dark pools can help reduce market
impact, the cost savings for asset managers can be significant. ✧
Sound Bite: “Everything we are talking
about hinges on regulations over the next six
to 18 months. I will be shocked if we don’t
see more regulation.” —Sang Lee, Aite Group
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2010
A Clear Understanding
CHALLENGE Institutional investors
are already demanding more transparency
from hedge funds. Not to be outdone,
regulators are readying new rules for
hedge fund reporting. By Greg MacSweeney
Why It’s Important: When Lehman Brothers failed and
AIG was on the brink of collapse in September 2008, the
systemic risk associated with a collectively over-leveraged
financial industry was painfully apparent. Add in the Bernard
Madoff Ponzi scheme, and investors and regulators sudden-
ly realized that maybe transparency is important after all.
Where the Industry Is Now: Investors are demanding
transparency from hedge funds, which can provide the nec-
essary information only by automating processes.
Fortunately, the industry is past the era when many funds
were run on spreadsheets. “We are well beyond the spread-
sheet-only days,” says Dave Csiki, managing partner at
INDATA, a provider of buy-side trade order management,
compliance and portfolio accounting software. “We are see-
ing a lot of transparency demands from investors, and real-
time reporting is very popular.”
Hedge funds, rocked by volatile markets and record
Sound Bite: “One of the first things an
investor asks is what systems a hedge fund
has in place. Running on Excel doesn’t cut it
anymore.” —Scott Alintoff, SunGard VPM
redemption rates, have risen to the challenge. “There has
always been a need for transparency, but when a fund is
beating the market, investors don’t ask [questions],” says
Nael Farsakh, solutions partner at EMC Consulting. “That
has changed. We never used to hear hedge funds talk about
transparency and compliance, but now they are making sure
they have the right infrastructure in place.”
In addition to investor demands for transparency, regu-
lators are looking to avert another global financial crisis by
identifying risks before it’s too late. The only way to pro-
20 December 2009 wallstreetandtech.com
Hedge Fund Automation
vide the necessary level of reporting and transparency is to
deploy systems that can track and report assets’ values.
Focus in 2010: “Most proposed legislation is focused on
monitoring systemic risk before it occurs,” says Keith Bliss,
SVP at Cuttone & Co., an introducing broker. “The only way
hedge funds are going to be able to handle the regulatory
demands is through automation.” New regulations may not
be finalized until mid- or late-2010, but hedge funds can’t
afford to wait to automate processes.
“The minimally accepted requirements by investors for
portfolio analytics and risk management have gone up dra-
matically,” reports Mike Rosen, managing director and prin-
cipal at Concept Capital, a mini-prime broker. “And NAV
[net asset value] ‘light’ isn’t going to cut it anymore. The
trend is going to be daily NAV, and it will be a check box in
the due diligence questions” that institutional investors
require hedge funds to complete, he adds.
An independent third party, such as a prime broker, and
technology solutions from proven vendors can help hedge
funds meet the due diligence requirements. “We are seeing
more investors coming in and doing due diligence on our
clients and technology,” says Nigel Kneafsey, CEO of
Options IT, an infrastructure service provider to the hedge
fund industry. “Running a hedge fund on a fully in-house-
built system is not going to be acceptable going forward.”
Industry Leaders: Introducing brokers, such as Cuttone &
Co., Merlin Securities, Concept Capital and Shoreline
Trading Group, all provide services and technology to hedge
funds that can help meet current demands for transparency
and reporting from investors and future regulatory require-
ments. Larger prime brokers offer similar services.
Technology Providers: Most introducing brokers and prime
brokers offer automation technology along with their servic-
es. Technology providers that cater to hedge funds also have
emerged recently. “A few years ago all you could find were
front-office solutions,” says INDATA’s Csiki. “Today there
are custody and back-office functions available as well.”
Price Tag: There are too many variables to pin down a cost.
Depending on the level of sophistication and size of the hedge
fund, and whether it is running its own technology or relying
on a prime broker’s functionality, prices vary widely. ✧
 KETS
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2010
No Country for Old Models
CHALLENGE Congress and taxpayers agree: Financial firms cannot continue to
make large, risky bets and expect a government bailout. Survival in 2010 will hinge
on more-effective risk management models, processes and technology. By Penny Crosman
Why It’s Important: If another failure on the scale of
Lehman occurs, bailouts may not be so readily available, and
Wall Street firms will have to be able to inform regulators of
their exposures across asset classes and geographies. Nassim
Taleb, author of “The Black Swan,” testified this fall before
Congress: “There are many variations of Value at Risk [the
commonly used method for projecting the losses an institu-
tion could suffer on a given day] out there, and for me, they
are all equally defective.” Even methods meant to improve
the standard VaR, such as “expected shortfall” or “condition-
al VaR,” are insufficient, he said, because past losses do not
predict future losses. “Stress testing is also suspicious because
of the subjective nature of a ‘reasonable stress’ number.”
Adds Irene Aldridge, managing partner and quantitative
portfolio manager at Able Alpha Trading, a proprietary trad-
ing and investment consulting company, “The major problem
with VaR is it underestimates the tail risk.” VaR has been
extended in many ways to reflect liquidity risk and take into
account operational risk and basic stop losses, but if there’s an
extreme change in price, VaR is thrown off, she says. VaR
needs to be supplemented with other risk management efforts,
such as considering worst-case scenarios, experts agree.
Where the Industry Is Now: Many firms are jumping right
back into high-risk products — for instance, by selling secu-
ritized insurance policies (referred to by some as “collateral-
ized death obligations”) to investors and hedge funds. But at
the same time capital markets firms are installing more risk
mitigation technology and rethinking risk-modeling tools. As
the cost of high-speed computing has dropped, risk modeling
has become almost commoditized and fewer humans are
needed to run them, says Aldridge. “You can price complex
derivatives in a matter of microseconds, whereas 10 years ago
it took several days.” Nonetheless, Aldridge adds, because of
the expense, “On Wall Street we’ve seen significant resistance
to applying technology toward minimizing risk.”
Focus in 2010: Wall Street needs to put more-sophisticated
models in place next year, argues John Lietchy, associate pro-
21 December 2009 wallstreetandtech.com
Risk Modeling
fessor of marketing and statistics, Pennsylvania State
University. “Firms can benefit from more-sophisticated time
series models of correlation structures and dependence
structures between marketplaces,” he contends, adding that
VaR models often don’t account for the extreme correlations
that occur during a market crisis or a disruption.
But Paul Wilmott, a researcher, consultant and lecturer in
quantitative finance, cautions against too much model sophis-
tication. “The more sophis-
ticated your tool, the
greater potential for pre-
Sound Bite: “No one
tending there’s no risk,” he with half a brain has ever
says. More important is to liked VaR because it can
have risk managers ques- be used to hide risk.”
tion existing models and
—Paul Wilmott, 7city Learning
apply real-world knowledge
to them, Wilmott asserts.
Able Alpha Trading’s Aldridge says she expects to see risk
management advances in the areas of portfolio manage-
ment, high-frequency trading and the risk ratings of loans.
Industry Leaders: Aldridge says Citi is doing a “phenomenal
job” of leveraging risk management technology, and much of
the credit goes to Shakil Ahmed, the firm’s cohead of electronic
trading. At the same time, Aldridge notes, Citi has dramatically
cut technology costs by using the R programming language,
whose source code is available for free, to create risk models.
Technology Providers: The R Project for Statistical
Computing, The MathWorks (Matlabs), Numerix and
Quantifi all provide modeling solutions that can be applied to
risk assessments; RiskMetrics Group and SunGard are among
the providers of risk management applications.
Price Tag: Varies tremendously. Companies are starting
to use free, open source tools, and many perform calcula-
tions on an Excel spreadsheet. But the high-performance
hardware, programmer time and quant time needed to
effectively address risk are expensive. ✧
 KETS
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2010
Intelligent Design
CHALLENGE Business intelligence tools can deliver decision-making insight to
areas on Wall Street that sorely need it, such as portfolio and risk management. The
catch? Data has to be clean, accurate and organized (if not integrated), which means
shelved enterprise data management projects may be resurrected.
Why It’s Important: The need for business intelligence tools
— which can help firms understand counterparty exposures
and operations risks and eliminate points of failure, as well as
monitor performance and identify business opportunities —
came to light amid the collapses of several broker-dealers last
fall. “The idea that you can have a valuations process that’s
discrete or distinct from a risk management process or even
distinct from an operations process is being thrown out the
window,” says Stephen Bruel, research director, securities and
capital markets, TowerGroup. “If operations are behind, if
you haven’t done a reconciliation with the counterparty, how
do you know what transactions you need to collateralize?”
Where the Industry Is Now: Although quants and research
analysts make heavy use of reports and analytics, business
intelligence is largely absent from areas such as operations,
risk assessment, investment performance and customer serv-
ice. Most firms have multiple, disparate customer databases,
operations data sources, collateral management databases and
trading data stores that make it impossible to optimize BI
tools, which require a solid data foundation or at least clean
and consistent data sources. Some capital markets firms are
working to integrate data stores to facilitate BI-style dash-
boards and reports. Large enterprise data management proj-
ects that were begun at many large Wall Street companies
several years ago but abandoned when IT budgets and staffs
were dramatically cut may see new life in 2010.
Business intelligence is also emerging in wealth manage-
ment. For example, wealth management firm Janiczek & Co.
recently chose hosted BI software from Mydials to monitor
and manage portfolio management, relationship manage-
Sound Bite: “If we have trouble with data
management in individual silos, what’s going
to happen at the enterprise level?”
—Stephen Bruel, TowerGroup
22 December 2009 wallstreetandtech.com
Business Intelligence
By Penny Crosman
ment, service management, sales management and business
management results. “You get what you inspect, not what
you expect,” says Joseph Janiczek, the firm’s founder and
chairman. Some wealth management firms are seeking to
provide more-accessible and -sophisticated client reports,
according to Craig O’Neill, SVP of Odyssey Financial, a
provider of wealth and asset management software.
Focus in 2010: Some of the new rules Congress and regula-
tors come up with likely will require business intelligence
capabilities. For instance, regulators are certain to require
firms to repeat the recent stress tests, according to
TowerGroup’s Bruel. “Broker-dealers are going to have to run
internal stress tests for things like liquidity and report their
findings back to the regulators,” he says. Such activities should
drive the purchasing of data management software and tech-
nology that provide more-efficient access to information, such
as in-memory databases. Further, complex event processing
software will make its way into the back and middle offices to
help firms address risk and valuations, Bruel adds.
At BNY Mellon, 2010 plans include making the new busi-
ness intelligence software easier to use and delivering more-
intuitive charts and reports — for instance, showing salespeople
at-a-glance wins versus goals or showing regional CEOs which
opportunities require decisions in the next month.
Industry Leaders: Bank of New York Mellon recently
completed a number of customer data integration projects
to build business intelligence reports (using Oracle soft-
ware) for institutional sales groups. State Street is engaged
in an ambitious enterprise data management initiative.
Technology Providers: IBM, Oracle, Sybase, SAP,
Microsoft, Actuate, Mydials.
Price Tag: Open source (read: free) and inexpensive business
intelligence tools are available, but the underlying data
integration or data cleanup projects tend to run in the
millions of dollars. ✧
 KETS
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2010
Clearing Up
Derivatives
Reform
Why It’s Important: “Central clearing is all about reducing
systemic risk,” says Kevin McPartland, senior analyst at TABB
Group, explaining that central clearing of OTC derivatives
would reduce the counterparty risk in bilateral transactions
between dealers. Adds Joe Trentacosta, board member of the
International Securities Association for Institutional Trade
Communication (ISITC), “Margin [would be] posted to a cen-
tral exchange versus directly with a counterparty.” Central
clearing also would enable added efficiencies, such as a reduc-
tion in margin requirements and cross-margining of listed and
OTC derivatives, as well as bring transparency to pricing.
Where the Industry Is Now: Major futures exchanges
(InterContinental Exchange, Eurex and CME) have rolled out
central counterparty (CCP) facilities in the U.S. and Europe
for plain vanilla credit default swaps and CDS indices. CME
even scrapped its CMDX electronic trading initiative with
Citadel to focus on clearing. NYSE Liffe and London-based
clearing house LCH.Clearnet, however, shut down their CDS
clearing business in September. Experts predict that CCPs will
clear plain vanilla derivatives but that exotics will continue to
be cleared bilaterally. “All of this requires the brokers to be
derivatives clearing members. That is still in its very infant
stage,” says ISITC’s Trentacosta. Buy-side firms also are figur-
ing out how central clearing will work. “They don’t like a sin-
gle entity seeing all of their positions,” Trentacosta explains.
Focus in 2010: A key focus will be on finalizing derivatives
reform bills. Another will be securing buy-side support and
pushing firms to submit trades through the derivatives clear-
ing members. But in order for central clearing to gain trac-
tion, exchanges need software to provide pre-clearing checks
and reconciliation mechanisms. “The exchanges don’t have
the infrastructure, and clearly the clearing members are not
ready to invest hundreds of millions to do it,” says Gerard
Raffe, SVP of product management at Calypso Technology,
which is working with Eurex and two other major exchanges
on a central clearing initiative. “Exchanges will need systems
23 December 2009 wallstreetandtech.com
OTC Derivatives Clearing
CHALLENGE Congress is
working on legislation for OTC
derivatives reform, but there still
is no agreement on mandatory
clearing of standardized
instruments or on how exotic
instruments will be handled.
By Ivy Schmerken
to calculate net present value, value at risk, margin and inter-
est payments on long-term swap contracts.”
Industry Leaders: Ventures from global futures exchanges are
the major players in OTC derivatives clearing — specifically
ICE Trust, CME Clearing House and Eurex Clearing. Nasdaq
OMX entered the CCP space with International Derivatives
Sound Bite: “The big question is what does
the word ‘standardized’ mean to you. Two ...
dealers may arrive at two different decisions on
what standard derivatives are.” —Tim Lind, Omgeo
Clearing Group (IDCG), partly owned by BNY Mellon, to
clear interest rate swaps, and CME and Eurex also are target-
ing interest rate swaps. Meanwhile SwapClear, owned by
LCH.Clearnet, currently controls 50 percent of the interest
rate swaps market. Another key player is DTCC Deriv/Serv, a
matching facility for credit derivatives trades. DTCC’s Trade
Information Warehouse is a top contender to become the cen-
tral repository for OTC derivatives trades, and TriOptima won
a bid to develop a repository for interest rate derivatives.
Technology Providers: Many vendors offer reconciliation
products and other post-trade systems to address workflow,
including Calypso, TriOptima, Omgeo and SmartStream, as
well as Summit Systems and Murex in the risk space.
Price Tag: There are no estimates for the cost of building an
OTC derivatives clearing infrastructure. But experts say
software packages from the vendors range from $50,000 to
$100,000. Still, “The buy side needs to know what the clear-
ing members are going to charge for the business,” says
ISITC’s Trentacosta. “[If] they don’t know how much it’s
going to cost, it’s hard for the buy side to gauge [how much
it should invest in solutions].” ✧
 KETS
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OUTLOOK
2010
Data On-Demand
CHALLENGE With a plethora of proposed regulations in the pipeline, financial
services firms are facing more-strenuous audits and data-reporting requirements
that could result in penalties if firms get them wrong. By Ivy Schmerken
Why It’s Important: Regulators are demanding increased
access to firms’ data because of the near global financial melt-
down precipitated by subprime mortgages and the derivatives
activities of AIG, which weren’t exposed to reporting require-
ments. “Investors and market participants are all looking for
transparency,” comments Milton Miyashiro, head of regula-
tory compliance for evaluations at Thomson Reuters. “The
reforms are designed to bring stability to the markets that have
been running away through innovation.” Firms will need to be
Sound Bite: “Nowadays the investment return
[on data management and reporting] is not
delivered in just dollars and cents but also the
number of prison years you avoid by getting
it right.” —Arvind Parthasarathi, Informatica
able to provide access to data that is trustworthy, relevant and
high quality, otherwise they could face penalties from regula-
tors, including being held to excessive capital reserve levels
that are detrimental to the business, suggest experts.
Where the Industry Is Now: Every regulator has some reform
or new requirement that it wants to implement. The SEC is
looking at the rating agencies and dark pools, as well as other
market structure issues; the U.S. Treasury is looking at OTC
derivatives transaction reporting, dark pool reporting,
registration of hedge funds and private equity firms, and report-
ing of bank executives’ compensation. Meanwhile FINRA is
looking to create post-secondary trade reporting for mortgage-
backed and asset-backed securities. And in 2009 banks dealt
with the Financial Accounting Standards Board’s FASB 157,
which forced them to report the fair market value of CDOs and
other complex debt securities on their balance sheets.
Focus in 2010: “Firms will invest in infrastructure and
extractor tools to strengthen their data quality and all their
different information systems and reporting systems to
24 December 2009 wallstreetandtech.com
Regulatory Reporting
come up with clear and accurate data,” says Miyashiro, who
points out that, “Basel II is going live, ... so you’re playing
with live ammunition.” Compliance with Basel II, according
to Miyashiro, will require the top 20 U.S. banks to score
their own assets and to aggregate their historical data to
determine their risk-based capital models.
OTC derivatives reform also will require banks to
report their trades to some form of repository. And as
industry consolidation continues, banks involved in merg-
ers and acquisitions — such as J.P. Morgan (WaMu), Bank
of America (Countrywide) and Wells Fargo (Wachovia) —
will need to integrate and consolidate enterprise systems,
licensing agreements, data farms and servers.
Industry Leaders: The too-big-to-fail banks (i.e., Citigroup,
Bank of America, Goldman Sachs, J.P. Morgan, Morgan
Stanley, Wells Fargo) that went through rigorous stress test-
ing to assess their risk with the U.S. Treasury department
already understand the scope of regulatory demands and the
underlying reporting requirements and capabilities.
Technology Providers: The main players in the data man-
agement space are GoldenSource and Asset Control, while
Sybase, Oracle and SAP are leading database solutions
providers. “The products are out there, yet firms have been
reluctant to hand their critical data over to a third party,”
says Kevin McPartland, senior analyst at TABB Group.
Instead, “They’ll [develop] enterprise solutions, and the
data will sit on their site.”
Companies such as Informatica provide frameworks for
enterprise data integration. Messaging standards also will
be required for data reporting. “FpML is a logical thought
there for [derivatives] reporting,” notes McPartland.
Others point to XBRL, an XML-based standard that the
SEC has implemented for financial reporting.
Price Tag: No one is willing to estimate the cost of developing
an effective data management and reporting infrastructure,
but experts agree that the investment is substantial. “These are
not trivial dollars,” says Thomson Reuters’ Miyashiro. ✧
 KETS
CAPITAL MAR
OUTLOOK
2010
Social Networking Is
Here to Stay
Why It’s Important: Almost every industry has seen the
influence of social networking, and capital markets is no
different. Traders use social networks to share trading
information (such as which ECN is having problems),
investors use them to share tips and companies are creating
internal social networks to increase employee productivity.
“Social networking is going to be here for the long term,
and it is important to stay engaged there,” says Stephen
Ehrlich, CEO of Lightspeed Financial, which runs
Lightspeed Spotlight, a social network for active trading
customers of Lightspeed Trading.
Where the Industry Is Now: In the past few years, financial
firms of all stripes — exchanges, brokers, industry associations
and vendors — have experimented with social networking.
Many use the technology internally for collaboration.
SWIFT, the global financial transaction consortium, launched
SWIFTcommunity.net in 2007 and has almost 12,000 users.
And most financial organizations have some sort of presence
on Twitter — CME Group’s Twitter feed has more than
766,000 followers. A few independent sites, such as Elite
Trader, offer participants a place to exchange information and
connect with like-minded users. Similar to Lightspeed,
Charles Schwab hosts a proprietary active trader social net-
work for clients. TradeKing has one of the most robust social
networks in the industry, with 175,000 account holders.
On most proprietary social networks, customers can
share ideas and even criticize the provider. “Many compa-
nies are fearful of how social networking allows customers
to speak their minds openly,” says Lightspeed’s Ehrlich.
“Sometimes you don’t like what they have to say about you,
but the criticism is often the most valuable information.”
Focus in 2010: The big question to this point has been
whether social networking provides an ROI, and it probably
won’t be answered for some time. “There is no money to be
made at this point,” says Marc DeCastro, research manager
at advisory firm Financial Insights. “Firms are still trying to
figure out if social networking is about marketing, client
support, customer support or something else.”
So why should a financial services organization invest in
25 December 2009 wallstreetandtech.com
Social Networking
CHALLENGE Social networking is
changing the way consumers, investors
and traders interact and share information.
But all companies are struggling to show
how the technology is actually adding to
the bottom line. By Greg MacSweeney
social networking? For starters, it is considered a sign that
the company has modern technology. “Millennials are
completely comfortable interacting with a financial institu-
tion online or through a social network,” DeCastro says.
“Banks in particular will look to refresh their platforms
with social networking types of interactions, as well as Web
2.0 tools. That is what is going to attract and retain clients.”
Engagement, however, still can be a concern for firms that
invest in social networking. SWIFTcommunity.net, for exam-
ple, saw only 1,300 people log on in October 2009, with just 93
comments in total, reports Andrew Carrier, head of marketing
communications and banking at SWIFT. “We have a lot of
users, but engagement is a challenge,” he concedes. “Social
networking is not about having a place for SWIFT to push out
Sound Bite: “The millennials who use social
networks will turn into the prime customers
in the future. But how long does a firm wait
around?” —Marc DeCastro, Financial Insights
its stories; it’s about having a place where the community can
engage. We didn’t build it for us — it’s built for the users.”
Industry Leaders: TradeKing, Lightspeed, Charles Schwab,
E-Trade, Scottrade, Elite Trader and SWIFT, to name a few.
Technology Providers: Some companies build their own
social networks, but others rely on technology from
providers such as Small World Labs, Elgg.org, KickApps,
Groupsite and CrowdVine.
Price Tag: Varies depending on the commitment. For
instance, after developing a platform based on technology
from Small World Labs, Lightspeed added a full-time
employee dedicated to maintaining its social network. ✧
 Technology Innovation

Living on As the operator of the

Chicago Mercantile
and other exchanges,

Technology CME Group’s

competitive advantage
increasingly is built on
By Chris Murphy, InformationWeek technology innovation.

T WO TYRANTS lord over the business technology team at CME Group, and they
explain most of what you need to know about the exchange operator’s Type A,
Saturday-working, never-satisfied culture. One is volume. The other is speed.
CME Group operates the Chicago Mercantile Exchange, the world’s largest
derivatives exchange. In the past five years, CME’s trading volume has grown
more than 300 percent a year — from 30 million orders a month in 2004 to
6.5 billion in October 2008, when the financial crisis hit its peak. In that same span, the aver-
age time for a quote or order to come into and back from CME’s data center was collapsed
from 180 milliseconds to less than 6 milliseconds. A blink takes about 300 milliseconds.
The Chicago Mercantile Exchange is a 111-year-old enti-
ty that in recent years acquired the Chicago Board of Trade
and the New York Mercantile Exchange. In doing so, CME
into its top spot among derivative exchanges. “They were the
upstart, underdog futures exchange 15 years ago, and now
they own the world,” says Larry Tabb, CEO of financial mar-
parlayed a pioneering role in electronic trading — it intro- ket research and advisory firm TABB Group.
duced Globex, the first electronic futures trading platform, in And now they own the top spot in the 2009
1992 — and its once mundane-looking clearing operation InformationWeek 500, Wall Street & Technology sibling brand
InformationWeek’s annual ranking of the most innovative
business technology organizations.
The company’s success hinges on a technology team, 800-
strong and led by CIO Kevin Kometer, that must live on the
edge of emerging technology — and even drive it, cajoling
Despite the economic challenges, this year’s vendors such as Dell and Hewlett-Packard, AMD and Intel,
InformationWeek 500 companies had the vision and and Cisco to build what might not look like mass-market
guts to keep trying new ideas. And 25 financial services products yet. “We’re almost playing matchmaker,” says John
firms made the list. View all 500 business technology Hart, CME’s managing director of technology engineering,
innovators at informationweek.com/500. about its relationship with vendors. Three years ago, for exam-
ple, CME started work with Verizon and Tellabs to create a

26 December 2009 wallstreetandtech.com


metro area Ethernet network that was more point-to-point,
not looped, to get far more speed. That went live last year.
Yet until 2008 one of CME’s most precious systems, the core
futures trading platform that matches buyers and sellers, was far
from leading-edge — it was ultrareliable but shackled to a lega-
cy system of 1 million lines of code, written for proprietary Sun
Solaris servers. New features required long and costly testing,
and hardware refreshes cost tens of millions of dollars.
So the IT team rewrote its core futures trading systems —
which handled contracts worth $1.2 quadrillion of notional
value in 2008 — in Java in six months and started migrating
them to commodity Linux servers in January. The results: At
a leaner 295,000 lines of code, the new platform cut response
latency by 67 percent (by 5 milliseconds), and cut mainte-
nance and capital expenses by 90 percent.
Platform for Growth
The company hopes to use its electronic platforms to seize
new trading markets, including carbon credits through its
Green Exchange joint venture and, in reaction to the finan-
cial crisis last fall, credit default swaps through its proposed
CMDX partnership with hedge fund Citadel Investment
Group. CME also is proving itself to be a partner of choice
for foreign exchanges, from Brazil to Malaysia, that are
looking to trade their products through Globex to reach
more global investors.
Rick Redding, CME’s managing director of products and
services, notes that with an acquisition or partnership, IT
teams are pulled in from the very earliest stages to assess if the
economics work. But if it’s an organic project that leverages
CME’s platform, IT’s called in fairly late in the game. It’s just
a given that the infrastructure is in place to expand, he relates.
“The IT team spends a lot of time in their cycle leveraging
ahead of our needs,” Redding explains.
And that’s the way it has to be when a big spike in volume
is 18 times an average day’s volume. CME maintains enough
capacity to handle two times the last known peak.
According to Kometer, every Saturday that’s not Christmas
involves some significant testing, which can’t be done on trad-
ing days. It’s common to have 100 people in the data center on
a Saturday, he says, lighting up the production environment to
test systems. Testing’s often coordinated with trading cus-
tomers — the hedge funds, banks and brokers — that need to
try out their own trading systems’ interaction with any new
CME software. A blazing-fast matching engine inside CME’s
data center doesn’t help if customers don’t see better perform-
ance in their systems, which increasingly rely on automated
trading. “We have to work with our customers to make sure
their technology is evolving with ours,” Kometer says.
It won’t get any less intense. CME, which runs about
27 December 2009 wallstreetandtech.com
Technology Innovation
“We have to
work with our
customers to
make sure their
technology is
evolving with
ours.”
Kevin Kometer,
CIO, CME Group
4,000 Red Hat Linux-based servers today across data centers
in Chicago and New York, is adding a 260,000-square-foot
data center in the Chicago suburbs.
CME’s tech-driven capabilities put it in the midst of a
huge business opportunity, in part driven by the financial
problems of the past year, says Joe Panfil, CME’s managing
director of enterprise technology. Companies are increasing-
ly doing real-time risk assessments of their counterparties’
ability to pay up, rather than waiting until day’s end, he
relates, explaining that that plays to CME’s strength in speed.
Political and regulatory pressure could drive some derivatives
traded over-the-counter today onto regulated exchanges or
clearinghouses such as CME. NYMEX’s clearing of OTC
energy contracts spiked after the collapse of Enron, Redding
notes, as people looked for more assurance that the other side
of a trade could pay. “It’s times like that [when] people look
for unique solutions to make the system better,” he says.
Challenges Ahead
CME faces challenges ahead, too. While it dominates many
futures products markets, TABB Group’s Tabb notes that equity
trading has fragmented among exchanges, and CME faces more
competition from established exchanges and from banks and
brokers setting up their own exchanges for emerging products.
One thing not discussed here is reliability, which might
seem odd given the pressure for the exchange to never fail.
When the financial crisis was at its worst last fall and volumes
soared, CME never buckled — nor did any rival exchanges.
Imagine the chaos if they had.
So alongside volume and speed, reliability must be anoth-
er of those tyrants, right? Sort of. It’s a bit like reminding a
champion marathoner to breathe while kicking the last mile.
“You don’t even talk about it, because it’s got to be there,”
Panfil says. “Then, the focus gets back to speed and capacity.” ✧
 Mutual Funds and
Cost Basis Compliance
O
N OCT. 3, 2008, President Bush signed into
law the Emergency Economic Stabilization
Act, which contains a provision that will require
brokerage firms and mutual fund companies to
track and report adjusted cost basis information
to investors and the IRS. Due to the economic
issues gripping the financial services industry, the basis report-
ing regulations went largely unnoticed. However, the legisla-
tion is significant, and little time exists for firms to properly
prepare to comply with the reporting requirements.
With just over a year before reporting equities becomes
required, brokerages should be well into the planning stages
for purchasing and implementing a cost basis system. Many
firms, however, have failed to begin planning, let alone com-
mence the lengthy process of selecting, testing and imple-
menting systems. This procrastination by the fund industry
may have a dramatic impact on business operations and
investor satisfaction over the long term.
Security-specific rules and the current state of cost basis
offerings create unique, often challenging problems for
mutual fund companies. Fortunately for investment manage-
ment firms, the legislation does not impact pure mutual fund
providers until January 2012. (Those firms with brokerage
arms will be required to cover equities beginning in 2011.)
Historically, mutual fund providers have used Average
Cost as the default lot relief method (LRM). The new legis-
lation requires that shareholders be allowed to select the
LRM of their choice. This process can be very difficult for
firms to resolve and undoubtedly will change the nature of
the relationship between firms and shareholders. Satisfying
this requirement means opening a communication channel
with the shareholders. If executed poorly, the result is a con-
fusing and unsatisfying experience for the client and a time-
consuming and costly exercise for the firm. Those firms that
focus solely on achieving the bare minimum necessary to be
in compliance with the new legislation are likely to fail in the
overall execution of cost basis implementation.
Brokerages and fund companies have four options avail-
able for automatically adjusting cost basis: retrofit a legacy
system that currently maintains some form of cost basis track-
ing, develop a new in-house system from the ground up, rely
28 December 2009 wallstreetandtech.com
About the Author
Cameron Routh, SVP,
Strategic Products, Scivantage
As SVP, strategic products, Cameron Routh
is responsible for the overall leadership
and management of Scivantage’s strategic
product initiatives and oversaw the devel-
opment of Maxit, the firm’s cost basis
application. Routh cofounded GainsKeeper,
an early cost basis vendor, in 1999 and
previously worked for PaineWebber (UBS),
Fidelity Investments and AIG.
on the back-office provider or transfer agent to implement a
solution, or contract with a dedicated cost basis vendor to
provide comprehensive tracking and reporting services.
For large firms, which frequently develop systems in-
house, retrofitting a legacy system may seem reasonable at
first. But attempting to support complex cost basis issues with
a system that was not designed specifically to support cost
basis can yield poor results. The final system is likely to be
costly to build, costly to maintain or both.
Custom-build projects are notoriously expensive. But the
greater issue at this point, even for deep-pocket firms, is time.
A custom-build project may take two to four years to com-
plete requirements, development and testing.
Many transfer agents offer some form of a cost basis solu-
tion. Transfer agent solutions, however, often provide minimal
functionality and limit the availability of data for other applica-
tions. Further, the systems tend to not be entirely automated,
leading to reconciliation headaches (and costs) for a firm’s
operations team. Generally the transfer agent cost basis offer-
ing will suffice for small firms, but will not be adequate for larg-
er, more innovative firms. Cost basis vendors typically offer the
most robust solutions but may, at first glance, appear to be
more expensive, as transfer agents may bury the expense of cost
basis systems in the overall relationship billing.
A Changing Client Relationship
The impact of mandatory basis reporting is not limited to tech-
nology acquisition. The very nature of the relationship between
firm and client must evolve. Investors will be allowed to use any
lot relief method they desire. This necessitates a new, more open
communication channel. Failure to provide an intuitive, accessi-
ble method for indicating accounting methods will lead to a
surge in support costs related to assisting confused customers.
The customer support angle is particularly compelling.
While most of the focus has been on compliance — and for
good reason — firms have not fully considered the impact on
customer support. With the spotlight now on cost basis,
shareholders are likely to ask more tax questions about every
position in their portfolios, including non-reportable lots.
Vanguard has already begun to think beyond compliance
to identify the various ways basis reporting will impact the
firm. “Even though a firm is not obligated to provide assis-
tance on pre-effective shares, it will lead to an increase in sup-
port traffic,” suggests Charles Portale, Vanguard product
manager, Retail Investor Group. “The manner in which each
firm handles these inquiries could have a significant impact
on the customer experience.”
He Who Hesitates Is Lost
Another issue facing firms is the scarcity of resources, both inter-
nally and externally. As the deadline for reporting approaches,
competition for qualified resources will increasingly drive up
development costs. By implementing ahead of the last-minute
surge, firms will have the best opportunity to manage cost.
Finally, firms that delay implementation of a comprehen-
sive system will be at a competitive disadvantage to firms that
are more proactive. Many fund companies will assume that
their cost basis offering will be measured against other fund-
only firms, which share the 2012 tracking deadline. It is
important to note, however, that clients will begin receiving
adjusted cost basis data from their brokerages in 2011. This
means customers will receive tax reporting assistance, in the
Complex Calculations
Many fund shops do not feel a sense of urgency to
implement a cost basis reporting solution prior to
the mandatory deadline. But this is a risky decision.
Accurately calculating adjusted cost basis is no small
task. Cost basis tracking systems for mutual funds
need to account for the following complexities:
• Wash Sales
• Dividend Reinvestments
• Multiple Lot Relief Methods
• Holding Period (short-term vs. long-term)
• Sales Loads
• Fund Reclassifications
• Method of Acquisition (purchase, inheritance, gift)
• TOA Out (firms will be required to include cost
basis information)
• TOA In (firms will be required to reconcile any
missing information)
• Corporate Actions
• Bifurcation of Tax Lots (two-bucket system)
29 December 2009 wallstreetandtech.com
The fund industry’s procrastina-
tion in implementing cost basis
reporting systems may have a
dramatic impact on investor
satisfaction over the long term.
form of adjusted cost, from their brokerage but not their fund
company. At a minimum, this will lead to client confusion and
a spike in help desk traffic; but in some cases, it could also
result in dissatisfaction leading to a shift in assets.
Furthermore, many large fund firms also have a brokerage
(e.g., Vanguard and Fidelity Investments). Likewise, many
large brokerages are also players in the mutual fund space
(e.g., Charles Schwab). Although no information is available
about specific firms’ development efforts, it is reasonable to
assume that some, if not all, of these firms will integrate
mutual funds into the cost basis solutions that they imple-
ment for the 2011 securities reporting deadline.
The potential for lost market share should not be trivial-
ized. Those companies that introduce cost basis systems next
year will not only get ahead of the legislation, they will be
perceived as innovators within the industry and potentially be
rewarded with in-flows from firms that are slow to respond.
Firms that identify the regulations as an opportunity to
offer innovative, value-added cost basis tools and online data
presentation to their clients will differentiate themselves and
become the clear front-runners as clients become more
focused on the need for cost basis information. Choosing a
fully featured, innovative cost basis system sends a strong
message to the industry that your firm is committed not just
to meet the requirements of government regulations, but to
do so while exceeding the expectations of your clients and the
ability of your competitors.
One last point to consider in evaluating cost basis options
is that cost basis is volatile. Tax rules change, new asset class-
es are developed, the demand for basis in other products
evolves and new ideas for related tools continue to emerge. If
a firm hasn’t already demonstrated a solid track record of cost
basis innovation, it is unlikely to innovate in the future. Make
the wrong selection and the functionality a firm buys today
could be all it is provided with three or four years later.
And don’t overlook the chance to have a positive impact
on your customers. Investors have always struggled with tax
reporting. Mandatory reporting or not, providing adjusted
cost basis to shareholders improves the overall investment
experience and increases customer loyalty. The sooner your
firm implements a cost basis solution, the sooner it will reap
the benefits of an improved customer experience. ✧
 Innovative Technologies & Services

Fidelity Launches Global Online Trading Platform

F
IDELITY INVESTMENTS launched a new news, and real-time market data and quotes for foreign currency
online platform for trading international stocks and international equities, according to Fidelity. It also offers
and exchanging foreign streamlined processing and recordkeep-
currencies. A significant ing of international equities and foreign
expansion of the firm’s currencies, the company says.
international investing capabilities, the Retail investors will be able to
new stock-trading platform — aimed trade in 12 foreign markets (Australia,
at retail investors, broker-dealers and Belgium, Canada, France, Germany,
financial advisers — includes access to Hong Kong, Italy, Japan, Netherlands,
more than 1,200 available mutual Norway, Portugal and the United
funds and 250 ETFs with international Kingdom) and exchange eight curren-
securities exposure. cies, all from their existing brokerage
The new platform provides retail accounts, enabling them to view all of
investors, and broker-dealer and adviser their equity investments and currency
clients with automated and direct access positions in one place. ✧
to a broad set of global markets and for- Fidelity’s new online global trading platform enables www.fidelity.com
eign currencies, third-party research, retail investors to trade in 12 foreign markets. 800-343-3548

Cadis Translates A Hosted Feed

For Asset Managers
Handler for High-
L
OCAL-LANGUAGE support can be a challenge
for global asset managers’ middle offices, according
to Cadis, which says fund managers require more
than a low-level translation of double-byte lan-
guages, as one character is often incompatible for
Frequency Traders

S
multiple processes and asset classes. Buy-side firms in Asia, for R LABS LAUNCHED a hosted version of its low-
example, often run middle offices in the local language; without latency, multi-asset-class feed handler for all
suitable translations, managers must resort to cost- and time- major markets in North America, Europe and
intensive workarounds, the vendor points out. Asia. SR Labs has partnered with Options IT, a
Cadis says its software supports deep translations that encompass provider of “infrastructure as a service,” to provide the
individual terms and labels in the language and definitions that the market data and technology infrastructure to house the
user understands. data feed handler.
The London-based The hosted feed handler will provide high-frequency
firm adds that trading shops with a market data solution designed
its software enables specifically to integrate market data into high-performance
users to source mul- trading applications and optimized for models deployed
tiple golden copies in exchange colocation facilities, according to the New
for local operations York-based trading technology provider.
while working from “High-frequency trading is increasingly being adopted
the same master by trading desks large and small, and the appetite for new
data as their global and better technologies is at an all-time high,” said
counterparts. Srinivasan Ramiah, CEO of SR Labs, in a release. “Our new
Cadis users can receive, store, display, create and modify data hosted offering provides high-frequency traders a one-
in all languages supported by their underlying infrastructure, stop solution for a fully managed, ultralow-latency market
enabling user-specific, rather than generic, translations. Cadis’ data offering, thus giving our clients a competitive edge
local-language support also encompasses downstream models, by reducing costs and accelerating entry to market.” ✧
applications and processes. ✧ www.srtechlabs.com 917-478-1243
www.cadisedm.com +44 (0) 207-033-8894

30 December 2009 wallstreetandtech.com

 Larry Tabb, Special Contributing Editor
2010 and the
Magic 8-Ball
P
ROGNOSTICATING ABOUT 2010 is much like
shaking a Magic 8-Ball: “Reply hazy, try again.” While
transparency is currently increasing, 2009 was a year of
extremes. We started ’09 as a panic gripped the world.
An unprecedented housing-led recession exacerbated by reckless
credit dissemination and wanton loan syndication threw the
economy into global recession. Our banks were hobbled; and
Larry Tabb is founder and CEO of New York-based TABB Group, a financial markets strategic advisory firm. ltabb@tabbgroup.com
while the TARP and the CBOE volatility index (VIX) reached
their apex, the Dow shattered its nadir: “Outlook not so good.”
Then in March the outlook changed. Fiscal stimulus was
provided, central banks reduced short-term lending rates to
near zero and, though the economy was still hobbled, markets
began to turn. The yield curve steepened, the VIX came down,
global markets rallied and even the lesser-performing global
indices grew by more than 40 percent. While not all of the
banks prospered, the more solvent are “without a doubt” turn-
ing in stellar results, and “signs point to yes” that we are in more
of a boom rather than the bust realized by the general economy.
So are we coming out of recession, or are we being dragged
Firms will both reinvest in
their infrastructures and repo-
sition themselves in the wake
of the regulatory realignment.
back into the mire? I wish I could answer that with certainty.
Economists can’t, and neither can our Magic 8-Ball: “Cannot pre-
dict now.” But I’m an optimist. I believe that the banks will regain
their footing, investors will come out of their holes and the finan-
cial markets will move forward, albeit with a bit of trepidation.
2010 will be a growth year as ’09 performance is looking
spectacular. Firms will both reinvest in their infrastructures and
reposition themselves in the wake of the regulatory realign-
ment that surely will come (“You may rely on it”).
Washington and Brussels will dominate the 2010 agenda (“It is
decidedly so”). Legislators and regulators are taking a deeper look
at market structure than we have seen in decades, revisiting every-
thing from information dissemination to order routing, dark pools,
flash trading, colocation and high-frequency trading. In addition to
examining the exchange-traded world, regulators are analyzing
31 December 2009 wallstreetandtech.com
the OTC markets as
well, looking at exchange
migration, product valua-
tion, central clearing,
margin enhancement and
enhanced capital reserves for non-vanilla products.
While the exact regulatory changes are uncertain at this
time (“Ask again later”), many will require greater reporting,
analysis and oversight dependent on more-extensive data man-
agement, risk management and real-time reporting as well as a
more extensive data-collection, event-processing and reporting
infrastructure (“It is certain”).
Electronic trading solutions also will continue to be front
and center (“Yes — definitely”). This will include both the
extension of liquidity-provisioning infrastructure as well as
investor-enabled tools such as algorithms and direct market
access. Very popular in the U.S./European equity markets and
the U.S. exchange-traded derivative markets, these tools are
beginning to be rolled out across more asset classes, including
FX and fixed income, and to geographies from Latin America
to the Far East (“Outlook good”).
This trend follows both Moore’s and Metcalfe’s laws about
price/performance of technology and networking. And no
matter how legislators and regulators clamp down on high-
frequency trading, their efforts will be thwarted, as banning
technology advancement, intelligence and the profitability of
being first will be all but impossible.
While the above trends are immutable, the next few will be
economically driven (“Concentrate and ask again”). As the
economy picks up, hedge funds will be recapitalized as investors
will not want to miss the alpha party. The IPO and issuance
markets also will accelerate, driving demand for research, ana-
lytics, and authoring and presentation tools. In addition, if the
market continues its upswing, we will see individuals eventually
come back into the market. But before individuals flood back,
there will be much carnage as advisers will be changed, portfo-
lios realigned and brokers fired. This will launch a new wave of
retail brokerage/wealth management investment.
While 2009 was a year of opaqueness with little or no fore-
sight, 2010 is still a question mark. Will we come out of these
challenges and stay out, or will we stay hunkered in our bunker
for another year? Will this be a year of growth or retreat?
Unfortunately the Magic 8-Ball says, “Still hazy, try again.” ✧