High-Performance Server Brings Low Latency to Java AppsJava’s popularity – according to IDC, more than $11 billion, or 20% of worldwide server spend, was devoted to Java servers in 2005 and analysts estimate that number is growing 15-20% annually – is sweeping the Street, at least according to anecdotal evidence. “There are four areas in which we’ve succeeded in the last 18 months: derivatives trading, risk analysis, hedge funds and foreign exchange,” reports Ram Appalaraju, vice president of marketing at Azul Systems, maker of a Java acceleration appliance used by many large Wall Street firms. “The reason they prefer Java is the cost of development in Java is a lot cheaper than any other programming environment.” The Achilles' heel of Java applications is that they can be subject to performance issues such as garbage collection (a periodic cleaning out of memory that can take several seconds to complete). Programs that deal with large data sets -- such as trading and risk analysis applications -- are particularly prone to Java performance bottlenecks. “The applications pause, they need to reboot the machine, all those things cut down on either the volume of trades, the closing or the risk analysis that cannot be computed in real-time,” Appalaraju says. “So they end up providing data to the portfolio managers that’s two hours if not one week old.” Azul’s Vega appliance, version 3 of which is being announced today, is a high-performance server that takes on the role of a shared Java Virtual Machine. “The entire Java application gets pushed out to the Azul appliance,” Appalaraju says. “We have multicore technology [864 processing cores per appliance] and lots of memory [three-quarters of a terabtye] in the box, that takes away any barriers to the application to scale.” According to Appalaraju, the company has documented customer before-and-after benchmarks that show performance improvements of five times up to twenty times using the Vega. A side benefit is server consolidation – a firm might replace ten servers with two Azul appliances, for instance. The Vega is often deployed to complement grid solutions. “Grid is good up to a point,” Appalaraju says. “If you have too many nodes, it becomes unwieldy and overly complex.” Azul appears to be part of the growing Wall Street data center trend toward greater virtualization and commoditization of hardware. Where once upon a time, a server would be dedicated to an application, today firms are creating shared pools of hardware that are deployed to whatever applications or workloads need them. Appalaraju also says the Vega is being used to support Java-based complex event processing. When numerous Java applets need to communicate with each other, latency occurs. Appalaraju says hosting all the components on the appliance reduces latency across events by almost 100 times, dropping latency to 40 microseconds or less, he says. What’s new about the Vega 3 is its Azul-designed multicore chip has 54 cores where the previous generation had 48 cores. Each appliance contains 16 chips, which adds up to 864 processing cores with 768 gigabytes of memory. A new DirectPath feature improves communication between virtual machines. The new appliance also has a real-time performance monitor that lets customers watch and react to performance needs in real time. Pricing starts at $100,000. Appalaraju has observed a trend toward more cautious IT spending on Wall Street. “It’s no longer the way it used to be two years ago,” he says. “Capital markets tend to buy the best toys, but now we’re seeing a higher degree of value-based assessment.” He says Azul passes the test because its product can be deployed within two to three months. 1/29/2010 10:24:41 AM |
Prop Trading Ban Proposal: Desirability vs. PracticalityHow do you ensure that firms do not take proprietary
positions? Do you require that the bonds be bought directly from a
customer? If so, how do you police it? In September 2008, within a few weeks of the fall of the house of Lehman, I had written the following, excerpted from my research note titled, "The Future of Investment Banking: Subprime and what it Means for The Industry." A New Glass SteagallAs investment banks are consolidated into commercial banks and the fixed income businesses look to tap into the lower cost of funding associated with deposits and commercial banking endeavors, I also would not be surprised if we get a new Glass Steagall-type of legislation which will again draw the lines between investment and commercial banks. This may mean that while these new Universal Banks have both equity and fixed income businesses, that the Universal Banks would be prohibited from proprietary trading, taking sizeable risk positions, and or underwriting corporate securities (both equity and corporate debt), leaving the Universal Banks' role in capital market as more of a processor, custodian, and agency trading operation rather than engaging in proprietary trading capitalized by deposits, and nave investor capital. While I assume that President Obama and Paul Volker didn't read this, I believe that the direction is sound. Why are we allowing depository institutions to leverage inexpensive and taxpayer-guarantee funding to take proprietary risks where both the shareholder and by default the taxpayer bear the risk? Now that said, implementing a policy like this will be extremely difficult. The banks, of course, will fight it but even ignoring the fight " how do you practically implement this type of strategy and even if you do, how will this impact the global financial markets? Defining Prop Trading Defining proprietary trading will be next to impossible. Investment banks take risks and separating the proprietary risks from market-making risks or client-servicing risks will be difficult. While there are people within the banks with proprietary trading roles, many of the positions held by the proprietary traders would be virtually indistinguishable, from an outside perspective, from market-making / customer-facilitation positions. For example, how would the regulators distinguish the following positions?
While the first example is clearly a proprietary position and the second is not, how would a regulator distinguish between these two positions? In both cases, the firms has built up a position in US auto debt. In both cases the amount is $50 million. The positions from an auditor's perspective would look identical. Today, these positions are differentiated by the trading accounts in which they are housed. While this is good for accounting purposes, I am not sure this will pass muster with regulators. So how do you ensure that firms do not take proprietary positions? Do you require that the bonds be bought directly from a customer? If so, how do you police it? Proprietary positions don't need to be acquired only via inter-dealer brokers. Do you require a recording of the client conversation? Do you just fire the proprietary traders? Do you segregate proprietary and customer-facilitation positions by a holding period test? What if you can't find the other side of the trade? Do you force the bank to sell the products at a loss? Do you force the bank to only act in an agency position? If you do this, then the bank would need to either increase its sales force dramatically or lower the price of the bonds to attract an immediate counterparty. I am not sure issuers, or investors, would care for either solution. If we look to tease proprietary trading from customer facilitation and market making by holding period, many firms have a proprietary, high-frequency, equity / options / futures trading business. These businesses take very short term positions looking for liquidity gaps. While many firms call this proprietary trading, much of this can also be called market making. What is the difference? Will we be able to tell what is proprietary from market making by the portfolio/trading account they are traded out of? I am not sure that will be effective. Liquidity Properly defining the difference between market making, customer facilitation and proprietary trading is critical. If the government makes it too difficult for banks to take positions, then there will be less liquidity in the market, meaning fewer buyers and sellers, wider spreads, and greater costs not only to trade but for companies, and for that matter. governments to raise capital.
The impact of this across asset class will be significant. Products
that employ less capital will be less impacted. Exchange-traded
products such as equities, options and futures will have little impact
since these products are for the most part traded "as agency" (meaning
the banks don't take big positions in these markets " except to hedge
other less-liquid positions) and the risk-taking functions within these
asset classes have effectively migrated from banks to other market
participants such as high frequency traders. So if regulators could
tease apart proprietary trading from market making and customer
facilitation and banks eliminated their proprietary trading, market
liquidity may change somewhat over the short-term but other players
will quickly and easily fill in the gaps. The products I expect would be more severely impacted are over-the-counter (OTC) traded products such as debt, currency, and all types of OTC derivatives. To support these products, large banks leverage their balance sheets and capital to make these products liquid. Separating market making, customer facilitation and proprietary trading for these products is much more difficult and if done incorrectly would leave a huge void in the market.
Without the dealers in these markets, liquidity and turnover would
initially dry up, spreads would increase, and it would become much more
expensive for companies and governments to raise capital and manage
risk. This would have a dramatic impact on not only corporations but
the government. The current debt ceiling is $14 trillion; a one-basis
point (.01%) increase in funding would cost taxpayers $1.4 billion a
year. Given that one-basis point is very small and global debt is huge,
it will only take a small increase in interest rates to significantly
impact both issuers and taxpayers. o court more liquidity and solve this gap, we would need to draw more liquidity providers into the markets. Since liquidity providers couldn't be large banks, we would need to adjust the products to enable smaller firms to partake in these markets. To accomplish this, OTC products would need to be made more standardized, and trading would need to be done in smaller denominations. By standardizing these products, it would turn these bespoke products from securities and derivatives created by corporations and governments for specific capital-raising and risk management purposes into trading products that may not benefit the financial end users. If a corporation needs specific covenants on a bond to raise capital or needs to insulate themselves from an economic event, how does a generic and standardized product help them accomplish this goal? It just creates basis risk, forces the corporation to move toward private equity, ignore the opportunity, or self-insure the risk " which will force corporations to reduce investment, take less risk, and will eventually impact the number of jobs firms create. Aversion Assuming that we can define and ban proprietary trading from customer facilitation and market making and can prohibit these practices, how will banks react? First, banks will determine if they can avoid this regulation by changing their registration. Goldman Sachs and Morgan Stanley were historically investment banks and not chartered as Bank Holding Companies (BHC). What if these organizations dropped their BHC registration? These firms have paid back their TARP money and currently have less reliance (possibly none) on the federal government. Would this mean they were suddenly safe? Would they no longer be too big to fail? My guess is, if either of these organizations just dropped their BHC status, continued their business as usual, and subsequently got into trouble, the government would just bail them out again. So just dropping a firm's BHC status would not be enough. Second, banks would think about if they could switch their proprietary trading businesses to overseas entities, say Switzerland or somewhere in Asia, maybe Singapore. If this concept takes hold, it would be likely that these organizations would create walled-off subsidiaries or switch their registrations to more loosely regulated jurisdictions where these practices would be less regulated or maybe even encouraged. I am sure that some country would be interested in importing thousands of bankers generating millions of dollars in bonuses, which of course would generate huge tax windfalls and generate a multiplier effect of support jobs. Third, if neither of these cases were possible, then banks would spin off these organizations, not shut them down. This would allow the proprietary traders to either buy out these businesses using either their own capital, private equity, or carve out the proprietary trading business through a spin off. The spin-off and capitalization of new trading businesses has been happening for years. Since the mid-1980's, brokers and banks have supported the spin-off of traders and trading desks into separately capitalized hedge funds and proprietary trading firms. Banks/brokers have developed prime brokerage businesses to facilitate this. By spinning off these businesses, it transfers the trading risk to a separate entity while retaining a fee-based revenue stream through trading commissions, lending and financing. So this may not be as awful a problem as anticipated. Risk Shifting As hinted above, if banks just clove off proprietary trading operations, it won't mean that they won't profit from prop trading or eliminate their exposure to proprietary trading. Banks will just shift this exposure from direct to indirect exposure. While banks may not trade for their own accounts unless investment banking and retail/commercial banking is completely separated, the larger banks will continue to have economies of scale over smaller shops. This scale allows larger banks to borrow and trade less expensively than smaller prop shops. These economies of scale will allow the banks to lend money, finance, and provide trading facilities for independent proprietary trading firms much like they provide prime services today. While a proprietary trading ban will reduce their exposure to risky assets, it will not eliminate them altogether because these same risky assets will be pledged as collateral to provide financing for independent providers. This will reduce direct exposure to these assets; however if the assets go south, the banks will still be left holding an empty bag. A Better Solution A much better solution would be to more carefully adjust / fine tune capital guidelines within banks to promote or dissuade banks from taking risky positions. Capital allocation could be employed to require banks to increase their capital ratios depending upon the size and composition of their balance sheet. They could be forced to hold greater amounts of capital for more risky, less liquid, and greater sized positions. By increasing the capital ratios on these more risky positions, it requires that the returns on these positions be greater to justify their investment. In this case, banks must either double down and take way more risk (which increases capital ratios even further), or eliminate their risk and allocate to a much safer investment " which is more likely. In addition to adjusting capital allocations, we should also look to see what type of capital banks are holding. Currently, tier-one capital is calculated on their total balance sheet and not based upon the assets held. Tier-one capital may be in the form of illiquid real estate assets, asset-backed securities or for that matter US Treasury bonds. We should look to ensure that the capital the firms are pledging/holding is not junky illiquid, miss-marked, or unable to be accurately marked, and ensure that pledged capital is of good quality, liquid, and safe. Washington Politics While I believe managing capital is a more fundamentally practical solution than shutting down proprietary trading, it is probably not politically practical. Washington needs scalps and must show that they are in control of Wall Street and not visa versa. Washington will not be able to declare victory by just saying that they kicked Wall Street's "behind" by changing capital ratios. That will not get anyone re-elected. The problem, unfortunately, is that unless the government is much smarter than they seem, the politically expedient solution may either have significant unintended consequences or be completely unenforceable " with the latter being much better than the former. The Bottom Line While I am all for figuring out a way to reduce risk from the banking sector and wholeheartedly agree with the idea that banks shouldn't use taxpayer-guaranteed deposits to fund risky trading practices in which banks and traders receive the bulk of the upside potential and little if any of the downside risk " I am not sure that banning proprietary trading as the de facto solution is the right answer. Banning proprietary trading will be difficult to enforce and if made too draconian could absolutely hurt corporations, governments, taxpayers, and Main Street by shrinking the level of corporate financing. While I am in favor of protecting the economy from another collapse, we need to think long and hard about doing this in a practical way " otherwise the unintended, or for that matter intended, consequences of a rash act may make the regulators feel better but would hurt not just Wall Street, but Main Street, and the global economy as well. Larry Tabb is founder and CEO of TABB Group, the research and strategic advisory firm focused solely on capital markets. *TABB Group recently launched TabbFORUM, the first-ever online community for capital markets professionals to share and contribute opinions on current issues affecting their business. 1/29/2010 10:23:05 AM |
Low-Latency Technology Outpacing Programmers CapabilitiesAs Wall Street turns to multicore processors to
handle growing data volumes and reduce latency, firms are having a hard
time finding programmers with expertise in writing code for parallel
processing applications.
Though Gordon Moore's 1965 prediction that the density of computer components would double every two years has been accurate, and computer processing speed has followed basically the same upward trajectory, the technologies' evolution is not being met with similar advances in computer programming expertise. While Intel and AMD were happy to roll out dual-core processors (followed now by quad-core and even dual quad-core processors), the programming expertise needed to truly take advantage of parallel processors is extremely hard to find in the marketplace, according to many of the speakers and attendees at WS&T's Accelerating Wall Street conference in New York in early May. Again and again, executives said that finding enough programmers who are able to write "parallel" code -- programs that efficiently divide workloads across distributed processors -- is almost impossible. As Wall Street firms rely on multicore processing and even distributed computing to handle the ever-growing number of trade-related messages that are sensitive to any increase in data latency, the divergence between the capabilities of the technology and the capabilities of the programmers is becoming painfully evident. No matter how many messages a powerful multicore processor can digest in a test lab, the experts said, if the software handling the message flow is written for a single-core environment, much of the value of the multicore processor is lost. That's a pretty scary statement, considering that financial firms will spend approximately $300 million just on technology to lower latency this year, noted Bob Iati, research director at TABB Group, in his presentation at the conference. A good portion of that dollar figure will be spent on multicore processors, as firms replace single-core chips. By 2010, Iati said, 49 percent of chipsets will be dual-core and 48 percent will be quad-core. That's not to say trading desks aren't seeing vast improvements in data latency as firms continually upgrade processing capability. But if software was written to take full advantage of multicore processing capabilities, a firm's advanced trading strategy could jump ahead of competitors in the low-latency arms race. Although I don't know where the talent will come from, history has shown that Wall Street will find the needed expertise somewhere. After all, as algorithmic trading took off, the Street managed to attract (and continues to woo) the best and the brightest quantitative analysts from the world's top universities. 1/29/2010 10:16:53 AM |
2010 Technology Forecast Is Anyones Best GuessWith the economy sending mixed signals, predicting
how capital markets firms will spend their technology dollars is a
difficult, though not impossible, task. Despite the return to near-record profitability at many financial services firms, most executives would probably prefer to put 2009 behind them and start fresh in 2010. After all, isn't that what the New Year is all about -- turning the page on the prior year and looking forward to something better?
The problem is that the economy is sending mixed signals. In 2009 we
knew what to expect -- job losses, a painfully weak economy and more
bank failures. As the industry looks to 2010, however, record banking
profits are likely to be accompanied by job losses, a painfully weak
economy and more bank failures. So how do CIOs finalize 2010 strategic IT plans when some economists are predicting a return to growth and other experts warn that a jobless recovery and sluggish business spending will postpone a serious rebound until 2011? I certainly don't know what to expect -- except that most 2010 budgets will be based on less-than-certain assumptions. While the editors at Wall Street & Technology aren't brave (or foolish) enough to try to predict which way the economy will move next year, we are confident (perhaps foolishly) enough in our technology predictions to publish our 2010 Capital Markets Outlook. This year's Outlook highlights 10 topics that will demand the attention of CIOs next year. There are four topics for 2010 -- risk management, regulation, credit derivatives clearing and social networking -- that we also deemed priorities for 2009. Two topics -- risk management and OTC derivatives -- also made our list in 2008. In fact risk management has been one of the priorities we have highlighted since 2005, though most agree that a lot of work still needs to be done (see: credit crisis). One of the largest unknowns heading into 2010 is what will happen with regulatory reform. Six of the 2010 Outlook's 10 topics -- high-frequency trading, dark pools, hedge fund automation, risk modeling, OTC derivatives clearing and regulatory reporting -- are waiting for some sort of regulatory clarification. Until 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 continue through 2010 or if the recovery will continue to be jobless. But I would be willing 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? 1/29/2010 10:14:38 AM |
With the economy sending mixed signals, predicting
how capital markets firms will spend their technology dollars is a
difficult, though not impossible, task. Despite the return to near-record profitability at many financial services firms, most executives would probably prefer to put 2009 behind them and start fresh in 2010. After all, isn't that what the New Year is all about -- turning the page on the prior year and looking forward to something better?
The problem is that the economy is sending mixed signals. In 2009 we
knew what to expect -- job losses, a painfully weak economy and more
bank failures. As the industry looks to 2010, however, record banking
profits are likely to be accompanied by job losses, a painfully weak
economy and more bank failures. So how do CIOs finalize 2010 strategic IT plans when some economists are predicting a return to growth and other experts warn that a jobless recovery and sluggish business spending will postpone a serious rebound until 2011? I certainly don't know what to expect -- except that most 2010 budgets will be based on less-than-certain assumptions. While the editors at Wall Street & Technology aren't brave (or foolish) enough to try to predict which way the economy will move next year, we are confident (perhaps foolishly) enough in our technology predictions to publish our 2010 Capital Markets Outlook. This year's Outlook highlights 10 topics that will demand the attention of CIOs next year. There are four topics for 2010 -- risk management, regulation, credit derivatives clearing and social networking -- that we also deemed priorities for 2009. Two topics -- risk management and OTC derivatives -- also made our list in 2008. In fact risk management has been one of the priorities we have highlighted since 2005, though most agree that a lot of work still needs to be done (see: credit crisis). One of the largest unknowns heading into 2010 is what will happen with regulatory reform. Six of the 2010 Outlook's 10 topics -- high-frequency trading, dark pools, hedge fund automation, risk modeling, OTC derivatives clearing and regulatory reporting -- are waiting for some sort of regulatory clarification. Until 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 continue through 2010 or if the recovery will continue to be jobless. But I would be willing 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? 1/29/2010 10:14:20 AM |
With the economy sending mixed signals, predicting
how capital markets firms will spend their technology dollars is a
difficult, though not impossible, task. Despite the return to near-record profitability at many financial services firms, most executives would probably prefer to put 2009 behind them and start fresh in 2010. After all, isn't that what the New Year is all about -- turning the page on the prior year and looking forward to something better?
The problem is that the economy is sending mixed signals. In 2009 we
knew what to expect -- job losses, a painfully weak economy and more
bank failures. As the industry looks to 2010, however, record banking
profits are likely to be accompanied by job losses, a painfully weak
economy and more bank failures. So how do CIOs finalize 2010 strategic IT plans when some economists are predicting a return to growth and other experts warn that a jobless recovery and sluggish business spending will postpone a serious rebound until 2011? I certainly don't know what to expect -- except that most 2010 budgets will be based on less-than-certain assumptions. While the editors at Wall Street & Technology aren't brave (or foolish) enough to try to predict which way the economy will move next year, we are confident (perhaps foolishly) enough in our technology predictions to publish our 2010 Capital Markets Outlook. This year's Outlook highlights 10 topics that will demand the attention of CIOs next year. There are four topics for 2010 -- risk management, regulation, credit derivatives clearing and social networking -- that we also deemed priorities for 2009. Two topics -- risk management and OTC derivatives -- also made our list in 2008. In fact risk management has been one of the priorities we have highlighted since 2005, though most agree that a lot of work still needs to be done (see: credit crisis). One of the largest unknowns heading into 2010 is what will happen with regulatory reform. Six of the 2010 Outlook's 10 topics -- high-frequency trading, dark pools, hedge fund automation, risk modeling, OTC derivatives clearing and regulatory reporting -- are waiting for some sort of regulatory clarification. Until 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 continue through 2010 or if the recovery will continue to be jobless. But I would be willing 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? 1/29/2010 10:14:17 AM |
Allianz Global Investors Small Application-Support Team Provides Big ResultsAllianz Global Investors Management Partners (AGI), which is made up of three separate investment management firms, has about $45 billion in assets under management. While the assets are not eye-popping when compared to a Vanguard or Fidelity, it's still a sizable company.
What's not sizable, though, is the technology team that supports AGI's
business applications. In all, just 33 people manage all of the
business applications for AGI's three investment management companies,
San Diego-based Nicholas Applegate Capital Management (NACM), Dallas-based NFJ Investment Group and Oppenheimer Capital (OpCap)
in New York. The application team oversees all of the systems that are
needed to run the business, including portfolio management, compliance,
sales, CRM, performance and attribution functionality, to name just a
few. And the management of all of the business applications and
software falls under the leadership of one person, Steve Rapp,
who is the managing director and CTO for Allianz Global Investors
Management Partners. (Rapp's 33-person team oversees only business
applications. Another team of 70 or so people runs the technology and
operations side, including all hardware, desktops, networking and
telephones.) With such a relatively small support team, most observers would assume that AGI leans heavily on outsourcers. "We don't have cadres of programmers working for us in an outsourced facility in Bangalore," Rapp says. "But we do have classic long-standing outsourcing relationships." For instance, AGI's accounting systems are run out of Toronto at an SS&C Technologies facility. "In those cases, we are entirely outsourcing the environment and application, and we just remote [connect] in," app explains. "We have a number of relationships like that." And AGI doesn't lean heavily on consultants either, according to Rapp. "We use consultants here and there, such as people we have worked with for a long time," he says. As for his 33 full-time team members, Rapp jokes, "These guys are pretty busy -- there are some weeks when they don't sleep." Big Decisions Despite the group's small size, Rapp and his senior team members -- including SVP Larry Russell and VPs Mike Urban, Sean Hudson and J.P. Gagnon -- have made some big decisions recently, as is increasingly common of the CTO role in today's business environment.
 "If you were to name all of the major application platform systems at an investment management firm, we are changing all of them at once," Rapp relates. "We are working on the accounting, portfolio management, trade order management, FX trading, performance and attribution, and reconciliation [systems]. This is a multiyear project." In fact the project is the reason why Rapp requested to be transferred to New York -- so he could help oversee the move to the new systems. "When you are doing a change at this level -- basically all of the major systems -- you need to focus on the people who will be involved in the project," Rapp says. That's not to say that actually configuring and rolling out the new systems is easy. "Having smart people who are experienced with the technology certainly helps" make the transition to the new technology easier, Rapp comments. "But with so many new tools, you are moving people away from their old systems and practices. That creates a lot of anxiety, and that is one of the things that I actually thought long and hard about. "That is why I asked if I could relocate to New York for a period of time," Rapp continues. "I felt that to have someone fly in to New York and say 'Here's some more change. My flight leaves tomorrow, see you in a month' -- that is disconcerting. It doesn't build a relationship, and it doesn't build a sense that we are trying to raise all the boats here" in terms of adding functionality and capabilities across the organization. One Thing Led to Another... Specifically, AGI is adding functionality by implementing a unified portfolio platform based on technology that NACM has in place in San Diego. "This all started through a collaboration between myself and the then CTO here in New York" in early 2008, Rapp says. "Originally it was going to be operations and technology. We then shared some application technology that was developed in San Diego [for NACM]." At that time, Rapp adds, OpCap and NFJ were starting to embark on a major technology investment to upgrade many of their business systems. "They saw some of the things we already created, so they decided to co-opt them rather than pay someone else to develop them," Rapp says, adding that at that point senior management saw the benefits of having one technology organization that serves the three independent investment management companies. For portfolio management and trading, AGI is migrating to Fidessa's LatentZero Capstone platform. "The migration was already underway in San Diego [for NACM], and we will put LatentZero into place at OpCap and NFJ," Rapp reports. FXall, also new to AGI, will be used for foreign currency trade execution in all three firms, he notes. AGI also is moving OpCap and NFJ to SS&C's Sylvan performance attribution software, which has been in use at NACM since 2003. According to Rapp, the move to the Sylvan product made sense because the application integrates easily with other SS&C products, including Pacer, which all three firms will use for portfolio accounting. Previously, portfolio accounting was handled by Advent Software. The goal is to get OpCap and NFJ on Pacer by early 2010, Rapp says. AGI also is moving all three firms onto Lexus Nexus Interaction for CRM. Currently NACM (since 2003) and NFJ are on Interaction, with OpCap set to transition from SalesLogix in 2010. Rapp says there are a number of reasons why AGI is moving to these applications. "One reason, of course, is for economies of scale and economic savings," he says. "But, most important, we are adding functionality for the business and, in some cases, the technology is changing the way the business operates so it is more efficient." The new systems, Rapp asserts, can improve business processes and help people make even better business decisions. In addition, NACM already had a lot of experience with some of the technologies, so it made sense to leverage that knowledge across the three companies rather than select other applications and start from scratch, Rapp contends. "A lot of work had already been done at Nicholas Applegate, and the various applications integrated well," he relates. "In this industry you can find a lot of applications, but they are fairly siloed. You need to find ways to knit them together. Sure, you can look at an individual tool from a certain vendor and it may have superior functionality, but when you look at how they are integrated with other applications in a complete package, the value may not be there." While Rapp declines to put an overall price tag on the project, he says, "It is in the millions of dollars in terms of spending. And it is in the millions of dollars in savings in years two, three, four and beyond." Winning Formula Undertaking such a large project -- or, rather, so many large projects -- with such a small team is possible, Rapp contends, because of the way the team is structured. According to Rapp, he has assigned senior technology team members to work closely with the heads of the business units. "The technology team responds to key departments in the organization. The team can have a tight relationship with the heads of the various departments," he explains. This way, Rapp adds, the head of institutional sales, for instance, can work with the same technology people day in and day out so Rapp's team can understand "on a very intimate level" what the important motivators for the head of institutional sales are. "The same thing holds true for the chief investment officer and all of his portfolio managers and traders," he says. Having some continuity in the business-technology relationship also brings consistency to the process. "This is a formula that has worked well for me over a long career, and I think it is an obvious approach," Rapp says. "People really appreciate getting to know someone and realizing they can count on them." Most important, the technology platforms that AGI has selected can grow with the business without adding IT head count, Rapp contends. "Our head count picture from a technology, applications and operations standpoint is very defensible," he says. "We have advanced technology that is allowing us to manage head count at a very competitive level. We delivered a technical platform that can grow and doesn't increase staff as it grows. Usually in the operations and technology area, as the business grows, you need to add operations and technology people in lock step. We have done away with that." 11/13/2009 12:59:18 PM |
BlackRocks Analytics Pay Off in More Ways Than OneBlackRock's valuation analytics are so well-respected that the firm made a business out of them. Now the federal government is one of its top customers. October 18, 2009 Tags: BlackRock, Barclays Global Investors, Security Valuation, Analytics, Rob Goldstein, Tom Fortin, Risk Management, Credit Crisis,In the wake of the financial crisis, BlackRock has emerged as one of the most valued and influential advisers to the U.S. government. Not only is it the world's largest money manager, with $2.7 trillion in assets under management stemming from its acquisition of Barclays Global Investors (due to close in the fourth quarter), BlackRock also has become a key contractor to the U.S. Treasury department because of the quantitative asset manager's expertise in valuing complex debt instruments. At the heart of BlackRock's rise to prominence has been its analytics, which are housed in the firm's BlackRock Solutions technology division. The technology organization develops BlackRock's analytics and maintains extensive databases. "Fundamentally, these products are incredibly complicated," says Rob Goldstein, managing director and head of BlackRock Solutions. "We fortunately have the modeling capabilities to look at them from the bottom up." Even before Bear Stearns' hedge funds imploded in spring 2007 and the credit crisis crippled the industry, BlackRock was called on for its risk analytics expertise. "We started to get inquiries to look at portfolios and to provide a risk assessment," relates Goldstein, who declines to name clients but acknowledges that the firm became involved with some of the "headline" names following the market implosion. Known for its expertise in fixed income, BlackRock reportedly was hired by the federal government to help value and unwind the complex holdings of Bear Stearns, American International Group and Citigroup. In addition the government engaged BlackRock to evaluate Fannie Mae and Freddie Mac, the mortgage finance giants, and to perform risk assessments of banks and insurance companies both in the U.S. and internationally. "It all goes back to the core modeling capabilities," emphasizes Goldstein, who compares the ability of the firm's analytics to provide transparency into complicated instruments to the capabilities of an MRI machine. The Birth of Aladdin These capabilities are delivered through Aladdin, BlackRock's enterprise investment management, operations and risk management system. "The roots of Aladdin started with the founding members of the firm," relates Tom Fortin, CIO at BlackRock's headquarters in New York. He explains that with the fast run-up in complex mortgage assets, BlackRock founder and CEO Larry Fink, who previously was head of the mortgage department at First Boston, realized the lack of capabilities on the buy side to understand these products.
 So in 1988 BlackRock cofounders Charlie Hallec, currently co-COO, and Ben Golub, the firm's chief risk officer, began building collateralized mortgage obligation (CMO) valuation models, relates Fortin. "That has been one of the guiding principles of the firm -- to understand the risks you are taking, to know where you are, to be able to manage them, and to know the limitations of the products and the models," he says. "Complete portfolio transparency was and is the theme," observes Goldstein, who says that BlackRock began to get inquiries from other institutional asset managers regarding its analytic capabilities when the U.S. mortgage market went through an earlier implosion in 1994: "Can you take a look at our portfolio?" he recalls being asked. Over time BlackRock started to make the analytics available to its institutional clients as a risk and analytics platform, expanding it to include various advisory services and eventually the entire Aladdin platform. The company officially launched BlackRock Solutions in 2000. Today BlackRock Solutions employs 1,000 people and has evolved into a global business with clients that span the Americas, Europe, the Middle East, Asia and Australia. It maintains local client service sites in major cities overseas and across the United States. With about $7 trillion in client assets, BlackRock Solutions is the largest securities and portfolio analytics company in the world, according to Goldstein. "BlackRock recognized very quickly that the problems its clients were facing were exactly the problems we are facing," explains Fortin. "It was a natural position to create these models, use them ourselves and use the models to help others."
Although it's the largest user of the Aladdin platform, BlackRock
collaborates with more than 100 large organizations that use the
analytics and risk tools, which ensures that the platform stays best in
class, according to Goldstein. Adds Fortin, "We offer Aladdin as a service, so we manage the hardware, the database, the communication services and the data centers." While the compute farm is a shared resource, he notes, each client has its own unique database and technology to ensure confidentiality of client information. BlackRock Solutions generated $116 million in revenue in the second quarter of 2009 (compared to $100 million in Q2 2008). In turn, the money manager can plow those profits into maintaining the models. "The commercialization of those tools allowed us to continue to invest and build out the tools that our clients and BlackRock needed," says Fortin, adding, "It's the combination of the technology and the human capital investment in people who understand the data and the models that has made us unique." As Fortin suggests, one of BlackRock's strengths is its analytics group, which includes more than 200 risk analysts. Woo Kwong and Jody Kochansky run the analytics group, which performs the modeling and quality control and helps explain to clients how the models' analytics work -- both the strengths and weaknesses, according to Goldstein, who started in the analyst program in 1994. In addition BlackRock hires a quantitative modeling group to analyze how the securities will perform in volatile markets. Recognizing their value, BlackRock works hard to recruit, train and retain top analysts. "BlackRock has a strong recruiting philosophy," says Goldstein. "We hire an analyst class with the goal of [putting them through a] training program." Analysts in training learn analytics quality control -- how to determine which data is important and why, and the quality of the data. BlackRock has built up a massive technology infrastructure to support all the analytics. But models and analytics are just one part of Aladdin -- it also includes the infrastructure that's needed to manage orders, capture trades, run compliance checks and manage trade settlement. An O.S. for Asset Managers "Aladdin is like an operating system for asset managers," says Fortin, who supervises the Aladdin development team of about 200 people who work on everything from portfolio management tools to pre-operational and performance measurements. A separate technology infrastructure team is responsible for "everything with a plug and for maintaining the giant compute farm that allows BlackRock to monitor, process and quality-control the models we use every day," he explains, noting that BlackRock manages its own computer farms, including more than 3,000 processors. The firm has several data centers on the East Coast with disaster recovery and hot standby. But, "Equally as important to the technology and models is having the capability to quickly process the data," Goldstein points out. "Many of these portfolios have tens of billions of dollars invested in them, with tens of thousands or hundreds of thousands of line items, so processing that information quickly and accurately is crucial." According to Fortin, BlackRock realized that mass parallelization of these calculations -- which can take hours -- would greatly increase their speed, so it developed cloud-like computing capabilities to support this. Clean data also is critical to the analytics process, and that's one of the reasons that BlackRock insists on maintaining Aladdin as one central platform for portfolio holdings, Fortin adds. "It's hard to get data clean," he says. "The notion of having it clean in 17 places" is impossible. With a central system such as Aladdin, if trade operations fixes an error, the portfolio manager benefits, and vice versa, Fortin continues. "The more eyes on a piece of data, the cleaner it gets," he says, noting that BlackRock employs an overnight quality control process in which a large team examines all the exceptions across the millions of securities valued every day. This way, Fortin explains, the portfolio manager doesn't spend three hours wondering if the portfolio values are correct. "To us the quality control component of the analytics is just as important as the people building the models, analyzing the models and loading the data," he says. With the acquisition of Barclays Global Investors, perhaps BlackRock's most important project will be to integrate BGI's technology with Aladdin. According to Goldstein, BlackRock will tap BGI's expertise to build the platform's equity and equity-trading functionality. "We're very excited to incorporate that intellectual capital into BlackRock and Aladdin," says Fortin. BlackRock also will tap BGI's automated trading and transaction cost analysis technology. "We think in 2010 it will give us an opportunity to do more with trading analytics in addition to securities analytics," says Goldstein, who notes that the company is constantly developing new offerings to meet money managers' insatiable appetite for analytics. In fact it currently has analytics initiatives ongoing with commercial mortgages, mortgages outside the U.S., inflation bonds, mortgages with existing prepayment and credit models. "You can never deliver too many analytics for portfolio managers and traders," says Goldstein, who compares it to painting the George Washington Bridge. "Once you're done, you need to start again." 11/13/2009 12:55:39 PM |
Goldman Sachs Sets Gold Standard for IT InnovationBy focusing on in-house development capabilities and a culture of collaboration, Goldman Sachs has built outstanding risk management and algorithmic trading products. Joseph Squeri, global head of equities technology, explains how the firm does it. October 27, 2009 Tags: Goldman Sachs, Joseph Squeri, Gold Book, Algorithmic Trading,Our Gold Book panelists applauded Goldman Sachs this year for a risk management infrastructure that steered the firm away from the subprime mess as well as for its widely used algorithmic trading products and its ability to manage technology efficiently -- "They very rarely have projects blow up," one panelist notes.
According to Goldman's Joseph Squeri, managing director, global head of
equities technology and co-head of securities technology, "Within
Goldman Sachs, everything we do has risk management ingrained in it, we
don't look at it as a separate function from our trading systems." The
firm, Squeri points out, has an in-house built platform for analyzing
risk pre-, intra- and post-trade. "Because we have a common platform
across all our businesses, we can give traders and business leaders the
information they need to make decisions in real time," he says. Much of Goldman Sachs's overall IT capability, Squeri relates, can be attributed to a culture of collaboration. "What makes IT work well here is our ability to collaborate across all disciplines -- application development, infrastructure, our quant teams and our business -- and packaging that all together into an application that meets the needs of our internal and external client base," he says. "We have a collaborative culture that brings them together and makes it work."
 Although it does work with some vendors, Goldman Sachs has a bias toward in-house development versus off-the-shelf vendor packages, except for commoditized functions, according to Squeri. "This gives us a competitive advantage and enables us to be more nimble so that we could adapt the technology to meet whatever business need is facing us," he asserts. Currently Goldman's largest IT project is its rearchitecture of order management connectivity and routing for trading. "We've been able to reduce our latency by 90 percent and increase throughput more than 1,000 percent, providing advantages to our clients and ourselves," Squeri reports. He explains that these improvements have come through rewriting the order management, routing and exchange connectivity paths in C++. The underlying hardware, he adds, comprises industry-standard Linux servers housing Intel Nehalem chips. Goldman also has developed an architecture that enables the automatic provisioning of servers, which, Squeri says, has enabled the firm to take advantage of consolidation opportunities in its data centers and reap significant capital and operating expense savings, as well as to manage the provisioning of servers more efficiently. The servers are virtualized with VMware; Goldman built the management layer that operates these virtual servers. This year the firm also moved to thin desktops for all elements of its businesses. According to the firm, this has reduced power consumption and provided flexibility in the area of business continuity while enabling employees to work remotely. Squeri notes that some legacy systems needed to be tweaked to work across the thin desktops, but otherwise the process has gone smoothly, he says. Multi-Asset Ambitions The IT focus for next year at Goldman will be on "leveraging components we've built in the past for algorithmic and automated trading across multi-asset strategies," Squeri says. "We're building automated trading engines for our in-house traders as well as our external client trading systems because we feel the biggest innovation we'll get over the next 12 months will be the ability to move toward more electronic trading across multiple asset classes." This is a somewhat astonishing statement coming from an executive at the firm that dominates the realm of automated trading. Surely equities are already traded electronically at Goldman? "They are, but right now for many of our external clients equities are still traded in somewhat of a manual fashion," Squeri admits. "If you've got a list of stocks you need traded, you wait for the market opportunity, submit an order down to the exchange or to a simple algo, wait for your trade fills to come back, then submit the next order. We're building automated multi-asset trading strategies that allow you to put much broader trade ideas into the algorithm and have the algo trade it for you through electronic pipes." Like other high-frequency trading programs, the software takes in a variety of signals, such as market news and trade ticks, reacts to those signals, and adjusts or implements automated trades, explains Squeri, who adds that Goldman is building new trading algorithms for several areas of its business, including fixed-income products and cross-asset-class trades. [This project made major news in July, when Sergey Aleynikov, a former VP at Goldman Sachs, was arrested for allegedly running off with some algorithmic trading code.] Also on Goldman's plate for 2010 are projects to provide enhanced analytics to clients through its front-end Goldman 360 platform. "A lot of it is about enabling our clients to operate and execute more efficiently, letting them benefit from some of the technical innovations that we've benefited from in-house over the past three years," Squeri comments. The firm has developed technology that lets it expose interactive models and real-time analytics to external clients via a Web 2.0 infrastructure. When these projects are completed, clients will be able to see how some of their trading algorithms have performed and get a better sense of which ones to continue and which ones to drop, Squeri notes. "We have the ability to do that because we have a common platform across our internal and external systems with physical barriers separating the two," he says, explaining that while there's a shared platform, two different broker-dealers are involved -- one for internal and the other for external clients -- so the two environments are physically separate. "That's difficult to architect," Squeri adds. 11/13/2009 12:50:42 PM |
The 10 Key Capabilities of Next-Generation Project ManagersTo succeed today, project managers need more skills and capabilities than ever before. It's no longer enough to be fluent in project management best practices, tools and methodologies.October 21, 2009 — CIO — Project managers might just have the toughest job in IT, responsible as they are for ensuring that high-stakes IT projects are completed on time and on budget. According to a new report from Forrester Research, the project manager's role is getting even more demanding and difficult to fill. It's no longer enough for project managers to possess good people skills and to be fluent in project management best practices, tools and methodologies. To succeed—and get hired—today, project managers need enhanced leadership skills; they need to be flexible and focused on business value; and they increasingly need to be familiar with Agile software development methodologies, writes Forrester Analyst Mary Gerush in Define, Hire and Develop Your Next Generation Project Managers. A former IT project manager herself, Gerush and colleagues interviewed IT professionals and project management experts from a variety of organizations, including Chevron, Microsoft and LiquidPlanner, for the report. Gerush notes that shifting business conditions are changing the role of the project manager and the skills associated with it. "Organizations are striving to achieve faster [software] delivery without diminishing quality or increasing cost," she writes. As a result, she observes, they're moving from traditional software development methodologies to more Agile ones.
The move to Agile software development "shifts the role of the project
manager from a director to a facilitator," writes Gerush, because Agile
development methodologies rely on self-managed, cross-functional teams.
In an Agile software delivery environment, the traditional
command-and-control approach of project managers is counter-productive,
Gerush notes. Instead of defining roles and making sure team members
are following project management processes and procedures to a T, next
generation project managers need to focus on improving collaboration
and removing obstacles and distractions so that project team members
can get their work done on time and on budget. Another trend changing the role of the project manager is the need for companies to make business and IT processes leaner. "As organizations realize that traditional software delivery methods are bloated with processes and artifacts that add little or no value, they are trending toward Lean Software—and this transition will significantly change how they deliver projects," writes Gerush. "Project management offices (PMOs) are looking for ways to streamline their processes to focus on value and eliminate unnecessary effort and documentation; project managers must adapt to communicating more while documenting less." That means project managers need to be flexible enough to adapt their approaches to the needs of the business. It also means they need even stronger communication skills than in the past.
As companies distribute their software development around the world,
the project manager's ability to communicate with and relate to people
from different cultures becomes even more important. Project managers also need to be more focused on business value. In this economic environment where every dollar of spending is scrutinized and resources are scarce, organizations are paying more attention to the business value that projects deliver. Next generation project managers see their primary role as delivering value to the company—not just completing projects on time and on budget. "Through their understanding of project management practices and their expert capabilities, strong project managers do more than just keep projects on track," writes Gerush. "They drive project teams to produce excellent results by analyzing and understanding customer needs and helping the team work together effectively. This improves customer satisfaction and business value, which in turn drives improved IT-business relationships." 10 Core Capabilities of a Next Generation Project Manager
Given the way the project manager's role is evolving and the critical
nature of the role, Forrester Research developed a list of 10 core
capabilities that IT leaders should seek in their project managers.
They are:
1. Emotional Intelligence: The ability to pick up on events and
interactions (both verbal and non-verbal) and to process those inputs
in the context of the project plan. Notably, technical- and traditional project management skills are absent from Forrester's list of core capabilities for next generation project managers, but not because those skills are no longer necessary. While those skills remain important, Forrester maintains that because the softer skills are more difficult to learn than hard project management skills, organizations may be better off hiring individuals who are strong in those key capabilities "even if they lack experience in accepted project management practices." It's an opinion that's likely to spark controversy in project management circles, but it underscores the changing nature of the role. "This role is essential to your success today and will be even more critical over the next decade as software delivery and business context evolve," writes Gerush. "Traditional soft skills and core capabilities still dominate as companies look to hire project managers, but new skills are quickly coming to the forefront." 11/13/2009 12:22:22 PM |
When the Business Is IT10/5/2009 9:48:31 AM |
X9 to Introduce Corporate Cash Reporting StandardBanks and corporates, along with SWIFT, are joining forces to update the BAI cash reporting standard so there is less room for interpretation. August 19, 2009 The Accredited Standards Committee X9 (Annapolis) announced plans to create a new standard for corporate cash reporting. A Cash Management Reporting working group will convene Sept. 2 that will bring together participants from the banking, corporate, vendor and government sectors to help establish a more uniform way for reporting cash positions.
Rather than starting from scratch, however, the working group will take the existing 20-year-old BAI standard for cash management reporting and revise it, Cindy Fuller, executive director at X9, told BS&T. "We want to narrow it, improve the readability and interoperability." According to Jim Wills, senior business manager, banking initiatives at SWIFT, corporates have to deal with numerous formats when reading their transaction statements, as each of their banks tends to report this information in different ways. "Each bank reports differently," he says. "Corporate transactions are complex and diverse. The existence of a standard is critical. If it's not clearly defined, everyone will interpret it differently. This becomes difficult and expensive for corporates to deal with." The BAI standard is issued by the Bank Administration Institute in Chicago. Fuller says the organization hadn't been maintaining it much over the last few years. Finally, BAI eventually handed over the management and copyright of the standard to X9. Now, with the involvement of SWIFT, X9 is working to make this a national American standard. "It's a big undertaking, but the industry tends to gravitate toward best practices and standards," says Fuller. The idea is to make the verbiage more definitive so that there will be less wiggle room for interpretation. Eventually, there might be an opportunity to introduce the updated BAI standard to the ISO arena, the international standards body, notes Fuller. "The benefit for the corporate is to have a new, fully vested BAI message standard that is aligned with today's cash management reporting practices allowing them to better manage their working capital," says Rene Schuurman, global product manager connectivity services, Citi Global Transaction Services (New York). "And for banks, this will help drive standardization and reduce custom enhancements resulting in cost savings and faster client delivery of services." It's not just an American standard either, adds Wills. "We are working from a wonderful foundation. BAI is the most widely used U.S. standard. It's in every financial institution and corporate," he explains. "BAI is used globally as well. We want to create a standard with global applicability. The corporates are global with accounts around the world. If the banks can implement the standard consistently, there will be enormous benefit to companies in saving money and mitigating risk." The BAI codes are mainframe applications. These will all be updated to take into account new kinds of transactions, such as SEPA (Single Euro Payment Area) credit transfers. Other transactions may be deleted. XML will also come into play. Extensible markup language is the syntax used in the ISO 20022 financial messaging standard since it provides richer detail to corporates. "This is also a server-based technology, so it will be easier to make changes going forward," says Wills. "But there will probably be technology challenges as we migrate from mainframe to server-based technology for this." And the timing of this announcement couldn't have been better, says Fuller, given the current financial environment. "We might not look at these standards in good times," she notes. But now we want to look at every opportunity. The corporates are making us understand this is a terrific time to do this work. There will be definite payback. But it's going to be an evolution rather than a revolution." In other words, whatever the final product is of the X9 working group, don't expect a big bang rollout. In addition to creating the standard, Wills says there will still be work around developing the technical documents and implementation guidelines. "We'll probably have our first publication within the year, but it's not going to boil the ocean," notes Wills. "We want to do what's achievable." Fuller says the group will most likely deliver the new standard in parts, depending on the needs of the corporates. Adds Wills, there are certain pain points the corporates consistently bring up in his meetings with them, the main one being the lack of uniformity in reporting by banks. The working group is being co-chaired by representatives from three sectors. Along with SWIFT's Wills, there is also Citi's Schuurman, and Bill Lundeen, group manager, global banking, at Procter & Gamble. Still, there have been efforts in the past to get corporate banking standards off the ground, but they never quite came to fruition. What will be different about the X9 initiative, says Fuller is that this standard will be continually maintained for relevance. "[The BAI standard] is widely embedded in legacy systems and any change will occur slowly," explains Fuller. "Implementing change will take years. When looking at what's needed next, we want to try to hear the voices of all our participants." Wills says this is a significant development, given how ingrained BAI. "There are only a few financial services standards as deeply embedded as this one. One is the check standard and the other is lockbox. The BAI cash reporting standard is embedded at every financial institution and corporate in the U.S. It represents a significant amount of money corporates spend with their banks. It's all about information. Corporate live based on the quality of information. It's critical to the decisions they make." Adds Citi's Schuurman, the true value of this initiative is to apply long-awaited enhancements to the BAI message format. "Corporates and banks around the world use BAI statements for a variety of purposes and many custom enhancements have been made," he explains. "There are, for example, no standard codes for activities originating from SEPA payments or UK Faster Payments. With this industrywide initiative, we will bring focus back on the core principles of the message, standardize and harmonize transaction codes, and establish a roadmap for continuous maintenance governed by X9." 8/19/2009 9:22:49 PM |
Wells Fargo Tech Exec Discusses Wachovia IntegrationMuch of the IT integration work still lies ahead in the closely watched acquisition. Editor's Note: This article originally appeared on Informationweek
One early success in merging the Wells Fargo-Wachovia IT systems was getting mortgage employees on a single platform in time to rake in this year's refinancing boom, says the executive leading the technology integration for the combined companies. Other victories include combining payment systems so Wachovia branches could accept payments from those new Wells Fargo mortgage customers, and allowing customers to use the combined ATM network, says Martin Davis, head of the Technology Integration Office and previously CIO for Wachovia. Still, most of the technical integration work lies ahead for one of the most closely watched acquisitions in the banking industry. "We've got the planning laid out, we know how we're going to do the integration, and now executing flawlessly is the most significant challenge," Davis says. "We know we can get the work done, but we want to make sure we minimize any impact to our customer base." Wells Fargo agreed to buy Wachovia for $15 billion in October, when Wachovia was on the brink of collapse. Wednesday, Wells Fargo announced second quarter results with revenue of $22.5 billion, up 28% from the first quarter, and net income rising to $3.17 billion. Yet investors still drove the stock down, as analysts worried about the bad loans in its portfolio, which grew to $18.3 billion, or 2.2% of its total loans. The U.S. banking sector is in the midst of major change as fallout from last fall's banking crisis. The Wells Fargo-Wachovia deal will create a 10,000-branch, 12,000-ATM operation, linking Wells' West Coast franchise with Wachovia's East Coast presence. Meanwhile, JPMorgan Chase expects to have fully integrated the retail banking assets of Washington Mutual by year's end, while at the same time bringing on the investment bank Bear Stearns. Anyone who's been through such IT integrations knows they're tough, in part because it means picking one software system and killing off another. "It can be emotional," Davis says. "[IT pros often] tie their value and worth to the organization to the system they support. We constantly remind our team members the value of a technology professional is the experience and knowledge you bring around technology, not necessarily tied to a particular system." Davis declined to put a number on the IT layoffs resulting from the acquisition, but says they've been minimized in part by reducing local contractors and offshore activity. Wells Fargo's IT integration strategy starts with the assumption that it'll keep the Wells system, unless there's a clear performance advantage, such as using Wachovia's brokerage platform. There's also the option of bringing in a new software platform that's better than either company has, but the team resists that. "We select system A or B, and we challenge if someone tries to bring in option C," Davis says. However, the integration does present a golden opportunity to efficiently ramp up adoption of the right emerging technology. One such example is server virtualization. In a typical year, an IT organization might work on 20% to 30% of its software platforms in a significant way. During the integration, IT teams will touch more like 80% of systems. Wells Fargo was in the midst of planning for a major data center expansion, but it instead will move into a new data center that Wachovia recently built. That's the right time to consider running more apps on virtual machines, thus increasing server utilization and letting the company operate fewer boxes. Both companies have been using server virtualization, of course, but Davis says this will speed that up, letting teams "make a conscious decision whether we should or should not virtualize." Wachovia had more recently been through a major integration, bringing on First Union and AG Edwards in recent years, so the combined companies are using Wachovia's methodology for setting integration priorities. Each business unit creates a "target operating model"—a Tom—that lays out the business units' product plans, workforce size and geography, its technology needs, and any gaps in product or technology. Business unit leaders walked through each TOM as a group, figuring out how to prioritize the integration, where the synergies are, and how they'll work together. Davis says the key metrics he watches to see if the integration's on track center around system availability, employee retention, budgets, and operational efficiency. The market's cool response to Wells Fargo's growing sales and earnings this week shows investors still have grave doubts about the banking markets, and that only ramps up the pressure on executing the Wells-Wachovia integration. CEO John Stumpf called the integration the company's "top priority." Along with the pressure, though, Davis says there's a motivation for the IT team in working on an historic integration. "How many times in a career will you have a chance to do what we're doing right now?" Davis asks. "You can probably argue there will never be a transaction in the financial services industry of this size again, given the size of the players that are currently in the U.S. financial market." 8/19/2009 9:19:43 PM |
IT Transformation Mantra: Carpe DiemThe tough economy of the past 18 months has given technology leaders in Wall Street firms the opportunity to implement IT governance and clean up operations. Make no mistake: The past 18 months have not been fun at financial firms. Companies have cut thousands of jobs and initiated drastic spending cuts across all business lines. And bonuses have been slashed, if not eliminated completely. Indicators show that the economy seems to be improving slightly, but it is by no means chugging along at full steam. And while Goldman Sachs once again is showing strength, newly reported unemployment numbers are still alarmingly high (though not as high as in previous months). Still, in preparation for a full recovery, some executives are moving quickly to improve the structure of their organizations during the current tough times. These forward-looking executives are taking advantage of the current environment to instill additional discipline in their organizations around how scarce development dollars are spent. At a recent Wipro-sponsored roundtable that was hosted by Wall Street & Technology, senior financial services technology executives met to discuss the rather nebulous topic of "IT transformation." They agreed that the industry is at a particular point in time -- perhaps an 18-month window -- where executives can implement IT development processes with the support of senior management. Why now? For starters, anything that cuts costs, improves efficiency and/or increases productivity is likely to gain the attention (and approval) of senior management. There also is a lot more attention than ever before being paid to what is spent and what the return on that investment might be. Finally -- and this may be the most important factor for capital markets firms -- there isn't the typical "costs and process be damned" push from the front office for new functionality. One roundtable participant noted that his firm views this window as an opening to clean up its operations and fix many of the mistakes that were made during the boom years, such as poorly designed systems. Another participant agreed, adding that his top managers are working to implement processes and discipline around how technology projects are selected and approved. If line-of-business managers don't take the time to implement stricter oversight now that they have the support of senior managers, it will never get done, he said. In all, it's interesting to hear how some technologists view the current environment as a great opportunity, despite all of the challenges and hardships. Carpe diem. 8/19/2009 9:18:49 PM |
Online Bill Pay Expected to Grow Through 2014Forrester Research shows there is still room for growth in e-bill pay, but the battle will continue between biller director and aggregator models. June 16, 2009 There may yet be room for growth in online banking—at least when it comes to bill payments. According to the latest research from Forrester Research, the total number of U.S. online bill payment households will increase from 48 million to 63 million.
In the report US Electronic Bill Payment And Presentment Forecast, 2009 To 2014: Preparing For The Rise Of The Biller-Direct Generation, Forrester analysts outline the growth trends in EBPP over the next five years and concludes there is definitely more that can be done here. However, even though they found that bill aggregators like banks and services like Yodlee have an edge, they also caution that the real battle will be by the banks to win over the younger generation, who tend to pay their bills directly at merchant websites. Forrester predicts slow but steady growth in EBPP over the next five years, saying the market is not yet saturated here. Such factors contributing to the increase include the younger, more tech-savvy generation who rarely write checks, the growing realization by consumers of EBPP's speed and convenience, and the earth-friendly angle and cost savings around paper generated by EBPP. Furthermore, those households that already pay some bills online are very likely to pay even more bills electronically. Although the biller direct model maintains its lead from early adoption by consumers, many are coming to realize the convenience of the aggregator model, notes the report. Once e-bill pay fees were eliminated by banks, this helped set the stage for what Forrester thinks will be a surge in uptake by consumers using banks as bill aggregators. The firm predicts biller consolidators will exceed biller direct sites for the first time in number of bills paid by 2012. The trick for banks, however, will be convincing younger consumers to pay their bills with them. Young affluent consumers are slightly less likely than average to pay bills via bank sites versus other consumers (35 percent compared to 46 percent). To remedy this situation, Forrester makes the following recommendations to financial institutions:
6/18/2009 4:21:16 PM |
Energy Stars: Wall Street Firms Sustainable IT EffortsStrained budgets combined with advances in virtualization technology and energy-efficient equipment are driving the efforts of Wall Street firms -- such as BNY Mellon, Citi, Northern Trust and Buttonwood Trading Group -- to make their data centers and broader IT infrastructures more sustainable. No Wall Street firm could declare its data center truly "green." After all, a fully loaded data center draws somewhere between 7 and 40 megawatts (millions of watts) of electricity, enough to power thousands of homes. According to the Environmental Protection Agency, the energy consumption of the nation's data centers will exceed 100 billion kilowatt hours by 2011, ringing up annual electricity costs of $7.4 billion. But some data centers hog less energy than others (see related article on Citi's LEED-certified facilities). And although most firms have ditched the unrealistic phrase "green IT" for the more practical (and perhaps deliberately vague) moniker "sustainable IT" -- sustainable in the sense of its impact on the environment and budgets -- they are achieving real efficiencies. Wall Street firms are deeply engaged in virtualization, consolidation and other energy-efficient initiatives; they're even shutting down entire data centers, turning off servers and desktops when they're not in use, and keeping their trading floors cool and energy-efficient with virtual desktops. Such efforts are not only helping to keep energy bills in check, they're helping firms handle some of their biggest IT issues: diminished budgets, still-rising transaction and data volumes, reduced staff, and the requirement to do more with less. "The benefit of sustainability is that from a hardware perspective it tends to be less expensive, and there's a great deal of value in that," says B. Gordon Green, VP of Bank of New York Mellon's technology services group. "Technologies such as lower-cost power supplies, more-efficient chips and blade servers have gone toward reducing overall hardware costs." These efforts tend to start in the data center but spread to other parts of the IT organization. "IT sustainability is more than just data centers," notes Jim Carney, senior executive in Citi's technology infrastructure group. "We look at data centers as the core of our infrastructure; in many of our energy-efficient initiatives the data center is the heart and soul of the organization," Carney continues. "But we also run a large desktop strategic initiative, in which we put thin clients on the desktop and bring desktop computing assets back to the data center. [And] we're giving employees the ability to work from home or at alternative locations." In addition to following LEED recommendations in its data centers and consolidating its data center footprint from 52 sites in 2005 to 14 strategic centers and 10 satellites by 2010, Citi also has aggressive server and desktop virtualization plans that should help it meet its goal of an overall 10 percent reduction in greenhouse gas emissions by 2011, Carney adds. Powering Down The single most effective action a firm can take to save energy is neither high-tech nor glamorous: Turn off (or put to sleep) servers that are not being used. "It's not fancy, it's not elegant, and it doesn't sell any hardware," points out independent technology consultant Neal Nelson. "It's a really boring, common-sense thing that will result in energy savings." In fact a recent study from the University of Michigan found that technology that enables servers to nap when they're not busy could save 75 percent of the energy they consume. The researchers noted that data centers waste most of the energy they draw because they are built to handle peak processing demands. Yet the technology to turn servers off and on within milliseconds or microseconds is still under development. There's also a psychological barrier: "The idea of putting a server to sleep makes people nervous," BNY Mellon's Green points out. But the concept is already being applied successfully to desktop computers. At Bank of New York Mellon, desktop power management is one of two major IT sustainability strategies as the organization continues to merge the infrastructures of the former Bank of New York and Mellon. "If you think in terms of where technology tends to draw power, everybody focuses on the data center, but we've got over 50,000 desktops deployed globally, and each of them draws a substantial amount of power every day," relates Green. "It's not uncommon for them to be left on overnight, which means they're drawing a lot of power when nobody's using them. We've been looking at aggressive approaches to reducing those power requirements." According to Green, who notes that the company already takes advantage of free approaches, such as the Energy Star recommendations for machine settings, BNY Mellon is testing and evaluating products that completely shut down desktop computers overnight, waking them up only for needed software distributions. These tools will also shut down computers during the day after 15 minutes of non-use, yet quickly boot them back up again when they're needed, he explains, adding that while the firm has not selected a solution yet, it expects to save $125,000 a month through the energy-efficiency of these tools. (In a separate example, J.P. Morgan Chase executives report that the company is rolling out NightWatchman software from 1E in a similar initiative to automatically power down PC workstations overnight.) But would BNY Mellon deploy such energy-saving controls in a trading environment? "There are going to be places where we have to be careful," Green hedges. "But all things considered, after the traders go home, I wouldn't feel uncomfortable making sure their machines are [powered] down. I would want to make sure their computers come up again an hour before they arrive and need to actually get on the markets." At the moment, Green reports, BNY Mellon's power management project is strictly for desktops. But one of the benefits of centralizing the control of desktops, he says, is new energy consumption reporting tools that will also work for servers, storage and network devices, and printers. Extreme Virtualization While simply turning off unused equipment may be the best step toward energy savings, server virtualization also offers tremendous efficiencies. The trend toward server virtualization, which allows more work to be accomplished on fewer servers, has spread across the Street and many other industries primarily as a way of saving money and easing provisioning. At Citi all new servers are deployed as virtual machines, with exceptions made for instances where technical limitations impact application performance, according to the bank's Carney. As a result, the firm reports, more than 18 percent of Citi's North American server footprint is virtualized. Citi has more than 2,000 virtual instances and generates more than 100 new virtual machines a week globally. Through these efforts it has realized savings of $1.6 million in power and cooling alone (not including hardware cost savings). In other examples, Northern Trust eliminated more than 2,000 physical servers and desktops and their associated power and cooling needs through its use of virtualization. And BNY Mellon has been deploying virtualization on a large scale in its data centers. While the firm has found that the power requirements for servers hosting virtual machines are about two and a half times the power requirements of a single stand-alone server, BNY Mellon's Green relates, each physical machine can handle the workload of 20 to 30 virtual servers, depending on the application. Chicago-based Buttonwood Group Trading is taking virtualization to the next level by creating one of the few virtual trading floors of which WS&T is aware. Buttonwood is a global futures trading firm named after the famous buttonwood tree under which 24 stockbrokers stood in 1792 and agreed to form the New York Stock & Exchange Board (now NYSE Euronext). "In the trading industry we consume a tremendous amount of power and generate a great deal of heat, probably more than other segments," notes David J. Dugan, Buttonwood's COO. "In some trading floors you see three or more computers under the desk as well as six monitors on top. Most trading rooms face power and cooling issues." But now that Buttonwood has begun using Pano Logic's virtual desktops, which are said to consume 3 percent of the energy required by regular desktop computers, on its trading floor, "Our power consumption needs are very nominal," Dugan says. "I don't have to worry about power and cooling." Of course, monitors still abound. "Screen real estate is always valuable," Dugan notes. Now, however, three-inch-square cubes that consume almost no power and generate no heat take the place of the computer towers that used to dominate the floor. "It's a nice, clean space and [the setup] creates an ergonomic, clean desk," Dugan comments. Actual computing now takes place on virtual servers (powered by VMware) housed in 24-core physical servers in a colocated facility run by Equinix next to the Chicago Mercantile Exchange's matching engines, Dugan relates. The trading floor and data center are connected by high-speed fiber. Replacing older, eight-core machines with 24-core servers also contributes to the energy savings, according to Dugan, who asserts that the energy required to power one 24-core machine is less than the power needed to run three eight-core servers. Factoring in the server virtualization, he adds, Buttonwood is using 10 percent of the power it would need to run conventional desktops. While some firms are wary of running trading applications on virtual desktops because the technology traditionally was viewed as too slow for such high-speed programs, Dugan says 70 percent of Buttonwood's trading applications -- including Trading Technologies, RTS and proprietary algorithmic trading models -- run fine on the new virtual desktops. The other 30 percent, he notes, are graphics-intensive apps for high-volume markets in which the transmission of the desktop images from computer to monitor introduces a bit of latency. But, Dugan adds, "It's our hope that with product enhancements and accelerated graphics cards integration, we'll go up the curve from 70 percent to 100 percent." 6/18/2009 4:19:33 PM |
Mobile Banking Is Now a Must-Have for BanksAccording to a panel of bankers at Celent Innovation and Insight Day, mobile banking has moved beyond the hype to the next step in banking’s evolution.
Senior analyst Jacob Jegher moderated a discussion with three bankers and one alternative financial services provider. All agreed with what others in the industry have long been saying—that mobile is where the business is going. Andy Arshad, mobile channel manager with USAA (San Antonio, Texas; $68.3 billion in assets), said as far as he's concerned, mobile banking is not hype—it's needed for serving his customers. USAA launched mobile banking about a year ago. Its customer base is unique as it consists of military personnel and their families. As such, this is a customer base that is "mobile" in more than one sense of the word. Since the company also has no physical presence, allowing customers to stay connected to the bank no matter where they are is paying huge dividends in terms of stickiness. Therefore, getting USAA's members to connect via mobile phone wasn't too much of a stretch for the diversified financial services company. "We are seeing great growth in mobile banking," Arshad told attendees. "We have a 12 percent adoption rate with one million unique users. Our mobile activity is double what it was seven months ago." For Bank of America (Charlotte, N.C.; $2.32 trillion in assets), getting to 2.5 million m-banking customers took a bit more work in terms of conveying the value of m-banking to customers. Douglas Brown, mobile product executive with BofA, said the bank addressed three primary areas: ease of use, cost of use and security. As expected, the early adopters were younger and more tech savvy than BofA's average customer. However, he said the distribution of mobile banking use among the bank's customers is evening out across demographics. "It's incumbent on the industry to move to mobile," he asserted. "Our customers are moving to lower cost channels. The immediate access and control of one's finances [offered by mobile banking] resonates well in today's economy." Denver-based Western Union's Matt Dill, SVP, head of digital ventures, agreed that mobile is becoming the channel of choice for consumers. "The industry has to recognize this," he said. Mobile has been a boon for his company. He said Western Union has been somewhat immune to having to keep up with most of the latest technologies and channels. This was due to the fact that technologies that were available in the industrialized markets were not always available in developing regions. Now, however, there has been a worldwide boom in mobile phone adoption, with about 70 percent of this in the developing world, he noted, adding, "The mobile phone is now equally represented on the send and receive side of our customer base. It's the device of choice for them and is becoming a core part of our business." Although many people compare the adoption and development of mobile banking to online banking, the biggest difference is the pace. Mobile banking is moving much faster than online banking ever did. And it's the faster pace that presents banks with an almost do or die option. "The difference between mobile and online banking is the pace of evolution," noted BofA's Brown. "There's a new world of parties who see it as a profitable opportunity." Added Carl Snyder, president, Zions Internet Bank (Salt Lake City; $54 billion in assets), "Banks need to adopt mobile more quickly [thank online banking]. If they wait, they'll be left behind." Zions will announce its foray into mobile banking in about two months. He said the bank plans to offer similar services to its competitors such as bill pay. And like other banks, Zions is adopting best practices around multi-factor authentication and device certification as well, since m-banking security is a concern among consumers. That said, Snyder noted there might already be advantages around security for mobile phones in customers' eyes. "Some people feel more secure on their mobile phones than on their PCs because of all the viruses and malware that can infect computers," he commented. Plus, adds BofA's Brown, the mobile phone is location-sensitive, yet another security advantage it brings to the table. And as smart phones like the iPhone become more prevalent, the possibilities around security, and even marketing, are something for banks to consider. They certainly are paying more attention to these more advanced devices. USAA recently introduced a mobile banking application tailored to the iPhone. "We saw a third of our customers were using the iPhone to access our mobile banking application," he explained. Devices like the iPhone may have also helped solve the distribution problem, according to Brown. BofA added an iPhone app at the beginning of the year. "Things like Apple's App Store makes it seamless for customers to download our [mobile banking] applications. And it's not just happening with the phones. Look at the [Amazon] Kindle. It's always on and has a built-in modem." Celent's Jegher noted that all three banks were offering their m-banking service via downloadable application. He said Celent predicted downloadable apps would be the method of choice for banks' mobile initiatives. Although USAA's Arshad acknowledges that banks can't cater to every device, the fact remains that the mobile channel gives institutions access to metrics they never before had, such as who the person is, where they are and the kinds of transactions they're performing. "It's a powerful tool for the consumer and the bank." 6/5/2009 4:35:11 PM |
Twitter Tips: How to Safely Blend the Personal and the ProfessionalApril 08, 2009 — CIO — Like it or not, the emergence of social networks, the proliferation of mobile devices and the ubiquity of the Web has blurred our personal and professional lives. This has been particularly true on Twitter, the social networking service where users share short messages with one another. Twitter holds inherent value for both your personal and business life. As a business person, building a presence on Twitter helps you connect with customers and peers, and perhaps get feedback on your products and services. For your personal life, Twitter can create what social media experts call an "ambient awareness" for the people important to you in your life — while each message might not be hugely significant, taken in total people can piece together you as a person or at least see the things you value. But this inevitable blurring between the personal and professional life creates perils for Twitter users. Sharing a tweet (a message on Twitter) that has certain personal information could cause you to lose your "followers" (people who subscribe to your Twitter messages) or, worse, get you into trouble at work. "If you want to use Twitter for both personal and business, then you have to be very wise about the type of information you are displaying," says Dan Schawbel (@danschawbel), who authored the new book Me 2.0: Build a Powerful Brand to Achieve Career Success. "Either way, your updates are all crawled by Google and can hurt your reputation if they negatively portray your brand." CIO talked with some social media and experts in online reputation management about how to find the right balance. The best strategies will differ from person to person, based both upon the type of business you're in and the audience that follows you on Twitter. Get Personal To Show What You Have in Common Contrary to conventional wisdom — created via horror stories of people getting fired for outlandish Facebook or Twitter messages — sharing personal messages (intelligently) can be advantageous to your business. You should not be afraid to do it. When people can relate to you, or find common themes, then they will be more likely do cut a deal or do business with you, says Laura Fitton (@pistachio), who runs Pistachio Consulting, a firm that helps companies utilize Twitter. "The more human you are, it's harder to vilify you or your brand," Fitton says. "Twitter isn't as much about 'what are you doing,' as it is 'what do you have in common?'" Perhaps the best example of this strategy has happened with Frank Eliason, a customer service representative from Comcast who runs the @comcastcares page. Because he has injected a genuine and personal tone into his tweets, he has likely changed some minds of people who love to hate the big cable company. "Ultimately, people do business with people," says Kirsten Dixson (@kirstendixson), a reputation management and online identity expert. "You don't need to hide behind a company brand to interact with people. In fact, that might not be the best thing." Know Your Twitter Audience Before you can build a content strategy around your tweets, you must examine the people who follow them. While it might be a diverse group, you should be able to find some common themes that will guide your decision about what to focus on in your messages. If many people follow you because of your profession, then you will want to populate your Twitter stream with many business related messages. But you shouldn't be afraid to hit on themes in your business life that intersect with the personal, says Dixson. "If your brand attribute is that you're very global, talk about a trip you're going on, or you post a picture of a neat place you've just visited," she says. You can also hit on universal themes that many people can relate to, such as family life, says Fitton. The key, she says, could be in frequency. "Talk about your kids a little bit, but don't bore people to death with messages about them." Remember Personal Is Different Than Private The dreaded "too much information" tweet can be avoided by understanding the difference between personal tweets and private information that shouldn't be published anywhere. If you're fighting with a significant other, or you have just carried out a nitty-gritty task involving your children, then you want to exclude that information from a Twitter stream. This can also be avoided by emphasizing important events in your life instead of the trivial, says Dixson. "As an example, you don't want to write that you're 'going to the gym,' but it might be nice to say, 'I just set a goal to run a marathon,'" she says. If You're Worried, Make a Blanket Disclaimer For many people who work at big scary companies, the decision to inject personal information into their Twitter stream can be especially agonizing, especially if your Tweets express opinions about business, politics and other hot-button issues. As a result, experts say you can put a disclaimer in your Twitter profile, noting that the Twitter stream reflects your opinions, not your employer's. To be clear, you can still be up front that you work for that company. Dixson provided this sample: This is a personal Twitter feed. The opinions expressed here represent my own and not those of my employer. No warranties or other guarantees will be offered as to the quality of the opinions or anything else offered here. 4/13/2009 7:35:36 PM |
Banks -- and Their Core Systems -- in Survival ModeAmid an economic downturn that is only beginning to show signs of a bottom, banks are reexamining their core systems, with a priority on phasing in capabilities to cope with new realities around risk, regulation and customer retention. April 07, 2009 See related article: Crisis Presents Banks With Opportunity to Reexamine Core Systems
Just when you thought it was safe to embark on a core systems replacement, along came the worst economic downturn in a generation. Less than a year ago BS&T reported that 2009 would finally be the year the industry would see movement in the U.S. behind core systems replacements. Then some of the premier financial institutions in the world went belly-up, the credit markets froze and the banking industry imploded. TowerGroup's Bob Hunt, senior research director with the Needham, Mass.-based firm, cites at least two top U.S. banks whose plans to pursue core replacements this year have been detoured. "One was taken over, and the other is in crisis mode right now," he explains. Stuck between the need to upgrade core systems in order to cope with a hyper-regulated, risk-averse environment and the reality of a severe recession, with few exceptions banks are looking to extend the capabilities of their legacy core systems. "Banks are retrenching, and spending is tight now. There is tighter prioritization of what banks will spend on," acknowledges Shane Loper, COO of Gulfport, Miss.-based Hancock Bank ($7.2 billion in assets) and a BS&T 2008 Elite 8 Award winner, suggesting that complete core replacements aren't in the budget. A data integration services executive at a large bank, who spoke on the condition of anonymity, confirms that banks are altering their spending plans around their cores. "Most know they have to do something to fix their cores," she says. "But now you have to look at how well you can manage risk and how fast. It comes back to the technology -- plans are being scaled back to first deal with the crisis, and banks are doing things on an as-needed basis." And right now what is needed is stronger risk management, greater transparency and more-aggressive customer retention. As a result, banks are upgrading their core capabilities in these areas while making do with legacy functionality elsewhere. Phasing In Core Functionality According to Mike Barba, a manager with Devon, Pa.-based SMART Consulting, banks must approach core transformation cautiously, particularly in this business environment. He advises institutions to take a phased approach to refreshing their core systems, starting with one component, such as a risk management module, rather than attempting a complete rip and replace. "Step back and look to accomplish a specific goal," Barba says. "The challenge for executives is being in crisis mode and surviving versus planning for the future. When you take a shortsighted approach, history tends to repeat itself." Joan Kelly, group executive with Purchase, N.Y.-based MasterCard's global technology organization, oversaw the replacement of the credit giant's core payments systems over the course of four years starting in 1999. Noting that the only area of the conversion that required a "big bang" approach was the clearing system, she suggests that introducing new core functionality in stages reduced a lot of the implementation's risk. "We had a phased-release strategy where we would release various aspects of the applications twice a year," Kelly recalls. But she stresses the importance of governance to project success. "Monitoring your delivery is important to break this down into executable pieces," she says. Patti Reynolds, senior managing consultant with MasterCard Advisors, the professional services arm of MasterCard Worldwide, says she tells her bank clients that core replacement is no longer an all-or-nothing project. "When you talk about the infrastructure supporting core card systems, it is either viewed as an enabler or an inhibitor to the bank's growth and efficiency," she comments. "We're telling clients to look for places where they can decouple their systems and find alternative solutions that can be integrated with the core, so I think you'll be seeing a lot of work-arounds." To support this kind of componentization, MasterCard built a service-oriented architecture (SOA) with the goal of creating a flexible global infrastructure capable of accommodating various payments channels over time, the firm's Kelly relates. As an added benefit, developers were able to reuse many services during its core conversion utilizing SOA and standardized processes, she reports. Using an SOA is critical when taking the piecemeal route to upgrading core systems, according to Jim Dempster, an SVP with Milwaukee-based Metavante. "SOA leads to strong integration that connects diverse pieces of technology," he says. Another approach that can help banks efficiently extend their core systems is the concept of software as a service. Although SMART's Barba believes SaaS is still rapidly evolving, he sees great potential in the model. "SaaS can help a bank in crisis mode by offering pieces of a solution that you use and pay for as needed," he explains. Pilot programs, according to Don Russo, group VP, financial services global business unit, Oracle (Redwood Shores, Calif.), also are a good way for banks to kick-start core systems transformations while keeping implementation risk at a minimum. "This is part of the challenge of the financial crisis," he says. "I'm seeing a number of banks look at pilot projects because they realize they have to start something. These are projects to prove out new infrastructure that will then be rolled out across the entire enterprise." The Customer Is at the Front of the Line While a phased implementation of core technology can help ease the pain related to resources and risk, the success of a core transformation largely hinges on which systems a bank chooses to replace. And like the rest of financial services, many banks are placing the customer at the center of their strategy and reengineering systems with a customer-data perspective. Given the present state of banking and the economy as a whole, as well as the inevitable rush of new regulation facing the industry, requirements around reporting and transparency will factor greatly into every bank's technology decisions. Many of the experts interviewed for this article believe that creating a better customer information system is critical for financial institutions to cope with the new compliance and customer service climate. To that end Mahesh Makhija, associate VP of banking and capital markets with Bangalore-based Infosys, says the areas that will see the most investment likely will be around branch infrastructure and channel integration. "In this environment it's important to increase customer trust," he asserts. "So although there may be a little reprioritization around where banks are spending money, you'll see more of a focus on customer-facing systems." TowerGroup's Hunt agrees, noting that the customer information file (CIF) is the one place where everything comes together. "There is so much information in the customer system," he says. "A new dynamic is in play that's driving banks to look at the customer information system as the piece of the core to replace." Hunt says measures such as the Patriot Act and Know Your Customer guidelines have placed increased scrutiny on the CIF. "This is highlighting the structural problems with the old CIF systems," he explains. "But if you replace your customer system first, you can see the relationship, the risk. This is also a good way to move to a real-time environment. You have to look at what replacing the customer information management system gives the bank in terms of compliance, risk management and regulation." Hancock Bank, which uses the core solution offered by Jacksonville, Fla.-based Fidelity National Information Services, understands the importance of focusing on the customer in the current business environment. According to Hancock's Loper, in addition to efficiency plays, the bank's technology investments will be aimed at strengthening customer service and boosting retention. "We'll look at projects to improve customer touch and tools that help us analyze how we're doing with the customers," he relates. "You have to make the case for immediate ROI today. That's why [Hancock] will focus on projects that deliver a return very close to the expenditure." Fostering Transparency With a Transactional View of Data Metavante's Dempster suggests that core projects centered on gaining a total view of the customer are likely to provide the biggest bang for the buck. "These days banks need to demonstrate safety and soundness in an overwhelming way to their customers," he says. "Banks need [a total view of the customer] to do their risk assessment of customers and to gain the transparency that you just can't get from the point of view of one transaction. [The data] has to be integrated throughout the systems." But banks don't always have the transactional view of their data required to achieve this transparency, Dempster continues. "The foundational technology is not about having a better DDA [demand deposit account] system," he says. "It's what you can wrap around the DDA system to supercharge it with relationship-based pricing, transaction capital, risk management and segmentation pricing." Infosys' Makhija adds that as scrutiny intensifies around requirements such as the Unfair & Deceptive Acts or Practices (UDAP) rules, core upgrades that enable increased transparency into customer relationships will become even more critical. "That is why banks will need a unified view of the relationship at the branch level where they'll have full product information available," he says, noting that channel integration will play a major role in this area for the large banks. "You need audit trails too. This all adds up to transparency." For these reasons, Makhija continues, Infosys' bank clients are looking to embed appropriate regulatory processes into their cores. Of course such transparency is rooted in data integration. "You need to integrate disparate systems so that it's transparent to the user where the data comes from, who owns it," says the data integration executive. "You don't need to write a lot of new code -- just use a standard delivery method, such as Web services," she recommends, adding that her bank used a solution from San Mateo, Calif.-based Composite Software for its data integration project. She says the response from end users to having more and higher-quality data at their fingertips has been very positive. Oracle's Russo says he expects to see more spending on creating a "single-instance infrastructure" for all regulatory reporting. "You can't immediately replace the entire core infrastructure," he comments. "You want to create stand-alone data marts where you focus on having one instance of all the information and connect that with the core so you can measure the data." This, he notes, is where Oracle plans to invest. Operating in Crisis Mode While U.S. banks are investing in ways to extend their legacy cores, banks outside the United States are trending toward outright core replacement, according to David Hovenden, a partner in A.T. Kearney's Sydney office. "It's a tale of two cities in some regards," he says. "Outside the U.S. I'm seeing a lot of activity [around core replacements]." Hovenden says the trend is especially evident in southeast Asia, where he has seen proposals from two major banks for core replacements, and Australia, where two of the big four banks are in the throes of core replacements. He points out that banks in those regions weren't slammed as hard by the subprime mortgage situation. While not at liberty to divulge any names, Hovenden says, "The programs have been reconfirmed post-crisis." It's not that banks in the U.S. don't recognize the value of full core upgrades, Hovenden notes. Rather, the uncertainty around which banks will survive is creating a fear of commitment. "Banks are looking at things more selectively, and that makes sense," Hovenden says. "There is going to be investment -- it's not a 'Do nothing' scenario. You have to do something, but with intent. Be smart about it." The financial crisis has forced banks to reprioritize, adds TowerGroup's Hunt. "It has everything to do with risk and compliance and having more resources devoted to those things going forward," he says. And for banks undergoing crisis-related mergers, or institutions that have accepted government bailout money, the pressure on their cores is even greater. "Acquisition integration is putting even more stress on existing cores," says Steve Reiter, a senior executive with Accenture's banking practice. Adds Jim Adamczyk, global process architecture lead for Accenture, "The core systems are strained to begin with and now they're being pushed harder in the M&A integration." While Hancock Bank did not accept any funds from the government's Troubled Asset Relief Program, or TARP, the bank's Loper notes that its systems still must cope with increased transparency requirements. "Not taking the TARP funds keeps us from feeling the related requirements attached to them. But we still have to deal with the credit crisis impacts through changes to lending regulations to Reg Z [Truth in Lending] and RESPA [Real Estate Settlement Procedures Act]," he states. "We're focusing on those changes to get our systems in shape to handle them. When you have new regulations raining down on you, you have to make some tough decisions: Do you focus on responding to regulatory changes, which may drive some processing to niche providers?" Time for a Change? Evaluating Core Systems Replacement Infosys' Makhija is reluctant to paint the industry with a broad brush with regard to how banks will proceed with core upgrades. He says banks are reacting differently to the crisis and that their approaches to their cores are affected by the lifecycle stage of their systems. "The larger banks were mostly affected by the crisis, but if they are already committed to a core project, they will probably press ahead because many of their problems stem from their core systems." A.T. Kearney's Hovenden believes there still is a business case for core systems replacement, even during this economy. When he helps banks make such decisions, he says, it's important to build a quantifiable case and include factors such as complexity, delivery constraints and the economic stability of the current core platform. "We project this out five years," Hovenden explains. "We measure what the cost would be to implement the new product changes and regulatory changes on the legacy platform against installing a new platform, and it's a 20 to 25 percent differential in cost. When you consider what goes into maintaining the old platform, you don't really get a big difference in the total spend over five years." As often is the case with technology strategy, size matters in the core systems debate, and smaller banks have their own options in these trying times. Kenneth Innocenzi is the VP of operations and compliance with Hamden, Conn.-based Quinnipiac Bank & Trust ($31 million in assets), which opened its doors a little more than a year ago. Although the institution started with a clean technology slate, contracting for core processing services from COCC (Hartford, Conn.) on an ASP basis, Innocenzi says it's just smart business to reassess core systems capabilities in a rapidly changing business environment. This assessment, he adds, depends on where the bank is in the life cycle of its contract and should allow sufficient time for due diligence, notification to the current provider if terminating the service and an orderly conversion to the new provider. Innocenzi points out, however, that for an institution of Quinnipiac's size, breaking the core replacement into pieces, as many experts recommend, wouldn't make sense since everything is completely integrated within one system. "But when you do convert, make sure the data integrity is maintained so no customer or corporate data is lost in the conversion," he stresses. MasterCard's Kelly says banks must ask themselves how much they are willing to invest and at what pace. "Core replacement is all about your business, not the technology," she says, pointing out that these tough decisions still must be made, even in this dismal market. "It's important to be alive tomorrow, but there's no point if you're not alive a year from tomorrow," she says.
Big Blue Pushes Core Transformation While banks' core systems have served them well, legacy technology simply can't handle the evolution to a customer-centric business model, claim IBM's Chae An, VP of the vendor's software group, and David Zimmerman, global solutions executive. In this IBM-sponsored video, see why Big Blue thinks core transformation is critical in the current economic environment. 4/13/2009 7:04:34 PM |
Fired Employees Can Still Access Co Systems, Survey FindsCrisis weakness: Cloakware reveals 14 percent of ex-employees can access ’secure’ systems. April 13, 2009 More than one in eight employees can still access key company systems after they have been laid off, according to a survey just published by Cloakware, a Vienna, VA, provider of security software.
Financial services firms made up about 30 percent of the 12,500 respondents Cloakware polled last month (March, 2009), a spokeswoman told BS&T. Telecommuting workers were a substantial factor in the data security risk, the survey revealed. With responsibility unclear, as remote access is often managed by multiple internal groups within a company, 21 percent of respondents admitted that they hadn't changed virtual employees' passwords after they were terminated. In this era of mass layoffs, Cloakware extrapolates from its survey that at least 1.3 million employees still have access to company systems after they have left the organization. That's based on a continued access rate among 14 percent of respondents. Gartner, the Stamford, Conn., research firm, noted in a February 2009 report that periods of financial hardship increase the risk of corporate fraud. In the report entitled, 'Best Practices in Information Security Before, During and After Employee Downsizing,' Gartner analysts Ant Allan, Jay Heiser and Roberta Witty noted: "The worldwide economic crisis, with its waves of employee downsizing is raising intense enterprise concern about the impact of these events on information security". Cloakware president and COO David Canellos, commenting on its survey findings, said: "With companies facing dwindling margins, reducing overhead costs is driving a change in employee work arrangements, but it also reveals weak protection practices—a critical issue for long-term security". 4/13/2009 7:00:50 PM |
BNY Mellon Benefits, Yet is Challenged by Market TurmoilLiquidity services business has tripled, but so have customer queries. The Liquidity Services business at $928 billion-in-assets-under-management BNY Mellon, which provides short-term liquid investments for institutional clients, has tripled in size between last year and this year. "That tells you what's going on in the market," says Jonathan Spirgel, head of the Liquidity Services group. "A lot of people fled the markets to safety and security and we were the beneficiaries of that." Prior to September, investors had 35% of their money in government products (Treasury bills) and 65% in money market funds. In September, those ratios reversed. A new shift has begun in the last couple of days, and clients are headed to a 50/50 split on these products.
At the same time, customer requests more than tripled for the group. "In September, October and November, people were saying, 'Where's my cash? Where are my investments?'" Spirgel notes. "We're inundated with requests from hedge funds that want to make sure we're here and our systems are here. We got a year's worth of requests in three months. Clients want to see that we're investing their money the way we say we are. They're asking us if we're doing things the right way with the right oversight."
To provide some of that transparency, last week the firm rolled out a new investment portal called Liquidity Direct that gives clients access to money market instruments and money market securities such as commercial paper and Treasuries. One part of the portal, Margin Direct, provides automated collateral management. "Margin Direct is our fastest-growing business; we can't open accounts fast enough to keep hedge funds happy," Spirgel says. Clients can also download annual reports and prospectuses from the portal.
In March, Treasury Services deployed Business Objects' reporting software so that it could provide customizable reports to clients. In this post-meltdown, post-Madoff climate, clients are asking for frequent reports that they can access or schedule for themselves. At the same time, "we have an amazing amount of data, and not everybody wants all of that," Spirgel says. Behind the scenes, the firm has begun integrating the Treasury operations of the former Bank of New York and Mellon. "Both systems on their own were fine, but we don't need two systems," Spirgel notes. The integration is challenging because of the high volumes of assets, accounts and documentation. It should be completed by the end of the second quarter. 4/13/2009 6:58:15 PM |
CIOs Top Priority: Managing IT Costs in a Challenged WorldThe industry needs to rethink its cost and processing
structures -- and perhaps make some radical changes, says Special
Contributing Editor Larry Tabb. Managing IT costs will be the central theme for CIOs for at least the next two years. TABB Group estimates that industrywide IT costs will drop approximately 20 percent in 2009 alone and possibly 30 percent over the next two years as IT budgets across the investment banking, brokerage, investment management, hedge fund and affiliated businesses will be brought in line with revenues and prospects. What will such dramatic reductions mean for IT? Is it all doom and gloom? Will staffs be decimated? What will happen to innovation? There is no way to reduce budgets by such an extreme amount without rethinking a firm's technology strategy. Hardware and software budgets are fairly inflexible given a status quo environment. These expenses are contractually agreed to and are hard to modify unless depreciation and allocation schedules can be realigned, software contracts can be renegotiated, or organizations can be convinced to eliminate various businesses. And while internal staffing can be more flexibly managed, wholesale staff-slashing can be problematic, especially since effective technology development can reduce operational costs by streamlining operations. So What Is a CIO to Do? To effectively manage costs in this environment, the firm -- not the CIO -- needs to rethink how it operates; what drives competitive advantage; how operational risk can be mitigated; and the balance between internal development, vendor-based solutions and application service provider (ASP)/outsourced services. In the absence of such rethinking, CIOs will not be able to cut enough heads, buy and integrate enough packages, renegotiate enough vendor agreements, or postpone enough technology purchases to get to their goals. There are three main ways for firms to pare back technology spending, and they all revolve around the firms doing less and outside providers doing more. Firms can increase their outsourcing, prompt industry utilities to take on an increased role in day-to-day operations and, the most extreme option, enter into shared-back-office agreements. Now, outsourcing includes the offshore initiatives that most firms already engage in, but it really means much more than that. While firms have engaged in offshore software development over the past decade, increasing a firm's use of offshore services will be difficult as trained resources are scarce (and even scarcer after the recent Satyam scandal). What really is required is an investigation of new ways of looking at shared services, such as sale and lease-back arrangements for networks, storage and data centers, as well as traditional outsourced support services such as desktop, trading floor and market data support. As colocation facilities become more viable, and new server hardware and software enable more-efficient processing and easier deployment, firms likely will close and consolidate data centers and shift as much as possible to colocation and shared environments. Moving toward the next level, the industry could pressure utilities such as the DTCC to incrementally increase the percentage of the industry workload they handle. While the DTCC has been effective in developing shared risk-based services for equities, fixed income, mutual fund and annuity products, most of DTCC's services revolve around facilitating interfirm communication and mitigating industry risk, not around the reduction of processing that most firms used to think of as a core function. An extreme example of pushing more work into an industry utility would be to develop a shared back office for major institutional players. While these services (correspondent clearing) exist for smaller firms, I am talking about providing these services for the largest brokers. This requires a new way of looking at, servicing and pricing the business beyond what many of today's clearers provide. Of course these ideas are not a panacea. Just outsourcing a firm's environment is not as easy as signing an agreement and writing a check. But if the industry really needs to rethink its cost structure, it also needs to rethink its processing structure. Just reducing bonuses or shifting the work to Asia alone will not get us there. 2/14/2009 10:00:35 PM |
Risk Management Is Wall Streets Top Priority for 2009Poor risk management is at the heart of the current financial crisis. Firms will have to implement new risk management practices and governance to shore up their performance, satisfy regulators and win back investors’ trust.
Why It's Important: Poor risk management practices have been blamed for the credit crisis and ensuing global financial meltdown. Financial institutions and regulators suggest that risk previously was simply reported, rather than managed, and inaccurately assessed, causing banks to post billions of dollars in losses in 2008. Where the Industry Is Now: "We've been seeing a rush to risk and risk management as a way to get out of this [financial crisis]," says JR Regan, senior executive responsible for global strategy, risk, compliance and security solutions at BearingPoint. Overall there has been an increased focus on enterprise risk management, he adds. "It used to be that financial risk was the granddaddy and everything else wasn't so important. Now firms want to see the sum of all the risks and how that impacts business." Despite the trend toward enterprise risk management, many companies are still far from achieving it. "Every company should quantify the likelihood of what can go wrong and the risk it is taking," says Philippe Stephan, head of global business development at risk management software provider Sophis. "In practice this is very hard to do, but it is what people should aim for." Meanwhile Alexandr Sokol, CEO of financial software developer CompatibL, points out that firms have now recognized the importance of credit risk. "Among the different types of risk, market and operational risk were always there, but credit risk seemed a low likely contingency," he says. "But after the events of the last few months it went from hypothetical to something very real, as people lost money when Lehman Brothers defaulted." Top management has also upped its interest in risk, Sokol says. "The key focus is to upgrade risk calculations. It's critical for a business to survive." As for technology, it has "always been ahead of what people were willing to spend," asserts Sophis' Stephan. "It has been available to address a lot of risks people were not managing, such as OTC pricing. The technology has been around for a number of years. But are people using the tools to manage risk? No." Focus in 2009: Risk management is expected to be the key industry focus for the next few years, with the spotlight on risk infrastructures. Traditionally disjointed risk and finance functions will be brought together, suggests S. Ramakrishnan, CEO of Reveleus and Mantas products for Oracle Financial Services Software. Firms will benefit from the CFO's strong connection to risk oversight, he adds. Analysts agree that the biggest challenge firms face in managing risk is at the operating level. Risk managers will be given much more importance by a firm's top managers than in the past, when the pursuit of alpha typically came at the expense of risk mitigation. As such, firms will have to develop adequate risk platforms to provide the CRO and management team with the right information to assess risk across the environment, TABB Group CEO and founder Larry Tabb says. And the CRO and management team will have to have the power to override individual desks or develop a strategy in which the CRO can overlay a hedge without the desk stepping in. Industry Leaders: Although some analysts question whether its risk management practices differ significantly from other firms', Goldman Sachs was the only bulge-bracket firm to turn a profit amid the 2007 subprime crisis. Technology Providers: SunGard, Oracle Financial Services, Sophis, Calypso, Misys, OpenLink, Risk Metrics Group and a number of other, smaller players. Price Tag: For compliance risk, a platform could require investment of more than $1 million to get started, but much larger investments are not uncommon, particularly when the bank has many lines of business. "For market, credit, operational or liquidity risk, the costs rise with the size and degree of sophistication of the bank's business," says Eric Bass, senior managing director, SMART Business Consulting. "A very large, well-known U.S. bank (with retail, wholesale and investment banking businesses) spent over $120 million building a custom credit risk management system." 1/9/2009 4:23:12 PM |
Cloud Computing Begins to Gain Traction on Wall StreetWhile Wall Street organizations such as Morgan Stanley, Merrill Lynch and Nasdaq have begun using cloud computing for its pay-as-you-go model, questions about control and security remain. Though cloud computing often is little understood, it is among the hot technologies for 2009, and it stirs up strong emotions among both supporters and detractors. For example, during a meeting with analysts in September 2008, Oracle CEO Larry Ellison ranted, "We've redefined cloud computing to include everything that we already do. I can't think of anything that isn't cloud computing with all of these announcements. The computer industry is the only industry that is more fashion-driven than women's fashion. Maybe I'm an idiot, but I have no idea what anyone is talking about. What is it? It's complete gibberish. It's insane. When is this idiocy going to stop?" Yet later that same month, Oracle announced that several of its products would run on Amazon's Elastic Compute Cloud, EC2. Further, Oracle has assured the public that it has more cloud products under development, and it has a well-stocked Cloud Computing Center on its Web site, complete with product datasheets, podcasts and white papers. Reluctantly or not, Oracle has jumped on the cloud bandwagon as much as anyone. Here's why cloud computing — loosely defined as Internet-based development and use of computer technology — has a future and the likely reason why Ellison doesn't like it: Cloud-based services so far are cheaper than traditional IT products, such as large in-house databases. Cloud computing users leverage servers, applications and/or storage hosted by a provider (or by their own company, in the case of internal clouds) and are billed strictly for what they use each month, like a metered utility. So if a company is launching a new product that requires a large database, it doesn't need to go out and buy one; it can use one hosted by a cloud provider such as Amazon, Google or Vertica. In contrast to large up-front costs, initial costs are small because data lookups are few. If the new product turns out to be a success and lots of customers access the data, costs will go up, but then revenues should grow as well. Still Ellison isn't the only one questioning the wisdom of computing in the clouds. Also in September Richard Stallman, founder of the Free Software Foundation and creator of the computer operating system GNU, said that cloud computing was a trap aimed at forcing more people to buy into locked, proprietary systems that would cost them more over time. "It's stupidity," he told U.K. newspaper The Guardian. "It's worse than stupidity — it's a marketing hype campaign." Stallman is a privacy advocate who believes that when people use Web applications they give up control. That ship, however, has already sailed — most companies and people utilize Web applications and have grown used to the idea of working over the Internet. In fact in early December Claus Mortensen, IDC's principal for emerging technologies advisory services, predicted that IT cloud services will form 25 percent of all incremental global IT spending growth by 2012. In addition Merrill Lynch analysts said that same month that by 2011 the cloud computing market will reach $160 billion, including $95 billion in business and productivity applications. Merrill uses IBM's Blue Cloud servers to build and evaluate new risk analysis programs. Morgan Stanley uses Salesforce's Force.com cloud offering for recruiting applications. Nasdaq Looks to the Clouds When Claude Courbois, associate VP, product development, Nasdaq Data Products, created a new product called Market Replay that enables brokerage firms to show customers and regulators that best-execution requirements were met for a given trade (view the tool at https://data.nasdaq.com/mr.aspx), he looked into buying a database to support the product. "Naturally database solutions are the first things people look at, because they're a safe solution," Courbois notes. The price for a dedicated database, however, was prohibitive, forcing him to put the project on hold for several months. Then Courbois realized that if the process work could all be handled on the client side, Nasdaq could use a simple data storage product such as Amazon Web Services' S3 storage cloud. Today Nasdaq stores many terabytes of Nasdaq, NYSE and Amex data in Amazon's storage cloud; according to Courbois, Nasdaq adds 30 gigabytes to 80 gigabytes of data every day to the cloud, about 300,000 flat files each representing 10 minutes' worth of trading activity on a stock. The data retrieval time, he reports, is less than one second, and the system scales instantly. Market Replay reconstructs the environment around a trade by pulling all the historical market data related to that trade and creating a screenshot of market conditions at the time of execution. This can be sent to regulators or customers who question a trade. "Often customers or regulators will call about a trade that happened several months ago," Courbois explains. "The fact that we're able to keep so much data online indefinitely means the brokers can quickly answer a question without having to pull data out of old tapes and CD backups." More important, Nasdaq never pays for one byte more than it uses, Courbois says. "If we built this ourselves or used a standard ASP [application service provider], we'd have to ask for more space than we initially need and pay for all these empty terabytes until we fill them up," he relates. On the other hand, the initial monthly bills Courbois received from Amazon Web Services were as low as $5. "I never had to buy $20,000 worth of hardware or enter into a big contract," he says. "Even though we're in a big company, every new project is a start-up, and you want to avoid situations where you have to plunk down a bunch of money to move forward." And if the new product wasn't a success for some reason, Courbois could simply delete the data and cancel the Amazon service. To purists, Nasdaq isn't technically using cloud computing (although it plans to soon) — rather it is using cloud storage. The difference is that Nasdaq didn't build its Market Replay application in the cloud, nor does the user interface exist in Amazon Web Services. The application was developed using Adobe Flex for the Adobe Air runtime, which provides more computing power than a standard browser, Courbois reports. But, he adds, Nasdaq plans to develop future applications in Amazon's Elastic Compute Cloud. For instance, the exchange will create an application to let users search historical market data and perform calculations on it, according to Courbois. For now, though, Nasdaq's next cloud project is taking Market Replay to Europe, using the same Amazon S3 cloud to store European stock data, Courbois says, adding that Nasdaq plans to have the product up and running in the first quarter of 2009. Nagging Cloud Doubts Cloud doubters often cite a lack of control as a hurdle to cloud computing: What if there's a problem? Who's going to fix it, and when? Courbois says that although Nasdaq hasn't had any IT issues with respect to Market Replay, Amazon has responded to questions quickly and has an excellent support Web site. "It's not a hand-holding situation — they don't advertise it as such, and you can't expect it to be," Courbois stresses. "It's not like paying for a data center or server-side ASP." Other cloud skeptics worry about security. But Courbois claims this is a bit of a red herring. "There are ways of securing data and then you can put it anywhere," he says, pointing out that if Nasdaq were to put proprietary data on S3, it would encrypt it first. Forrester Research analyst James Staten, who wrote in a recent report that enterprise IT is not ready for the clouds largely because of security concerns, says, "It's not that [the cloud providers] can't handle security, but they need to articulate it better." Staten notes that he has seen firms build and manage Monte Carlo simulations, risk analysis scenarios and forecasting models with cloud computing. Nonetheless Nasdaq's Courbois concedes that there are limits to a cloud's usefulness. For instance, Nasdaq has no plans to run its stock market in the cloud in the foreseeable future — "That has to be in our own environment," he says. 1/9/2009 4:17:07 PM |
PricewaterhouseCoopers Urges Financial Organizations to Increase Vigilance and Oversight of Information Privacy and Data SecurityThe process of protecting sensitive customer and employee information has become increasingly complex Financial services firms, traditionally considered leaders in privacy and information security, are discovering that the process of protecting sensitive customer and employee information has become increasingly complex, according to PricewaterhouseCoopers. Based on responses from 665 financial services executives -- part of the sixth annual Global State of Information Security Survey 2008 conducted by PwC in conjunction with CIO and CSO magazines, more than half (54 percent) of financial services respondents indicated that their firm does not have an accurate inventory of where personal data for employees and customers is collected, transmitted or stored. Just over half (51 percent) of financial services respondents said they do not require third-party service providers to comply with their company's privacy policies.
"Financial services firms have been leaders in privacy and security, but their policies and capabilities are being outstripped by changes in technology and business practices," said Sergio Pedro, managing director, PricewaterhouseCoopers, in a press release. "Firms must address customer demand, competitive pressure and stringent, ever-changing regulatory requirements by developing comprehensive, integrated privacy and data protection programs," he said.
Financial services firms' increased use of their non-U.S. locations and offshore third-party service providers to handle and process sensitive data has exposed these international organizations to a maze of privacy-related requirements. Numerous laws have been passed in countries around the world since the late 1990s, covering privacy, data protection, telemarketing, fax and Web communication, and security. The survey found that just 45 percent perform due diligence of third parties that handle the personal data of customers and employees. This appears to be a blind spot for financial services firms: Despite this lack of due diligence, most (81 percent) consider themselves either "somewhat" or "very" confident in the information security practices of their partners and suppliers. 1/9/2009 4:15:27 PM |
Competition in U.S. Clearing Has its Cost, Risk and ChallengesBy Robert Iati
November 24, 2008
Following years of taking a back seat to the front-office drivers, such as commission management platforms and low-latency execution systems that are more closely linked to revenue generating activities, the importance of core transaction processing is top of mind for the decision makers in the industry. Like any infrastructural backbone, people often do not feel the need to understand such a complex system unless prices go up or something goes wrong. It is no wonder, then, that the industry is starting to sit up and take notice. With firms focusing more closely on cost and customer retention, clearing is beginning to capture the attention of market participants in many ways. However, any new competitor in the US clearing business will be swimming upstream to some extent, says Robert Iati, facing the prospect of challenging a firmly entrenched incumbent in the NSCC. "The potential competitors are a mix of horizontal and vertical models and ownership structures that includes existing utilities, exchanges, clearing entities or quite possibly a combination of two or all three." European entities are also part of this group, "since they're eyeing the clearing space as new fodder for their businesses." Market structure is changing as exchanges merge across both geographic borders and asset classes. As exhibited by the mergers of NYSE, Euronext and Amex; and of Nasdaq, OMX and PHLX; the trading markets of today are quite different from those of the recent past and will alter the way transactions are processed, costs are assessed and risk is managed. So after a period when both the market and the process were simple, there is pressure to focus our efforts on improving clearance. While this whirlwind of change and competition plays out, trade and share volumes continue to rise with no indication of tempering. Although these higher volumes are good news for trading firms, they also come at a price. Ever since the adoption of decimalization and the utilization of trading algorithms, trade sizes are being chopped into smaller pieces with the average sizes declining to around 250 shares per trade. Smaller trade sizes in combination with increased volumes are generating more trades to process. The US clearing industry has experienced a 300-percent increase in clearing volume of US equities over the past four years. This is having a profound effect on brokers' costs and cutting into their bottom line, even despite the fact that exchange costs have lessened because of competition in trading. As long as markets are constrained by geographic borders and distinct regulatory oversight—as in the past—the clearing paradigm faces little industry-wide pressure. Local markets, overseen by provincial regulatory authorities, faced little pressure to change, restricted to issues related to their own specific market. Now, as exchanges merge and align across borders, the core of market structure will be permanently altered and, with it, challenges the tenets upon which clearance processes have operated. Recent market issues have made all participants more sensitive than ever to their exposure to counterparties and credit. Institutions need greater certainty of their counterparties' ability to fulfill. 12/19/2008 11:26:49 PM |
Banks Must Aggregate Risk Management EffortsFinancial crisis shows that FIs need to break down silos when it comes to dealing with risk. A growing image of information silos continues to emerge as financial institutions conduct their postmortems. Senior executives in many firms appear to have been caught off guard when trading positions had to be written down. Indeed, some issues were out of everyone's hands; consider that eight of the biggest Wall Street banking institutions lost roughly $1 trillion in combined market capitalization over the past year. Below the executive ranks, risk managers may have thought they understood the size of their firms' mortgage exposures, but they struggled to understand how liquidity risk would make it challenging to unwind subprime positions. What many firms needed was more-robust information in aggregated firmwide risk reports -- information that could have captured the comprehensive risk attributes required to truly understand their exposures to the mortgage business. Indeed, firms that have best insulated themselves thus far in the crisis are the few that have been addressing the need for stronger data collection and risk assessment processes for more than a decade. These institutions consistently viewed risk management as a core strategic principle and a source of enduring competitive advantage, long before risks reached a tipping point. Unfortunately, we've seen the results of a reactionary approach to risk management. What we've learned is that successful firms elevate risk management responsibilities to the highest ranks -- generally on par with CFO-level positions. They align aggregated risk with corporate investment policies and objectives, and take a long-term, iterative view of infrastructure improvements. They address not only the consistency and timeliness of risk information, but also the breadth and comprehensiveness of this information. Hindsight being what it is, most financial institutions now understand they missed an opportunity to reassess existing risk and control capabilities. Now banks and investment houses have no choice but to raise their ability to capture, analyze and act on risk information across the organization. Risk Management Best Practices But firmwide risk management is not a one-time event. Firms that position themselves best for the future will build these capabilities as part of an ongoing program consisting of short-, medium- and long-term initiatives. These strategies require consistent, ongoing investment in the people, information architecture, data and models required to reach an unparalleled understanding of all the dimensions that contribute to a firm's risk profile. This includes market, credit, operational, liquidity and reputation risk. Data ownership and accountability will be just as important as the simulations firms use to evaluate risk. That means it is critical that the CIO has proper oversight of technology and the vital role it plays. Institutions that are best positioned to survive this crisis have CEOs who are the champions of their firms' technology direction. Altering an institution's culture to make risk management a core strategic principle and a source of enduring competitive advantage is a tough task. But, as we've seen, it may very well be a matter of survival. Rachel Parker and Daniel Pitchenik are partners in Diamond Management & Technology Consultants' financial services practice. 12/19/2008 11:16:22 PM |
Failed Banks May Not Have Had Failed SystemsBy Art Gillis For reasons that I cannot fully explain, the quality of a bank and the quality of its IT systems may not necessarily correlate. For example, the three largest U.S. banks run on 40-year-old legacy core systems. Even though anything is possible these days, I don’t believe Citi, BofA or Chase will fail. I should know about this disconnect situation because I used to work for a first-rate bank (eventually acquired at a 40 percent premium by BofA) but our systems were “also-rans” at best. I believe one can find similar situations of non-correlation today with one big difference—the failed banks screwed up. Their systems did not. Asking a failed bank which system they used is like going to a funeral and asking the widow which brand of scotch the deceased drank. Who cares now? So I have not tried to look at the 19 banks that failed so far this year to see which core systems they were using. Instead, I will list a few anecdotal experiences that relate to the disconnect between institutional performance and systems performance. • In the mid-seventies, I worked on a consulting project, as a sub, to upgrade the admissions and registration systems at Georgetown University. Georgetown knew very well that its systems were cumbersome, antiquated, labor intensive, error prone, and plagued by negative feedback from innocent freshmen who were quite vocal about their frustrations. So I expected we would be doing site visits to some of the better institutions of higher learning to see what they had. But Harvard, Princeton, Yale, Dartmouth, Brown, Columbia, Cornell and The University of Pennsylvania were not the places we visited. They were still using quill pen and parchment. We went to a community college in Colorado to see the slickest admissions and registration system for educational institutions in the U.S. That was my first observation that institutional rank and systems excellence don’t necessarily match. • Then I spent five years in the healthcare industry (thanks to a bank CEO who was a trustee at a top five medical institution) with particular focus on names that would impress patients who traveled from continents afar to seek the ultimate in U.S. medical excellence. Deserving as they were in their reputation as a healthcare provider, information technology was based on the Mont Blanc pen, paper records, lost records, and more important to physicians who had an ownership stake, lost revenues due to inadequate Medicare claims reporting. The electronic patient record was unheard of. The urgency of retrieving a medical record was reliant on the quality of the ball bearings of the skates worn by the retriever and his/her ability to track down the last physician who forgot to return the file when he/she was finished with the recording of procedure/diagnostic notes. One of my favorite statements delivered to medical practitioners was, “Financial institutions carry more bytes of data on a customer’s wealth than medical institutions carry on a patient’s health.” • I’m not sure how much of BofA’s acquisition price was based on Countrywide’s technology, but BofA made strong statements to the press and Wall Street about the superiority of Countrywide’s technology. I don’t think they were referring to Risk Management. • The 19 banks that failed so far this year probably did so because they made irresponsible loans and bad investments. The only other mistake that could have done them in was to go home without locking the vault door. To blame technology is so ludicrous that, so far at least, no banker has tried it. My logic is based on this. Seven companies represent 78 percent of the marketshare for U.S. financial institutions. They earned that sizable marketshare by delivering good stuff and people-based support to their customers. So I’m saying the 19 failed banks were probably using the systems of the seven most popular vendors. The challenge for any energetic skeptic is to see if the 19 banks were using systems delivered by 23 other companies whose technology may not be up to snuff. If that exercise proves to be correct, and in contrast to my reckless assumption, then the title of the skeptic’s blog should read, “Nineteen Banks Failed So Far This Year Because They Were Using Weak Systems.” 11/13/2008 4:08:43 PM |
Credit Crisis Reshapes Banking LandscapeWall St. disappears; divide emerges between big banks hampered by losses and community banks in the market for new technology. "What's the capital of Iceland? ... One pound-fifty," quipped a financial consultant BS&T met at a conference in mid-October. For the Briton, though, it wasn't really a laughing matter, as his wife was 25,000 pounds sterling (US$43,250) out of pocket since an Icelandic bank with which she had an online savings account was gone, Iceland's government unable to meet its guarantee to insure deposits and the U.K. government suing the Icelandic government. Yes, it's been some month or two: a Western, democratic country going bankrupt (Iceland); the U.S. national debt clock in Times Square running out of digits; the Dow losing $1.2 trillion in a day; the disappearance of Wall Street as we know it; more failures of banking monoliths worldwide; the U.S. and U.K. governments taking part ownership of failing banks; and unprecedented concerted action by central banks worldwide to stop the chaos -- all of which provides some flavor of the financial times. "Europe may enter recession before the U.S.," says Austin Hughes, chief economist with Dublin-based IIB Bank, a unit of top 50 global bank KCB Bank (Brussels; US$422 billion in assets). According to an October 15 BBC report, U.K. unemployment hit an eight-year high in August.
Clearly no one will remain unaffected by the crisis. How banks fare, and how their technology budgets will be shaped, depend partly on the new competitive landscape. Assuming a bank survives, it now has new competition. Pure investment banks are gone, with hybrids -- depositories with major securities units -- their new form. Also, a select class of huge U.S. banks, with about 5,000 branches spread coast to coast, is emerging -- seemingly a factor in San Francisco-based Wells Fargo's and Citi's (New York; $2.1 trillion in assets) recent titanic struggle to extend their branch networks into Charlotte, N.C.-based Wachovia's territory. U.S. banking is beginning to resemble a barbell, with only the extremes of big and small banks, notes Tom Kelly, a spokesman for New York-based JPMorgan Chase ($1.6 trillion in assets), the new owner of Washington Mutual (Seattle; $327 billion in assets). Speaking before Wells Fargo won Wachovia ($1.4 trillion in combined assets), Kelly told BS&T, "If you look at Citi and Wachovia, us and WaMu, and Bank of America and Merrill [$2.5 trillion in combined assets], there's going to be three companies with 4,500 to 6,000 branches each, Wells with more than 3,000, then those with 2,000 or fewer." Those institutions are among the nine top banks in which the U.S. government will take an ownership stake in return for funding; the others are The Bank of New York Mellon ($205 billion in assets), State Street ($154.4 billion in assets), Goldman Sachs ($1.08 trillion in assets) and Morgan Stanley ($722 billion in assets). All but Bank of New York Mellon and State Street are also on the list of top 10 financial market players in the U.S. that collectively lost $460 billion, or 54 percent of their market capitalization, between Jan. 1 and Oct. 10 of this year, says Larry Tabb, CEO of Westborough, Mass.-based research and consulting firm TABB Group. Such global behemoths were the most likely investors in failed complex investments and so are the worst-hit by the crisis. Now retail banking, which was in the shadow of the high-stakes wholesale side, is being reappraised. Many in the U.S., including Tabb, read the decision by Wall Street's last remaining investment banks, Goldman Sachs and Morgan Stanley, to switch to commercial bank charters as "absolutely" a play for funding in its easiest form: consumer deposits. "It's funny," says former banker turned Aite Group (Boston) analyst Alois Pirker. "When I was at UBS, there was no interest in retail. Now it's saving them." (UBS, the biggest loser on Tabb's list, lost $87 billion from its stock value through October.) Frankfurt-based Deutsche Bank (US$3.1 trillion in assets) announced in mid-October a big push into retail banking. It did not respond to BS&T's queries as to whether the goal is to boost liquidity and what its technology plans are for its 400 new European branches. Deutsche also announced it would cut 1,100 back-office jobs. Rebirth of Community Banking? At the other end of the banking barbell are ascendant community banks. Aside from the likely battering of their stocks (if they are public), many are reporting solid financials because they didn't dabble in subprime mortgages or their derivatives. Community bankers tell BS&T that they are benefitting from the compromised position of the big banks. As consumers run to a perceived safe haven, Brent Rickels, SVP of First National Bank of Bosque County, says, "We've been growing steadily because of the influx of cash." In the past two months Rickel's bank has added a significant $2 million in deposits, growing its asset base to $97 million. He says the money is mostly from consumers who pulled out of investment banks and large banks. Similarly, Joe Nicotera, SVP of Mercantile Bank & Trust Co., a Boston-based community bank with $139 million in assets, says his institution has gained $4 million in deposits over the past 18 months and expects to win substantially more using remote deposit capture. (For more on Mercantile Bank's RDC strategy, see page 41.) "This could become very big for us in the coming year as more businesses look for a smaller bank with all that is going on in the banking world," he says. Separately, Boca Raton, Fla.-based Sun American Bank ($649 million in assets) aimed to capitalize on depositors' concerns by introducing in October a scheme to distribute consumers' deposits with Sun American across multiple institutions to overcome the newly raised FDIC limit and insure deposits greater than the new $250,000 ceiling. More Changes to Come Another backdrop to bank/technology prospects is new global competitors that, unsullied by subprime loans, may be on the march. For example, Madrid-based Banco Santander (US$1.2 trillion in assets), which owns part of subprime-weakened Sovereign Bank ($85 billion in assets), avoided helping inflate one of Europe's biggest housing bubbles ever and agreed in October to buy the rest of the Wyomissing, Pa.-based bank. The other big environmental change in banking is possible new, international regulation to ensure that a similar domino effect can't take down the world's banks again. For instance, British Prime Minister Gordon Brown -- who has referred to the subprime crisis as "this problem that has come from America" -- urged at an Oct. 15 E.U. meeting that the International Monetary Fund should act as a global financial regulator with jurisdiction over national financial regulators in the U.S. and elsewhere. This increase in regulation obviously could create a rash of compliance-related technology changes. 11/13/2008 4:06:55 PM |
Remittances Offer Promise of New Revenue and New Markets to BanksBy Orla O'Sullivan It's a $430 billion market, and banks have finally decided they want a real part of it. About 40 percent of the global funds transmitted annually by migrant workers to their home countries emanate from the U.S., yet banks here process only about 3 percent of world remittances, according to SWIFT estimates. That's poor even compared with banks' overall poor share (30 percent or less) of the global remittance pie. And the pie is growing -- by various estimates ranging from 8 percent to 30 percent a year -- as business goes ever more global. Today's 200 million migrant workers represent $15 billion in annual remittance revenue, SWIFT estimates. That's an opportunity largely conceded to money transfer operators (MTOs), such as Englewood, Colo.-based Western Union (whose business actually is facilitated by banks, which allow their branches to be used as a distribution network for Western Union's profits). Telcos, credit card companies and PayPal are also said to be eyeing the remittance opportunity.
The Whole Is Greater Than the PartsOne-third of funds remitted today are sent as cash. Besides coming to a newfound appreciation of the collective worth of individuals' small payments, banks -- which previously focused cross-border efforts on large, corporate transfers -- have recently come to value the remittance business as a hook both for unbanked customers and for mobile banking."Remittances will be a major topic at SIBOS," David Pryce, then-acting head of the Americas for SWIFT, told a July press briefing, anticipating SWIFT's 2008 payments conference in Vienna. And SWIFT will kick off a global remittance pilot in October to help banks insinuate themselves into the business. Banks' interest has really emerged recently, sources say. Yet U.S. bank names are few on SWIFT's lists of remittance committees -- just three of 13 on the remittance advisory group are U.S. institutions, all New York-based: Bank of New York Mellon, Citigroup and Deutsche Bank's U.S. division. Worldwide, about 50 banks and 20 vendors are now on a SWIFT remittances mailing list, according to Michael Whyte, project manager for workers' remittances at SWIFT. "We are recruiting pilot banks," he says. "So far, 16 have signed agreements." Half of those are based in South America, predominantly Colombia. Not one is from the U.S., or even North America. The initial group includes Banco do Brasil (Brasilia, Brazil), Bancafe (Bogota, Colombia), La Caixa (Barcelona), Standard Chartered Bank (Hong Kong), ICICI Bank (Mumbai, India), Russlavbank (Moscow), and Standard Bank of South Africa (Johannesburg). It's possible that a new SWIFT office in Miami may be involved in the pilot, since the bulk of remittances to Latin America come from the U.S. But, "We don't know which corridor we'll test first," Whyte says. SWIFT published technical standards for interbank remittance messages and settlement in July. This followed the creation of global principles for remittance practices last December by the World Bank, which wants to see competition lower the rates paid by migrant workers. Remittance transaction fees now vary widely and run as high as 20 percent, says the development bank, which was scheduled to publish existing remittance rates for 100 payment corridors on its Web site in August. Gregory Watson, the World Bank's remittance specialist, told a SWIFT roundtable late last year, "Six years ago nobody was talking about remittances. Part of my job is to explain to banks [that migrant workers are] an attractive client base." He added, "Cross-selling is the key. "Many banks act as agents for money transfer companies. If you are receiving a remittance, you go to a bank branch, ... they hand you cash and never offer you a bank loan. It happens a lot more than you think."
Technical HurdlesSWIFT's Pryce noted at the press briefing, "We're trying to provide industrywide initiatives so there's standard pricing and delivery wherever you are in the world."As to what this means for banks' technical staffs, SWIFT's Whyte says, "At a minimum, participants will have to support SWIFTNet FileAct Store and Forward [release 6.1], and be able to send and receive the relevant ISO 20022 XML messages specified under SWIFTNet for workers' remittances." Banks that are already on SWIFT's network still will need to write their own software to integrate with SWIFT's new file and message formats. "What we're supplying is the interbank messaging for the clearance and settlement of remittances," Whyte says. For a bank already using XML -- the language in which the messages are written -- technical integration, to both their back offices and retail systems, "should be relatively simple," he claims. The bigger challenge may be cultural more than technical, Whyte says. "Banks have always been involved in cross-border payments, but within the wholesale part of the bank," he explains. The major challenge might be getting the retail, wholesale and technology staffs to cooperate and produce the necessary "integrated marketing campaign," he adds. Compliance culture is also relevant, observers note. While the Single European Payments Act should encourage remittances, some banks are discouraged from participating because of onerous know-your-customer rules, particularly since Sept. 11. They say governments may need to address this to ensure that remittances aren't driven underground into a mostly cash mode.
Key Dates for Global RemittancesDecember 2007 — The World Bank, with industry input, produces a code of conduct for banks with five operating principles. July 2008 — SWIFT finalizes technical specifications for communication and settlement of remittances. September 2008 — The World Bank details global remittance fees to show disparities that exist worldwide. October 2008 to March 2009 — SWIFT intends to run a world pilot to test the new specifications. 10/24/2008 3:51:31 PM |
NYSE Euronext Launches TradeCheckNYSE Euronext offers a low-cost service enabling customers to evaluate equity trade execution in a range of European markets. NYSE Euronext has launched a low-cost online service that enables its users to establish whether they have got the best possible deal when trading equities on 18 European exchanges and other trading venues. Aimed at small- and medium-sized trading firms, TradeCheck will enable asset managers and hedge funds, broker-dealers and compliance officers to assess, optimize and demonstrate the quality of trade execution cheaply, while ensuring that they meet their customers' needs and comply with the best execution requirements set out by the EU's Markets in Financial Instruments Directive (MiFID). As investment patterns become increasingly international, and trading venues proliferate, customers can use TradeCheck to analyze single or multiple trades executed on one or more markets, in one or more currencies, at a particular time or over a period in the past. TradeCheck can then generate execution analysis statistics and tailor-made reports for its customers' own clients.
TradeCheck offers three analytical tools to assess a trade: execution quality gives an instant analysis of a trade compared to the market, it helps firms to demonstrate that they have achieved best execution in pre-defined markets and currencies; transaction cost analysis measures the trade against different valuation benchmarks (such as volume weighted average price) over a defined period and then calculates execution performance, it takes into account market impact and the implicit costs of trading (like the size of the bid-offer spread) as well as explicit costs (such as trading fees); order book replay allows users to analyze the depth of the market around the time of the trade or order by rebuilding the order books for one or more markets and replaying them forwards and backwards in time. 10/24/2008 3:38:18 PM |
New Web Site Consolidates Real-Time Market Data Peaks Across U.S. Equities and Options VenuesMarket data professionals doing capacity planning may soon have a real-time benchmark for tracking peaks in message rates. Any market data professional working during the week in which Lehman Brothers filed for bankruptcy and Merrill Lynch arranged its own sale to Bank of America would have noticed that market data message rates soared to new highs. The turmoil in the credit markets in September and October caused equity and option trading volumes to spike, leading to record-breaking trading volumes and quotation update rates. Coincidentally, the same week that the credit crisis reached new heights, Exegy, a St. Louis-based consolidator of arket data feeds, launched a new Web site to help market data professionals at brokers, exchanges, ECNs and vendors cope with capacity planning. Exegy built the site, MarketDataPeaks.com, and is sponsoring it in cooperation with Xasax, a network provider of colocation services, and the Financial Information Forum (FIF), an industry association that tracks market data capacity as well as other issues that impact financial technology operations. No Time Like Real Time "The real-time aspect of it is the most powerful component because we can compare relative quote traffic observed on the MarketDataPeaks.com Web site with real-time issues we're dealing with in our own environment," comments Rob Wallos, global head of market data architecture at Citi and cochair of the FIF's Market Data Capacity Planning (MDCP) working group. Though FIF has historically tracked the market data message rates from the exchanges on a monthly basis, Tom Jordan, chairman of the FIF Advisory Committee, explains that the availability of real-time data is new. "This is really moving [the information from the exchanges] toward real-time presentation of the information," he says. For the first time, members of FIF -- including the exchanges; utilities such as NYSE/SIAC; the big market data vendors Bloomberg, Interactive Data and Thomson Reuters; as well as the financial recipients of the data, such as UBS, Citi and Credit Suisse -- "who are concerned with the potential stresses and strains on their systems" created by exploding market data volumes will have access to this real-time data, says Jeff Wells, Exegy's VP of product management. "They are interested in knowing what the peaks have been and listening to the exchanges on what may be coming next to make sure they are provisioning their systems and bandwidth," he adds. Take the case of Monday, Sept. 15, when Lehman's bankruptcy filing and Merrill's sale to BofA were announced, causing the Dow to drop 500 points. That day, U.S. equity and option markets' update rates peaked at 990,800 messages per second, according to MarketDataPeaks.com. The following day, Sept. 16, the North American equities and options trading venues set a historic high, reaching 1.83 million message updates per second at 12:17 p.m. "We saw the market peak very quickly following the various news items through the 16th," recalls Wells. Previously, the record rate had been set on May 19, when the peak was just more than 1 million (1,058,227) messages per second. FIF's Jordan notes that he had always assumed daily peaks occurred at 9:31 a.m., after the market open. But he now realizes this isn't always the case. According to Exegy's Wells, "On normal days, the peaks are at the beginning of the day, as the markets open up, and at the close of the day with all the closing messages. But these peaks are happening any time the news hits, and the big news is very unpredictable." But even under normal conditions, Wells adds, the market currently experiences about 200,000 messages per second. "A few years ago, that would have blown everyone out of the water," he says. Since the majority of those message updates originate from option and equity order books, many FIF members are interested in a breakdown of which exchanges are generating the peak volumes, Wells continues. Explaining MarketDataPeaks.com's functionality, he says, "You would click on the high, show how much was options, how much was stock, how much was Level II or Level I, BATS or Arca." According to the site, it tracks all the market data messages that occur simultaneously in any given second across all live data feeds, including NYSE/SIAC, OPRA, Nasdaq, Arca, BATS and Direct Edge, including both Level I and Level II. "It is clear that a lot of the volume comes from the order book feeds," adds Wells. MarketDataPeaks.com reports that BATS hit 113,312 messages per second and Nasdaq TotalView hit 125,619 messages per second at the same time on Tuesday, Sept. 16. And Wells points out that the site actually underreported NYSE Arca volumes on the big day because the software was measuring data packets, not messages. "NYSE Arca told us on Thursday [Sept. 18] that their system peaked at around 300,000 messages per second," Wells relates. "The system has been fixed now, but that means we'll never actually know for sure how busy the market really was." Exegy is constantly keeping track of the message rates coming from the North American trading venues. "All the market data peak numbers that we see [from Exegy] are provided on a per-second basis, and they include all the North American equity feeds, option feeds from OPRA as well as international feeds," explains Arsalon Shahid, program office manager for FIF in New York. To measure the peak market data rates and aggregate them in real time Exegy relies on its hardware acceleration appliance within the Exegy Ticker Plant. All the data is processed through the Exegy Single Ticker Plant and is updated in Xasax's colocation facility in New York. Xasax provides on-demand virtual servers and runs a financial network called the Xasax Financial Backbone, pulling in the majority of the liquidity available from the U.S. customers of Xasax, including independent traders, smaller hedge funds and brokers that want access to the fast data to do their own high-frequency trading without contracting for the data center space themselves. Xasax has contracted with the various exchanges to bring in those direct data feeds and is leasing machines from Exegy to handle the feeds, says Exegy's Wells. "So that means we've got access to the boxes to do these measurements," he explains. Normalizing Data Rates What the FIF and Exegy are trying to do is normalize the data rates observed across various trading venues and present these statistics in a common format, says Citi's Wallos. Tracking message rate statistics across trading venues is often quite difficult since there is no requirement that exchanges publish their metrics in any standard format, he adds. For example, some exchanges might publish messages per second versus updates per second. "If Nasdaq is publishing a statistic in megabits per second [Mbps] and OPRA is publishing something in packets per second, what does that mean for a brokerage house trying to rationalize a spend on more servers or bandwidth?" Wallos asks. Even though most of the investment banks that take in direct exchange feeds calculate these statistics on their own systems, if it normalizes the data across all the exchanges and ECNs, MarketDataPeaks.com could become a benchmark for the investment banks to use as a reference point for their capacity planning. Under such a scenario, if a firm were breaking through capacity thresholds on its systems that process raw OPRA data, for example, it could use the site as a reference point to figure out whether it was having capacity issues with internal systems or if the problem were Streetwide. "The whole point is to provide a relationship between the peaks and the trading-related information," says FIF's Shahid. "If someone is on the [NYSE] floor and they hear news related to market data capacity, they can quickly go to the Web site and see if it's not just them being affected -- the spike or the drop can tell them if it's something bigger." Going forward, FIF's Jordan says, FIF is going to build this information into its capacity-planning meetings. "FIF will provide all the peak information, and we'll provide what time of day it happened. We'll do it by entity, by OPRA or NYSE, for instance," he says, adding, "The peaks are not necessarily [occurring] at the same time." Now that penny pricing and algo trading are expanding to options, Jordan notes, market data and infrastructure professionals are eager to delve into the underlying reasons for data spikes. "This will tell you what the real peak is," he asserts. "It's a tool to help people evaluate what their overall capacity needs will be." 10/24/2008 3:28:23 PM |
Industry Insiders Assess the Challenges Facing Todays Banking CIOsBS&T asked industry insiders to give us their take on the challenges facing today’s CIOs and what exactly should constitute a good bank technology chief. Allen attributes this largely to the emergence of the Internet as a commercial medium and to the addition after 9/11 of counter-terrorism compliance to a growing body of regulatory constraints. "The CIO became strategic around 1995 to 1997," she says, and now the CIO is a business executive as much as a technologist. Certainly business acumen will be in even greater demand as banks try to do more with shrinking budgets. The biggest challenge facing CIOs will be stretching "the limited financial resources into an understanding of business needs and translating them into technical/process solutions," says John Fricke, chief of staff with the Financial Services Technology Consortium (New York). To find out what other challenges await bank CIOs and identify exactly what characteristics make up an elite technology chief, BS&T asked a panel of industry insiders. 10/6/2008 12:36:00 PM |
The End of the Single Prime Broker ModelBy Sameer Shalaby, CEO, Paladyne Systems
September 30, 2008
Hedge funds with single prime brokers " even firms with less than $1 billion in assets under management " are currently scrambling to balance their assets and manage risk by establishing relationships with new brokers. In the immediate future, many hedge funds will need to take measures to reduce their operational dependence on their primes, actively seeking greater independence and disaster recovery arrangements to protect their assets and operations from third-party shocks. The Risks of Overdependence For hedge funds with a single prime broker, the sudden collapse of that relationship is devastating. When a prime goes belly up, a hedge fund can lose access to more than its assets; the fund's very operations can be at risk. For much of the last decade, prime brokers have offered hedge funds "free" technology as a value-add in their relationship. This means a hedge fund with no technology can gain access to a front-office trading platform, direct market access algorithmic trading tools and even back-office accounting and reporting technologies, all provided and managed by the prime broker as a service to the fund. With prime brokers now on shaky ground, however, hedge funds are finding that this reliance on a single prime broker for fundamental trading and operations is leaving them vulnerable and potentially unable to do business in the event of a crisis. The collapse of Lehman Brothers earlier this month and uncertainty at Goldman Sachs and Morgan Stanley saw many funds " at least 1,000, with about 20% over 800 million AUM " struggling to unwind assets, many of which were tied to single prime relationships. For these hedge funds, the confusion and disarray drives home just how much a fund's operational integrity is based on the health and good judgment of their prime brokers. Fund managers that are able to withstand the current market volatility and shorting ban in the coming days and weeks will move quickly to assess these shortfalls in operations and infrastructure. The Multi-Prime Imperative The prime broker market, once dominated by Goldman Sachs and Morgan Stanley, has been transformed and is rapidly being dominated by those investment banks attached to a commercial entity " namely: Credit Suisse; Deutsche Bank; Bank of America; JP Morgan; Barclays; and Citigroup. Meanwhile, Goldman Sachs and Morgan Stanley are changing their status to expand into commercial banking in an attempt to expand their balance sheets to retain their hedge fund assets. Funds that relied on a sole prime broker for infrastructure may choose to turn to their new prime relationships for infrastructure and technology. However, this plan only replicates the risk on relying on a single prime. Secondly, as the prime broker model itself shifts, those counterparties still operating will likely reduce service levels as margins fall and leverage is curtailed. Furthermore, some of those primes still do not offer technology that allows a fund to have multiple prime broker relationships. Funds will need to grow assets in the future to be viable players in today's markets and to attract investors, which increasingly will be institutional allocations. To attract institutional money, these funds will need to pass rigorous business and operational due diligence investigations. Funds will also need to invest in technologies that will guarantee their capability to comply with likely regulation focusing on transparency. This will mean securing independent platforms for the front, middle and back office with multi-prime interface capability. Those funds that relied on a single prime broker for this capability will need to have this up and running in weeks, not months, once they have unwound their assets from their current prime. Establishing Contingency Plans For many hedge funds, the September 2008 financial crisis drives home the need for firms to alter their thinking on disaster recovery. With major financial institutions failing or being sold in fire sales, disaster recovery is no longer a "what-if" scenario that simply involves housing servers in an off-site location. Funds need contingency plans for their entire business model " to ensure that their technology, business processes, counterparty and service provider relationships continue uninterrupted in the event of a financial meltdown or catastrophic event. To protect their assets, firms should consider that establishing relationships with multiple prime brokers can spread the risk that their assets will be in jeopardy if another crisis arises. In these troubled times, the best approach is to establish a balanced, independent infrastructure that is under the fund's control and oversight, with as little dependence on third parties as possible. 10/6/2008 12:26:23 PM |
How Not to Build a Wall Street Data CenterThe dos and don’ts of state-of-the art data center design. For financial firms, the data center design of the future will only be successful if it enables them to adapt to specific business operational characteristics (e.g., performance, cost, regulatory, etc.) for high-velocity electronic and algorithmic trading, risk management, and complex synthetic hedging strategies. This will require a value chain platform that executes in real time, providing greater performance at a lower cost in contrast with today's data centers. To get there, firms have to understand the design limitations created from past decisions. Previous data center designs have resulted in complexity, waste, performance barriers and cost models that just do not work. A lack of understanding and transparency about what has been done in the past will continue to create misalignment with business needs if this issue is not addressed today. Critical design limitations include:  Click image to view larger chart
10/6/2008 12:19:06 PM |
Next-Generation Data Centers: Wall Street Keeps Data Centers Lean, Mean and GreenRemote management, high-speed networks, state-of-the-art virtualization management and efficient cooling are just some of the best practices top Wall Street firms are using to make sure they have the highest-performing and most-efficient data centers possible. Technology executives charged with running Wall Street's data centers have a difficult balance to strike: On one hand, demand for high performance and low latency to support algorithmic trading has never been greater; on the other hand, subprime write-downs and the troubled economy portend IT budget cuts while skyrocketing energy prices necessitate efficient use of energy.  Tony Amicangioli, CTO, Lime Brokerage Driving Low Latency The top priority for any Wall Street data center is to ensure low data latency so that as market and order data travels to and from exchanges, algorithmic trading programs and order management systems, the data center helps speed it on its way rather than slow it down. Network topology, server speed and physical distance are among the many factors that can reduce or add to data latency in this environment. To keep up with the pace of change, Lime Brokerage is in the process of rolling out its third new trading platform of the past six years. "The first wave was a millisecond war," says Tony Amicangioli, chief technology officer for the New York-based brokerage. "It was considered amazing if you could turn an order through a machine in one millisecond. Now, with our latest rollout, we're down into the microseconds for performance under loads of tens of thousands of orders per second per box. It's an ongoing thing -- you have to keep up."       According to Amicangioli, Lime is constantly working with telecommunications vendors to get as close as possible to real-time, speed-of-light connectivity between its Jersey City, N.J., data center and the trading venues. Most of the networking is gigabit Ethernet, but "wherever the I/O [input/output] rates of a box are an issue of focus or concern, we have 10-gigabit solutions," he says. "We haven't had a need to get to a full 10gigE data center yet, but who knows what next year or the year after holds?" Lime uses a home-brewed latency monitoring system. "We decided long ago we wanted to build a high-performance box that would measure the latency of data coming in and out of our boxes from clients and then from our box onto various trading venues, such as Inet, Arca and BATS," Amicangioli relates. "It's been a very useful tool; it not only lets us measure latency to the microsecond, but it's also acted as a scope into the venues to see how well they're doing." Lime also has begun colocating some servers with Savvis, a St. Louis, Mo.-based provider of hosted data center facilities, at the behest of customers that would like their applications to be closer to the exchanges, including Arca and BATS. Amicangioli says, however, that due to the latency improvements the brokerage already has made, colocation is almost a moot point, as it only takes five microseconds (i.e., five millionths of a second) for data to move from Lime's primary data center to Arca and BATS anyway. "But some traders are saying they want this, so in the spirit of listening to the customer, we're proceeding with this colocation initiative." Currently, 200 clients colocate some trading applications with Lime at the Savvis data center. Nasdaq Keeps Customers Close To fulfill its low-latency promise to customers — it offers a round-trip transaction time of 250 microseconds — Nasdaq offers what might be called co-colocation, or co-proximity, hosting: the equities exchange invites customers to colocate their servers in the same facilities alongside Nasdaq's servers. "We're trying to drive latency as low as possible," says Phil Marie, SVP of global infrastructure, Nasdaq. "To do that, you have to be in close proximity to your users or offer stratification of services. We put our computing as close to the end user as possible." Approximately 100 clients take advantage of the service, Marie reports. Nasdaq has linked the colocation facilities it uses into one virtual data center with 10-gigabit dense wavelength-division multiplexing (DWDM), a technology that enables increased capacity and bidirectional communications over one strand of fiber networks. While the facilities are hundreds of miles apart, DWDM allows fail-overs and backups to take place on the fly, according to Marie, who adds that he also is considering switching from gigabit Ethernet within the data centers to faster InfiniBand switches. To test latency and performance, Nasdaq performs frequent simulations and stress tests. "We test two times the highest load we've ever seen," Marie relates. "We know we have the capacity to manage the busiest market day up until that day times two." Most stress testing is conducted on weekends, Marie notes; during the week, a capacity group uses statistical modeling against benchmarks to ensure Nasdaq can handle a market surge, he says. Keeping Cool and Virtually Green While Wall Street is narrowing the latency gap, a bigger challenge to running ultra-high-performance data centers currently is their energy-hogging nature. Wall Street data centers typically take in 20 to 30 times the energy per square foot used by the average office building, according to Bob Hunter, CEO of data center energy management consultancy Trendpoint. "Data centers have traditionally been designed for security and high availability, but not really for energy efficiency," comments Glen Seimetz, director of portfolio strategy for data center and security services for Siemens IT. "Older data centers ... chill the whole room rather than select computing environments. And server chips kept needing more power and running hotter." Cooling typically represents at least half of a data center's energy consumption. The most state-of-the-art cooling technology today includes liquid-cooled chips (Liberty Lake, Wash.-based SprayCool is a leader here) that enable servers to produce less heat; cooling zones in the data center equipped with sensors that pick up on temperatures and adjust fan speeds and air conditioning based on the requirement for that zone; and air-side economizers that use outdoor air to cool the data center. (As you'd expect, this only works if the outside air is cooler than room temperature.) Lime Brokerage's founder, Mark Gorton, is an eco-chic role model. Not only does he bike to work in Manhattan each day, he's also active in The Open Planning Project, a nonprofit organization that is trying to get cars off the streets in New York City. Naturally, Gorton and Amicangioli aim to make Lime's data centers as green as they can. Like most companies, Lime has turned to server virtualization as one means of greening the data center: using virtual servers means far fewer physical servers are needed. For four and a half years, Lime Brokerage has been building a "nerve center," or unified control system, from which it can monitor and control all its virtual servers. "If we have a new customer and we need to set them up for trading, they'll need a certain set of quotes, some trading capability, maybe U.S. equities — we can control and configure that from one place," Amicangioli explains. By the end of the year, a new dimension will be built onto the nerve center that Amicangioli refers to as the "green machine" — the ability to shut down the vast majority of systems that are idle in off-hours and during weekends. This fits with the company's socially responsible attitude and should save it a lot of money in wasted power consumption, he reports. "It's long driven me crazy that we'd finish the trading day by early evening and I'd walk into a machine room and there would be hundreds of servers raging away that also have to be cooled," Amicangioli says. According to Amicangioli, Lime's disaster recovery site alone uses 200 kilowatts of power and 80 tons of cooling — 40 small homes' worth of cooling. "And it isn't a super-megawattage data center by most standards," he says. When the green machine is completed, the virtualization middleware will be able to recognize when the day's trading is completed and power down servers that are no longer needed, Amicangioli continues. Before the next day's session, the software will bring those servers back up. The virtualization management system also provides self-healing. Lime has a high-availability topology, meaning that for every server in production there's a standby server constantly synchronizing with it so that if the production server malfunctions, everything on it will quickly fail over to the standby unit. The forthcoming green machine will be able to power down the failed server, power up the standby server and assign it the ID of the failed unit "so that we're not sending IT personnel on fire drills every time there's an equipment failure," Amicangioli says. "As the company grows, this becomes more important." Further, a new cooling system that Lime is piloting in its newly built Waltham, Mass., data center as well as its disaster recovery site and development facility is designed to respond automatically to changes in load so as systems get shut down, the chillers will pump out less cold air, Amicangioli adds. Nasdaq Watches Energy Use Carefully Nasdaq's virtual data center strategy has enabled the exchange to close nine data centers in the past five years and cut its data center energy bills in half, the firm's Marie reports. "Not that we didn't need them, but we've merged them together," he notes. The equipment, Marie explains, has been moved into colocation facilities run by Verizon, Savvis, Equinix and others, dramatically reducing energy costs. "We get a better profile because we use the space we rent more efficiently," Marie says. "And the colocation providers are using more of their space, so rather than using 20 to 30 percent of the building, they're pushing 70 to 80 percent. When firms own their data centers, usually that doesn't happen. It's hard to run a full-bore data center to the max when you're not a Yahoo, Google or Microsoft." But Nasdaq has found that even when using colocation facilities, the biggest issue is power. "You have to be very conscious of that," Marie asserts. "As we negotiate new contracts, we only pay for the power we use, versus a set rate — that encourages us to be energy conscious even in colocation data centers." When it shut down its data centers, Nasdaq kept on the electrical engineer who had been managing them and made it his job to audit the exchange's energy consumption within the colocation facilities as well as the providers' adherence to best practices, according to Marie. "Most colocation providers will sell you a cabinet based on potential use and reserve that much power for you," Marie notes. "In reality, most cabinets use only 30 to 40 percent of the power allocated to them, so you have a lot of capacity sitting idle all the time. That's a waste of energy." Nasdaq also takes an energy-conscious approach to data storage. The exchange runs all of its tape in two of its server facilities on massive arrays of idle disks, or MAIDs, Marie notes. The technology enables disk drives to spin down when they're not in use, thereby reducing power consumption. While Nasdaq aggressively pursues energy-efficient data center solutions, it hasn't bought any water-cooled servers yet, Marie says, because of the expense and because the exchange has standardized on Intel chips. He does try to select the most energy-efficient Intel-based servers, however. "We look at how they are designed, how much power they use, how they perform, whether or not they help us with latency, how many transactions per second they can handle," Marie relates. "Then at the end of the day, how do they step down so you're not using as much power in the off-hours?" Remote Control Another growing trend in the management of data center power consumption is remote, or "lights-out," management. The concept isn't brand-new, but technology has only recently made it truly workable. The idea is that anything that needs to be changed in the data center or colocation facility can be handled remotely from a dashboard-like console. In addition to providing staffing flexibility — no one has to physically go out and fix a server at 2 a.m. — remote management also eliminates carbon-spewing commutes to the data center. Nasdaq has remote operation centers in Stockholm; London; Trumbull, Conn.; Philadelphia and New York — far from the colocation facilities in which its servers are physically housed. In fact, Nasdaq does not maintain any staff at the colocation facilities, according to Marie; employees of the colocation providers take care of anything that needs to be done in person in the computer room. The dashboards that managers use to monitor the data center facilities track millions of data center events, including temperature changes. "You have to get very confident that you can remotely manage things, and you have to have a lot of faith in your people and the tools you're using — that you can see what's going on at a remote site that could be thousands of miles away," Marie says. The tools Nasdaq uses include HP OpenView, NetIQ software and in-house written programs, as well as off-the-shelf KVM switches that can be used to remotely turn servers off and on. But no advances in monitoring technology can provide a glimpse into the future, and Lime's Amicangioli wonders about the technology risk created by all of the data center and infrastructure decisions Wall Street firms are making today, in light of the fact that better, more energy-efficient technology might be right around the corner. "If you build a data center and you have jet engine-like cooling and power density that can light a small city, one thing that might and should happen is that the folks building the silicon could find a way to create compelling amounts of computing power at a greatly reduced power profile," he suggests. "Should that happen, lots of data centers out there may be overpowered and overcooled. It may not be the worst thing in the world, but when I think five years into the future, I can't help but think things will be very different." Amicangioli says he tries to build out Lime's data centers with an eye on such possibilities — for example, by building "cells" that can be added or removed as needed. But, "No matter how hard you try to plan," he insists, "there's always twists in the future that make it difficult." 10/6/2008 12:06:22 PM |
Bank of Americas PayMode Service Reaches Record MembershipBofA demonstrates the growing importance of e-payments and e-invoicing service to clients’ supply chains. According to the bank, its clients can pay about 30 percent of their targeted vendors on day one and up to 75 percent within the first 12 weeks, enabling immediate processing and cost efficiencies. Kevin Phalen, SVP, product management executive, Integrated Debt and Treasury Solutions, notes that BofA reaches out to the vendor community to invite them to enroll in PayMode. Such outreach is becoming more common among financial institutions in their financial supply chain management businesses as they attempt to bring more efficiencies to clients. "Bank of America associates contact targeted vendors for enrollment into the network on behalf of the client," Phalen explains. "And, once the supplier enrolls, he agrees to be paid by anyone in the network, so there is no need to re-enroll for each payer." Phalen says this b-to-b e-payments and invoicing network is designed to help move companies from a paper-based environment to an electronic one. He says the benefits are there not only for BofA's commercial clients, but for the suppliers as well. "[PayMode] offers vendors electronic deposit of funds and provides flexible alternatives for delivery of remittance information to meet their current banking and system capabilities thereby removing the barriers to their conversion," he says. Remittances can be delivered in any format or can be viewed, printed or downloaded from the PayMode secure Website. Additionally, suppliers do not need to share bank account information with their customers as PayMode maintains and authenticates all the bank data for its network members. BofA currently has 400 commercial and government clients enrolled in the PayMode service. Although Phalen says it is open to any size client, it works best for entities that make a minimum of 12,000 Accounts Payable payments per year. The PayMode network is a component of Bank of America's Electronic Payment Services suite, Comprehensive Payables, and has processed more than $225 billion in transactions since its inception in April 2007. According to Phalen, the service has seen a recent spike in interest from clients and vendors, leading to the signing of the 50,000th vendor member—quite a milestone for the bank, he says. "The rapid growth of this network in 2008 demonstrates the need buyers and sellers have to transact their business more efficiently," he comments. "The PayMode solution, although sold to the payer, has been successful due to the effectiveness of a solution that works for the suppliers as well. When both sides of the transactions reap benefits, you have a win all around. This network, as demonstrated by this milestone, addresses that fundamental supply chain need—make it easy and reduce costs for both parties." 9/5/2008 11:03:54 AM |
Mobile Banking Takes Off ... Or Does It?Bankers report adoption exceeds industry expectations, but not everyone is convinced. Brandon McGee, the industry's unofficial ambassador for mobile banking, says, "The biggest change in 2008 is that adoption has really taken off." McGee, senior product manager for mobile banking with Columbus, Ohio-based Huntington Bancshares ($56.1 billion in assets) and a mobile banking blogger increasingly cited by the press, adds that m-banking is "booming." Banks view mobile banking as a tremendous opportunity, as the channel potentially offers new revenue streams from mobile payments; new marketing and service opportunities, including text alerts; and better hooks into the unbanked as well as existing customers. McGee says Huntington's June 30 launch of m-banking, for example, "exceeded our wildest expectations." "The number of users we had after four weeks was our goal for after eight months," he reports. And through his blog (www.brandonmcgee.blogspot.com), McGee relates, he hears similar tales of success from other banks. New York-based Citi ($2.1 trillion in assets), which has six million retail customers in the U.S. (compared to Huntington's one million), also expects m-banking to be huge. In fact, the banking giant is set to launch a new subsidiary next year to facilitate its m-banking service and serve as a vendor to the industry. Steven Kietz, EVP of Citi and head of its new unit, Mobile Money Ventures, points to the acquisition of Firethorn, a leading m-banking vendor out of Atlanta, by San Diego-based Qualcomm last November as indicative of the industry's great expectations for m-banking. Qualcomm paid $210 million for a company with "less than two years' " experience in m-banking and which had "negative revenue," he says. It "seems like a good precedent," Kietz adds wryly. "Mobile banking's going to happen much faster than previous technologies," he continues. "M-banking will happen in three years, whereas Internet banking took 10." But Emmett Higdon, a senior analyst with Forrester Research (Cambridge, Mass.), is a lone voice among analysts and bankers in dismissing as "abysmal" the same m-banking growth Huntington's McGee sees as "booming." Based on a Forrester survey of 5,000 U.S. consumers in mid-2008, there has only been an increase of 1 percent, to 5 percent of the online banking population, in the use of m-banking since the end of 2006, when Forrester conducted a similar study. An excerpt from the study and McGee's rebuttal are posted on McGee's blog. In essence, McGee says of Higdon's comments, "He's saying m-banking will be successful at 20 percent [adoption by 2011]; we're saying it's successful at 5 percent." According to McGee, within months of launching an m-banking offering, many banks have exceeded their target of 3 percent to 4 percent adoption by their online households (not individual customers) within the first year. The No. 1 reason consumers polled by Forrester gave for not using m-banking, according to Higdon, was, "My needs are not that urgent" (i.e., they can wait until they get home or otherwise have access to a PC to conduct their banking); No. 2 was, "I don't see the point." But more on that later. Despite the banking industry's unfolding financial difficulties from unpaid mortgage loans, not one source contacted for this article was aware of any bank cutting back on m-banking -- perhaps perceived as more of a luxury than a necessity. "That's a pleasant surprise because six to nine months ago that was a concern," Huntington's McGee notes. But, he adds, "You might not see as many press releases because larger banks are guarded now." Perhaps indicative of that, Kelly Brieger, a spokeswoman for Clickatell, a Redwood City, Calif.-based provider of text messaging services to banks, including two of the top three South African banks, says U.S. clients won't allow their names to be released. "We signed three domestic, regional banks in the last six months, but they're all really tight-lipped," she explains. The only source who even comes close to suggesting that banks have put the brakes on m-banking developments is Forrester's Higdon. The top 20 banks are already committed to the channel, he says, so "they're certainly not scaling back or abandoning those projects." Smaller banks, however, may hold off to see what works, he suggests. "Nobody knows yet -- we're waiting to see what slides off the wall."
To Text, or Not to Text?London-based Barclays Bank ($2.27 trillion in assets), the 18th-largest bank in the world, hardly qualifies as small, but it still represents some of the uncertainty surrounding the form in which mobile banking will be delivered. Following the bank's introduction of browser-based mobile banking in summer 2007 and tests of various vendors' SMS-text offerings since, Barclays now plans to make its major m-banking push a text offering early next year, according to Phil Sowter, the bank's head of mobile and self-service initiatives, who admits that Barclays will be a little late to the SMS fray. Barclays is convinced that text messaging is consumers' preferred method of banking on the run -- for now, Sowter says. "It's not a matter of either/or," he adds, suggesting that there is room for both browser-based and text-based mobile banking. But it will be some time before the content of the average Web site has been designed with the mobile user in mind, Sowter asserts. "SMS is where the market is at in the U.K. at the moment," he continues. "It offers the reach and adoption that isn't there for downloads or browser-based m-banking." Given the uncertainty about m-banking platforms themselves -- not to mention vendors' proprietary products -- Barclays exemplifies why some banks might keep mum on vendor announcements. Though Clickatell cited Barclays as a customer, Sowter tells BS&T that Barclays conducted "a couple of tactical pilots" of m-banking text alerts but would not proceed with Clickatell. In Sowter's view, there's a lack of "scalable" vendor offerings for SMS-text banking. "We're looking at much larger and more-complicated SMS messages," he explains. "We want to extend the range of alerts beyond online banking customers." Sowter says Barclays' text service will include unique features, but he declines to elaborate. Eventually, "The fixed and mobile Web will converge," Sowter contends. And he is echoed by others, including Huntington's McGee. "We'll see many institutions layer one technology on another," McGee predicts. "The progression will be from browser to text to downloaded applications," he asserts, noting that the cost of deploying the three dominant forms of m-banking rises in that order. That said, "A tiny little bank with a good programmer could launch a mobile browser solution for a couple thousand dollars," McGee contends. But for that, he adds, "You'd likely just be able to check transaction history." BankPlus, a $2.1-billion bank based in Jackson, Miss., isn't exactly tiny, but compared with the few banks operating locally that offer m-banking -- such as Wachovia Corp. (Birmingham, Ala.; $812.4 billion in assets) and Regions Financial Corp. (Birmingham, Ala.; $144.4 billion in assets) -- it is. According to Dave McLeod, BankPlus' EVP and chief technology officer, as of July, 3,000 of the institution's 30,000 online customers have adopted browser-based m-banking since it was first offered in late February 2008. "Today, it's just an extension of our Web site," McLeod says. But, he adds, BankPlus hopes for revenue opportunities from m-banking in the future. "Bill payment is the only Web banking function you can't do in our m-banking," McLeod notes. But he stresses that BankPlus plans to offer m-banking functionality that goes beyond online banking, such as alerts.
Where's the Money in M-Banking?McLeod's characterization of BankPlus' m-banking plans encapsulates many of the issues facing banks: How do they make money from m-banking? Why would customers want m-banking in the first place? In the words of Forrester's Higdon, the knock on the current state of m-banking is that "All we have done is simply port over everything we have online to a mobile platform." Indeed, Citi's Kietz remarks that there was some online "badmouthing" of Bank of America for such "porting" when it recently released an m-banking service for the iPhone. Yet Charlotte, N.C.-based BofA is the industry's big mobile banking success story, with more than one million m-banking customers, and the iPhone is widely lauded for raising consumer awareness of mobile devices as transactional tools, not just communication devices. With the continued development of third-generation (3G) handsets and software tailored for the devices, that awareness should continue to grow, and payments initiated from mobile devices are believed to offer big revenue potential. But there are significant development hurdles to overcome -- especially for contactless payments, which are initiated with a wave of the mobile device using near-field communications. For one thing, handsets need to be modified, meaning cross-industry collaboration -- among banks, phone makers, mobile carriers and software vendors. In the face of self-interest, however, such collaboration isn't a given. Barclays' Sowter says there's "not so much a standoff as a gold rush mentality," with everyone looking to hit pay dirt themselves. An easier interim mobile payments offering for banks will be money that today might be transferred by check (e.g., person-to-person or bill payments), for which the funds can travel via the existing payments system while the associated messages can use existing mobile communication technology. For example, by early fall Citi will launch person-to-person payments using technology from Obopay, a Redwood City, Calif.-based vendor that sends payment messages by text and moves funds via the Automated Clearing House (ACH) network. According to Juniper Research (Hampshire, U.K.) mobile money transfers, by migrant workers and others, will exceed $5 billion globally by 2013 -- which suggests another big m-banking angle: Though more relevant to developing countries than the U.S., m-banking could be the hook to draw unbanked customers into the financial system. "By 2015 there will be one billion new middle-class customers [worldwide], and the mobile is going to be their first banking device," says John Gauntt, a senior mobile analyst with eMarketer, a New York-based research firm.
Consumers Get the MessageBut the return on investment U.S. banks are seeking from m-banking -- in the short term, at least -- is more about marketing opportunities and potential cost savings than direct revenue. For example, there's no expectation that U.S. banks will start charging for text alerts, as U.K. banks have begun to do (see related article, "Mobile Banking a Money Maker for U.K. Banks"). However, one in four frequent mobile banking customers is likely or very likely to respond to an SMS marketing message received on his or her mobile phone -- almost three times more than the average customer with a mobile phone, according to a June mobile marketing report by Javelin Strategy & Research (Pleasanton, Calif.). Barclays' Sowter adds that "90 percent of all texts received are read," which is much higher, he asserts, than e-mail or direct mail. Additionally, texts can prompt an immediate response. Imagine, for example, a loan offer -- a bank could say, "If you're interested, text XYZ and we'll call you right back." Even Forrester's Higdon agrees that if banks could make something like bill pay as easy to do from a mobile device as from a PC, such a "sticky app" would make the mobile channel an important customer retention and acquisition device. Further, m-banking holds the potential to cut service costs. For example, "Look at the money saved by pulling calls out of the call center -- customers looking to see if their checks have cleared or find out their balances," says Huntington's McGee. "One call could cost upward of $6." Richard Winston, a Dallas-based senior executive with Accenture consulting, adds that banks have a new incentive to push m-payments. As check use has finally fallen, he explains, check processing has gone from a low-margin revenue business to a drain on the bottom line and, without economies of scale, each check processed is a net cost. With m-payments, Winston contends, "Banks are trying to solve both problems." Still, Citi's Kietz says, cost savings are a small benefit in the scheme of m-banking. It's more about revenue potential and customer appeal, he says. For example, as U.K. customers already do, U.S. consumers increasingly will receive potential-fraud alerts when high-value transactions are made on their accounts. "We'll get the customers to be the fraud department, and they'll be happy about it because they're worried about identity theft," Kietz relates. Asked if there's any likely tipping point for m-banking adoption, Huntington's McGee says there is any one thing. But, he adds, "One number I read lately jumped out at me -- that m-banking use is expected to quintuple this year versus last." 9/5/2008 11:01:43 AM |
Financial Supply Chain Management Continues to EvolveMerging the physical and financial supply chains continues to present challenges and opportunities to banks. With the world economy in flux, banks and their clients want to find even more ways to squeeze efficiencies out of their systems. One area that is ripe for reevaluation is financial supply chain management (FSCM). FSCM consists of services that bring together data and transactions from trade and payments activity in a manner that provides the parties in the supply chain with all the information they need to effectively complete their business transactions -- at least, that is the ideal for which banks, corporates and technology vendors strive. In reality, FSCM is still evolving, and the services and technologies that crop up to support it need room to incubate. At its core, however, FSCM is about efficiency -- something that never goes out of fashion, particularly in tough times. "The economy could have an impact on how we deal with our corporates, but it presents an interesting opportunity," notes Bill Grace, VP, global treasury management product manager, with Cleveland-based KeyBank ($101 billion in assets). "Everyone will want solutions that focus on doing more with less. If the ROI is attractive and helps reduce overhead, that's where the success will be." According to Jim Gahagan, global industry executive for financial services with Columbus, Ohio-based business process integration provider Sterling Commerce, until things settle down in the markets, controlling cost will play an even greater role in companies' purchasing decisions. "The economic situation is the overriding factor in any technology investment for banks and corporates today," he says. "Any technology initiative is under more scrutiny around its ROI. But streamlining the interactive supply chain is a value to corporates, and they understand this." To Christopher Baker, SVP and trade executive for the Americas and Europe for Charlotte, N.C.-based Bank of America ($1.7 trillion in assets), it certainly is not "business as usual" for the bank as it deals with its commercial customers. "As the economy tightens, liquidity follows," he explains. "But there is a recognition that if a supplier needs faster working capital turnaround, there is a greater willingness and recognition [that it is] a co-equal in the supply chain ecosystem. As we build the global supply chain for key buyers, suppliers and financial intermediaries, they will all see they have a stake in making it work efficiently. It's a mentality that will grow." But always at the core of FSCM is process optimization, adds Ian Watkinson, head of e-invoicing with Edinburgh-based The Royal Bank of Scotland (RBS; US$3.5 trillion in assets). "The trend among our customers is that they are looking at ways to optimize their processes," he relates. "That's the heart of what they are seeking." A Portal Into Supply Chain Activity While banks take numerous approaches to meeting the FSCM needs of their corporate clients, some services are fundamental to any FSCM offering. For instance, the portal concept has been gaining steam. These Web-based hubs are designed as repositories of information for the buyers (banks' corporate clients) as well as the suppliers in the chain. According to Enrico Camerinelli, a senior analyst in Boston-based Celent's banking group, "visibility portals" are key to supply chain management. "Visibility portals are where the buyers and suppliers meet and exchange bills and invoices," he explains. Christopher Doroszczyk, a principal in the financial services arena with New York-based Deloitte, says portals should constitute the core of FSCM offerings. "The biggest technology today in this area is around client access -- the ability of banks' clients to access a plethora of services offered by the financial institution," he relates. When this is combined with other services, such as electronic invoicing and the integration of supplier invoices with buyers' payments, banks have a well-rounded supply finance offering, claims Doroszczyk. "This is beyond a Web portal because you're offering different services and the ability to settle in different markets where the portal lets you check transactions and pay," he continues. "It connects corporates' ERP [enterprise resource planning] systems to the portal, their positive pay to the portal -- they can do reconciliation and can move to different liquidity activities. It's like a portal on steroids." According to George Ravich, CMO with Fundtech in Jersey City, N.J., more visibility enables banks and their corporate clients to more efficiently fund the supply chain. "It's like just-in-time cash," Ravich comments. "This drives the working capital needs of a company. It's a business we think the banks should get into." Peter Radcliffe, executive chairman of Accountis, a Fundtech company that provides an e-invoicing solution, says visibility into the financial supply chain creates opportunities for banks. "This will allow banks to provide services like invoice discounting and factoring, and they won't have to handle paper," he notes. "They receive an electronic copy of the invoice, and they know it has been received by the purchaser and that it's scheduled for a payment. This gives the bank a greater opportunity to be more dynamic." Creating an End-to-End Supply Chain Solution This past year, RBS went live with the Accountis solution. The e-invoicing service complements bank clients' ERP systems, says the bank's Watkinson. "We want to help clients process invoice information in a cost-effective and compliant manner," he explains. "We want to support and complement their ERP systems. ... We want to help them get the information in and out efficiently." One way RBS supports its corporate clients is by helping to on-board their trading partners to the service hub. "We're creating a network where all the participants can connect to each other," Watkinson relates. "We host and run the service. It is ERP-independent, plus we don't force our customers to change their accounting systems. It is easy to use because it interfaces with their ERP systems." Most of the large, money center banks are attempting to establish this kind of hub. Mike Quinn, managing director responsible for product management in the global trade services unit of JPMorgan ($1.8 trillion in assets), says the New York-based bank is committed to creating an end-to-end trade finance solution for its large corporate clients. "Our services range from classifying a part for duty purposes to license determination to clearance of goods resulting in cash," he relates. "Straight-through processing is more than just going from point to point. This is taking data from its inception and enhancing it in the physical and financial supply chain." BofA's Baker looks at FSCM as the convergence of trade and treasury management. "It involves aggregating those technologies for the best value proposition for our clients," he explains. "Banks have been investing to upgrade and globalize their infrastructure to bring clients greater value." The bank offers Bank of America Direct Trade Services, an integrated trade and treasury platform for its clients. An important component of the service, according to Baker, is electronic document preparation, which helps cut down on paper pushing. However, he notes, whether a bank builds in-house or with a technology partner, there is no one-size-fits-all solution for FSCM, as each client will have specific needs. According to Deloitte's Doroszczyk, developing an integrated FSCM solution still requires a high degree of technology customization. "There's nothing off-the-shelf yet," he says. Due to the varying requirements of the different industries banks deal with, it just isn't feasible to develop a plain vanilla solution, Doroszczyk adds. "To develop the supply chain concept, banks have to be detailed to the industry they're dealing with," he explains. Making Connections Currently, BofA's Baker says, his bank is working to plug into its clients' systems. "Our challenge now is to seamlessly integrate with our clients," he relates. "With global supply chain [management], the key is the linkages you create. Connecting with and integrating the buyer and seller in multiple markets and meeting local finance needs requires a good deal of work." Not only must banks create linkages to their clients, they also must establish connections to other financial institutions. Some of the largest corporates can have dozens of financial institution relationships due to the number of countries in which they do business. But Sterling Commerce's Gahagan says many businesses wish they could cut down on the number of banks with which they must deal. "Corporate treasurers want to simplify their overall bank relationships. They want flexibility without having to deal with every bank in every country," he explains. "You won't see corporates dealing with just one bank, but there will be fewer of them, especially as the banks create linkages with clients' systems. Corporates want creative ways to streamline the interface with their banks." Gahagan notes that Sterling offers a solution that helps corporate treasurers centralize the message flows among their systems and their banks' systems so they have more flexibility to work with multiple financial institutions in their supply chain dealings. However, the challenges of banks embedding themselves into their corporates' ERP systems go beyond technology -- a shift in mind-set also is required, says Steven Starace, director and head of trade and supply chain finance with technology services firm CGI (Montreal). "It's a struggle -- you're not just selling the corporate a product; you must also be a collaborator," he remarks. "And you're not just working with one department in the corporation anymore, either. Both sides are going through an evolution to be more open and collaborative." For many banks, this process is proving to be a challenge, says SWIFT's Chris Conn, regional solutions manager, supply chain services. "This is going to take a lot of hard work because [FSCM] is outside banks' traditional trade discipline," he asserts. "It can be a challenge for some banks because they now must deal with the logistics department, even the merchandising department in some cases." As a result of this transformation in their services, banks are beginning to remake their sales forces and are even hiring people from the physical supply chain world and teaming them with traditional trade bankers. "Once banks have articulated the value proposition, corporates are receptive to it," Conn adds. SEPA: Simplifying FSCM One initiative that may simplify FSCM is the Single Euro Payments Area. Now that SEPA has officially gone into effect, corporations that do business throughout the European Union not only receive a more equitable price on cross-border payments, they also may be able to more easily trim their banking relationships. There also is hope for banks in simplifying their payments infrastructures to accommodate the more commoditized system -- at least for those banks that can see beyond losing a source of fee revenue, experts say. Celent's Camerinelli says SEPA goes hand in hand with FSCM. "SEPA offers a common [payments] platform so that banks can concentrate on offering more-valuable services and more STP," he comments. "The value of SEPA is full supply chain integration -- everything becomes easier from a technology perspective." Sterling Commerce's Gahagan agrees that SEPA will have an impact on the FSCM area. "This is going to help simplify and unify things onto a single set of standards for transacting business across borders," he contends. "It's going to enable the physical and financial supply chains to converge." But, he points out, "Just because SEPA is 'official' doesn't mean everyone is using it yet." Eventually, however, SEPA will help strengthen the supply chain, JPMorgan's Quinn suggests. The initiative promotes the use of standards and, ultimately, will help streamline FSCM, he says. But Aaron McPherson, Financial Insights' practice director in payments and security, says banks are simply not ready for SEPA. "What the banks have been able to muster so far are consolidated payments in the EU," he says. "There are large cost savings there. This is good because SEPA provides efficiency. But no European banks are using it as a driver for financial supply chain management. Deutsche Bank is probably the furthest along with SEPA, but they haven't hooked it up with their financial supply chain management platform. They can do both, but they're not on a unified platform yet." Moving Beyond the Concept Stage McPherson says FSCM is in a similar place in its development to where enterprise payments were four years ago. "There's still a lot of debate around what kind of information and services to include and a lot of skepticism over whether banks can get their acts together," he explains. "In about three to five years we'll see some real movement here because it's still in the concept stage. It will take time to do all the integration." One idea McPherson believes will help more banks expand their supply chain services is to enable e-invoicing using the check image exchange networks. "There's a lot of potential here for the image exchange networks to hold images of paper invoices to serve as a bridge technology," he explains. "The image archives might want to get in on this kind of business as check volumes and [transaction revenue] go down." He adds that just as Check 21 allowed the image archives to provide a transition between paper and electronic check clearing, perhaps the same can be done for e-invoices. "Using this approach will pay dividends in the financial supply chain area," McPherson says. "It might be a good compromise since a typical buyer may have some suppliers that are more electronically enabled than others." Leveraging existing technologies and bringing them into the FSCM space is also the way Cynthia von Hollen, principal for financial services with SAP (Walldorf, Germany), sees things evolving. "I think we always see a big focus on innovative payments at the consumer level," she relates. "As these new technologies advance, I think they will move into the corporate area as well. So how will mobile payments, standard payments formats such as ACH IAT [international ACH standard] or RFID [remote frequency identification] work on the supply chain side?" Although there are many possibilities for new technologies to crop up around FSCM, BofA's Baker thinks the market will see an evolution of existing technologies. "The challenge will be to build an end-to-end global solution that leverages the infrastructure and to bring best-in-class services to clients. It will require more integration of systems and a refinement of existing technology into a cohesive whole so they can be deployed globally. Most of the technology is there, but not everyone is able to use it." KeyBank's Grace says he will keep a sharp eye on any new technology developments in the FSCM area since the bank is preparing to relaunch its FSCM business in the coming months. But he also believes most advances will involve tweaking existing technology. "There are certainly other technologies that will be available. But I think the next big thing will be around creating even further integration into clients' ERP systems and their everyday operations," he comments. According to SWIFT's Conn, the biggest challenge to the development of FSCM as a profitable business line for banks is the number of parties involved. "There are millions of individual players in hundreds of countries. But we see banks as the entry point in many respects. As banks come on board and provide services, they will need to be tailored to the needs of the various end points," he says. "Standardization will lead to greater adoption and maturation of financial supply chain management." 9/5/2008 11:00:02 AM |
Businee process management moves beyond workflow to business optimizationFinancial institutions are taking a fresh
look at processes, moving to more automation and consistency, to
improve the customer experience and gain efficiency.
With the growing popularity of BPM, banks are taking a fresh look at their processes, which at many financial institutions still tend to be siloed and manual. The resulting ability to streamline and often automate key functions -- such as lending, payments and account opening -- has become a key factor in the race to win new business, improve productivity and gain a competitive edge.
While BPM initially emerged as an efficiency play, the drivers for BPM initiatives have changed. According to Phil Gilbert, chief technology officer and EVP of the products group for Austin, Texas-based Lombardi Software, which provides a suite of BPM software, BPM most often is implemented today to improve the customer experience -- for internal and external customers -- rather than simply boosting efficiency.
Mary Pilecki, a senior analyst with Forrester (Cambridge, Mass.), says the goal of improving customer satisfaction is driving banks to automate their processes. "It's not about saying 'hello' and being friendly," she says of the customer experience. Rather, it's about "the process customers have to go through."
Of course, BPM technology and methodology have matured, allowing banks to rethink how they deploy BPM. And now that BPM is available as thin-client technology as opposed to host-based solutions, banks are expanding its use throughout the enterprise.
"Banks first used BPM for case management tools -- research requests, adjustments, retractions," notes Pilecki. "Now they are expanding out."
But there is no one common area of the business in which banks are implementing BPM, Lombardi's Gilbert asserts. "We have a customer that is doing optimization around customer-statement generation, loan-officer onboarding and normalizing the loan process across all loan types," he relates. "Another bank is doing teller support, all of the back-office support; [and another] is doing the debit card charge-back process. It's all over the map and comes back to areas of pain for that particular company." BPM Best Practices
Memphis-based First Horizon National ($38.8 billion in assets) implemented BPM to optimize sales and service across its entire organization. "We wanted to optimize processes on an end-to-end scale," explains Robert Salazar, the bank's SVP of enterprise technology. "We were very effective and efficient at the functional or department level, but we felt there was an opportunity to improve operational abilities as they spanned groups."
First Horizon's BPM implementation received a gold seal of approval in a September 2006 Forrester best practices case study, which featured Salazar's seven best practices for successful BPM implementations. The first is to start with a common view of overall process. "Understand what you are really trying to achieve -- your organizational needs," Salazar says. "And from there make all your other decisions."
Salazar's second best practice is to obtain C-level support. To justify the costs of First Horizon's BPM project to non-IT business leaders, Salazar relates, he and his group drew up a list of a half-dozen projects and demonstrated how BPM would increase efficiency and quickly lead to cost savings. The items on the list were "cost-justified on a project-to-project basis," he explains.
Salazar's third best practice is to choose a flexible business process management suite (BPMS). After more than six months of searching, First Horizon chose a BPM suite from Fuego (which since has been acquired by San Jose, Calif.-based BEA and made part of the vendor's AquaLogic business service interaction product line).
"We really weren't looking for a workflow tool, but [rather] a true
process management environment," Salazar explains. To vet and deploy a
solution requires that you think process and collaboration, he adds.
"There's a very tight correlation between decisions at process design
and how those decisions translate -- without much technical work,"
Salazar says. First Horizon began its BPM initiative with the low-hanging fruit -- best practice four -- including easily attainable automation opportunities in loan delivery, compliance, risk management, mortgage banking and delivery services, according to Salazar. To accomplish his fifth best practice -- developing a consistent and reusable process methodology -- Salazar began with Fuego's methodology and then adapted it around the bank's existing project management office procedures. "Methodology needs to be based on collaboration across all the stakeholders that partake in the process," he explains.
Following the establishment of methodology, Salazar says, each process should be assigned a clear owner responsible for making final decisions in the case of an impasse -- best practice six. And the final best practice is communicating the successes, which helps build momentum for additional BPM projects, he notes.
Finding the Right BPM Solution
When Steven Liles, manager of integration services at Winston Salem, N.C.-based BB&T ($118 billion in assets), speaks about his bank's successful BPM implementation, he often stirs the listeners into a "frenzy," he says. "We did it in a very agile way," Liles explains. "The implementation time was literally 90 days."
Just a year ago, executives at BB&T realized it was one of the only top 20 U.S. banks that did not offer automated account opening on the Internet, according to Liles. They wanted that fixed in the fastest way possible. "There was a push from management to get this done by Q4 no matter what," Liles relates. Liles' integration team had wanted an opportunity to implement BPM within the bank and realized this was a great place to start, he says.
BB&T first examined building a BPM rules suite in-house, but the project timeline would have been more than a year, according to Liles, so the bank turned to packaged solutions. After reviewing the vendors that performed well in Gartner's Magic Quadrant for BPM, a report that examines the solutions marketplace, BB&T selected Cambridge, Mass.-based Pegasystems' SmartBPM solution. Liles says he chose the solutions for its agility, something that other BPM experts encourage.
Forrester's Pilecki advises banks to look for a BPM suite that a vendor
has prebuilt for financial services. The vendor also should understand
the specific needs of financial services firms and their core processes
so they are not starting from scratch every time they need to build a
simple process, such as account opening, she adds. All those things
being equal, banks can look to differentiators such as ease of use,
robustness of the rules engine, interfaces and simulation abilities,
Pilecki says. The technological aspects of a BPM implementation, however, can be challenging, according to Dimitris Livas, director of retail IT strategy for EuroBank (US$72 billion in assets). The Athens-based bank currently is expanding both its footprint and product portfolio within and outside of Greece, Livas explains, and turned to BPM to alleviate its growing pains. "We need to close the gap between business and technology, and that is what BPM is doing for us," he says. "We want to automate the business processes of the bank."
While some of the basic tools that go into BPM for defining and deploying rules, and optimizing and analyzing processes have been around for a while, "integrating all these things is quite new," Livas asserts. "We need guidance on how to use them," he adds. "They are very early suites [and] we have a lot to learn and improve upon."
Mature or not, BPM solutions are going to be big business in the coming years. According to Stamford, Conn.-based Gartner, the worldwide market for BPMS will exceed $1 billion in 2007 in total software revenues and will reach $2.6 billion by 2011. The BPMS proliferation, which began in 2005, marks the end of "pure-play" solutions that focus solely on human workflow capabilities in specific areas, according to Gartner.
Recent innovation in BPM technology has largely been in simulation capabilities, says Ashish Mohindroo, senior product director, Oracle (Redwood Shores, Calif.). Newer systems have the ability to tie in with business intelligence (BI) tool sets and capture data to create real-time business insight and create more realistic pilots, he says. In fact, many experts are pointing to BI's integration with BPM as the future direction of the technology, including using historical data for process development as well as building real-time data integration into decision-based processes.
"In banking, things change in real time," Mohindroo continues. "Banks have to be nimble to adapt and adjust to market changes." Cultural Changes of BPM
Of course, BPM brings its own changes. "BPM is a religion that the company acquires over time," Mohindroo continues. Because BPM is not department- or product-specific, it can break down barriers between business and IT, and topple silos of functions, he says.
The renewed focus on business processes necessary for BPM also should secure IT more of a voice in the bank's decision-making process, adds Mike Nichols, president of the American Society for Quality, a Milwaukee-based trade organization focused on the tools and strategies that support quality. "Technology [traditionally] is not invited on the front end when people are defining the problem," Nichols says. "Technology groups have to change this -- they have to be on the front end because they are in the best position to challenge processes."
While the technology behind Eurobank's BPM efforts was an important piece of the puzzle, the bank's Livas stresses that IT was simply the facilitator -- the business drove the project. "This is not a software project," he observes. "This is a business project because it is a cultural change."
Livas adds that the cultural changes resulting from a BPM initiative are long-term. "BPM is not just for one thing," he says. "We have to be able to manage and define the business rules that we use. ... By understanding those rules and defining the process, the business can pass those definitions through tools to IT." Livas notes that Eurobank now has business process engineers who design processes and the associated rules, then turn those deliverables over to IT for deployment.
While these cultural changes enable improved efficiency, IT is not used to having responsibility over the policies and strategies that go into developing business rules. As a result, the new way of doing business also introduces new roles for IT and business executives, such as the business analyst.
BPM and SOA
Any discussion of BPM would not be complete without mention of service-oriented architecture (SOA). According to First Horizon's Salazar, SOA and BPM are opposite sides of the same coin, and banks should keep them tightly coupled.
BB&T's Liles says he never could have implemented the
account-opening process so quickly if it hadn't been for SOA. "If you
don't have SOA, you start with simple workflows where you are not
integrating with anything," he explains. "If you want to automate and
not just manage process, you want to do [BPM] on top of SOA." While First Horizon was implementing BPM, it was also moving to SOA, the bank's Salazar reports. "The better the SOA, the faster we can do automation," he says, adding that the reusable services created with SOA give the bank the speed to quickly deploy new solutions and products.
"If you simply use a BPM platform without an underlying architecture, you can get value," says Lombardi's Gilbert. But "to do this at scale and make it an organizational competency, you will need to have an underlying technology architecture for the part of BPM that is technology," he stresses.
As a result of its BPM initiative, Eurobank is tying together previously separate processes to add value for its customers, according to the bank's Livas. "We can offer more-sophisticated, bundled products" with the new level of automation, he says, adding that the bank markets the combined products. For instance, customers that fill out a mortgage application also will have provided the information needed for a credit card, which the bank now can offer them on the spot, Livas relates.
BB&T similarly has added value to its services following its BPM implementation. BB&T's new online account-opening system, for example, allows new and existing customers to open accounts, receive approval decisions and transfer funds into a new account from BB&T and other banks immediately, according to the bank's Liles, who adds that BPM also has enabled the process to be completed across channels. If a customer begins account opening on the Internet and runs into problems, he then can call the call center and a customer service representative will be able to find the in-progress application. "They can pick it up and complete it for the customer over the phone," Liles says.
BB&T's BPM implementation has also led to increased sales, reduced costs and improved customer experience, Liles continues. Completed and funded applications per month rose by a factor of five and the number of employees required to maintain Web applications fell from 20 to 3, he says. Further, exceptions for account opening are less than 5 percent, Liles adds.
BB&T's online account-opening system also received high marks from Forrester, which said that it "promises to be the envy of the industry." And the bank is already leveraging its BPM solution to other areas of the bank, Liles says, noting that it currently is building a centralized dispute-management system and launched a lead-management system for merchant checking and payroll in early June.
First Horizon's Salazar says he measures his success by the fact that he continues to get approval for more BPM projects throughout the bank. But there are more-tangible results, he points out. "[BPM] has measurably reduced internal costs related to operations processes and reduced service turnaround time at customer touch points," Salazar says.
Similar reported results of BPM implementations across the industry have made a believer out of Forrester's Pilecki. "I love BPM," she says, adding, "It's not going to solve all the problems of the world, ... but if banks haven't looked at it yet, they really should. It's a critical tool in financial services."
7/5/2008 12:20:09 PM |
BPMs Strategic Benefits Offer Greater Agility EnterprisewideBy
Nancy Feig Before the implementation, it took as long as two weeks to open a customer account online, according to Liles. The process now can be completed in mere minutes, he says. Before, the bank had 20 full-time employees in place to support the online account opening process, Liles adds. Now it needs just three. Meanwhile, the number of accounts opened online has risen steadily, to more than 100,000 in 2007. But that's just the tip of the BPM iceberg. Like many banks around the world, BB&T is turning to BPM as a means to achieve a more transparent and disciplined organizational model. BPM enables banks to link their IT systems into their processes, allowing them to automate, streamline and monitor key processes, such as account opening, compliance and payments. The impact that a successful BPM implementation can have -- on everything from application development to customer service to channel performance -- can be astounding. According to an August 2007 report from Forrester Research (Cambridge, Mass.), the market for BPM software is projected to grow from $1.6 billion in 2006 to $6.3 billion by 2011. One of the greatest promises of BPM is transparency into processes. Transparency, in terms of BPM, is the ability to view all the steps in a process and where a certain transaction or case resides in the flow of that process. According to Liles, he has been able to make several improvements to BB&T's ($136.4 billion in assets) online account opening process based on reporting from Cambridge, Mass.-based Pegasystems' SmartBPM Suite. In BB&T's online account opening system, every customer is treated as a separate case, he relates. The Pegasystems BPM solution is able to produce reports on individual cases, as well as larger trends and patterns, Liles notes. The SmartBPM Suite includes dashboards available to analysts in the bank's online channels that allow them to spot patterns in customer behavior, Liles explains, adding that employees in the bank's call center have access to customized dashboards to handle exceptions in the process. The ability to see exactly where and when in the process customers drop out, he continues, has allowed BB&T to make improvements to the process quickly. "We routinely look at bottlenecks," Liles says. "Early on, people would drop out at the funding stage." Liles notes that the SmartBPM Suite's case management system also allows for greater channel integration. "BB&T's branch channel is now using the same BPM backbone," creating more-seamless visibility into customers' interactions with the bank across channels, he relates. That type of end-to-end process visibility brings IT and the business closer together, according to Kiran Garimella, VP for BPM solutions at Darmstadt, Germany-based Software AG. "You see process in a very live sense," says Garimella, who has written several books on BPM. In addition to process improvement, BPM also can help financial institutions streamline regulatory compliance. Because BPM solutions automate processes based on complex rules engines, compliance functions can be easily integrated into the workflows. Vendors even are building compliance frameworks into their BPM suites. Supporting Fraud Investigations Atlanta-based SunTrust Bank ($175.1 billion in assets) plans to use Pegasystems' SmartBPM solution to help prevent money laundering, support fraud investigations, and manage compliance with the Bank Secrecy Act, USA Patriot Act and other regulations. According to Kevin A. Poe, the bank's SVP of enterprise business process services, SunTrust's goal is to simplify compliance by consolidating its multiple systems for suspicious activity reports (SARs). SunTrust's newly optimized fraud investigation process will be rolled out in several iterations, Poe relates. The project, which will be released in four phases beginning this September and ending in the third quarter of 2009, will span seven business units, he says, explaining that the ability to use the SmartBPM Suite to collaborate across multiples lines of business and disparate application areas was a major reason for its selection. In fact, SunTrust already is using the Pegasystems BPM suite in another area of the bank, Poe reports. Like BB&T, SunTrust first targeted online account opening for process improvement, rolling out an enhanced sales application March 12, 2008. "The idea was first [to address] generation of account opening through the online channel," recalls Christian Caspersen, VP, business process lead, for SunTrust. "The goals were a 15-minute interaction and everything done on a real-time basis." According to Caspersen, "We've seen great results." Even though the bank is not yet marketing the service, it has seen "three or four times the volume" compared to the numbers prior to the BPM implementation, he says. A large reason for this, Caspersen suggests, is that online account-opening customers are not dropping out of the process nearly as often. As a result, "The online channel is opening more accounts than any branch," he adds. This ability to reuse the BPM suite throughout the bank sets Pegasystems' solution apart from other tools that the bank has used, notes SunTrust SVP Donald Marks. "We're looking to leverage the processes and lessons" learned from the initial deployment of the SmartBPM Suite, he says, crediting the vendor with helping SunTrust plan future deployments. "They talked about alternative tracks and the best way to deploy the tool" across the enterprise, Marks relates. Pegasystems also facilitated discussions between SunTrust and peer banks via user groups, notes Trace Fooshee, a process consultant at SunTrust. In these user groups, banks offered advice on how to best structure a BPM deployment, he explains. "Peers have a lot of experience with optimal reusability," Fooshee says.Application Development: Go Speed Racer That reusability extends beyond the BPM application itself to the processes that it optimizes. Similar to a service-oriented architecture (SOA), BPM speeds application development through process reuse and improves an organization's overall agility. Pointing to the philosophical similarities and synergies between SOA and BPM, BB&T's Liles advises other banks to "try to coordinate BPM activities with SOA activities." "This was very powerful for us and led to real automation," he says, adding that BB&T has reused BPM-optimized processes for several initiatives. "We've already used it for several other projects: fraud management workflow, marketing lead lifecycle management and payroll services onboarding," Liles relates.
As with SOA, the rapid pace of change in the industry is a major driver of banks' BPM implementations, says Stessa Cohen, research director at Gartner (Stamford, Conn.). "One of the key benefits [of BPM] is around agility," she adds, defining agility as "the ability of an organization to sense change and adapt to it efficiently and effectively." By enabling the reuse of processes, BPM helps banks adapt to whatever the marketplace requires -- new channels, new devices, new products -- in the shortest amount of time, Cohen continues. "Are you going to re-create the wheel every time [you need to adjust or create a process]?" she asks. Gene Rawls, VP of continuous development, information services, for Wells Fargo Financial (Des Moines, Iowa) -- a unit of San Francisco-based Wells Fargo & Co. ($575 billion in assets) that provides real estate-secured lending, auto financing, consumer and private-label credit cards, and commercial services to consumers and businesses -- says the bank's businesses initially didn't believe how quickly applications could be built leveraging Austin, Texas-based Lombardi's Teamworks BPM solution. Rawls relates a time when a stunned line-of-business manager turned to him and said, "I didn't think you'd be back so soon," when Rawls delivered Wells Fargo Financial's ($73 billion in assets) first BPM-powered implementation in early 2007. According to Rawls, there were numerous benefits of that first deployment -- which involved automating dealer setup -- starting with an automated workflow. Now dealer applications are routed automatically from person to person, rather than requiring the pushing of paper files. Rawls says the streamlined workflow has led to increased employee productivity. "Another benefit is the tracking of work," Rawls adds. Prior to automating and defining the process of dealer setup, a dealer would call to check on the status of his or her application, and a Wells Fargo representative would have to physically find on whomever's desk the application was sitting at the time, without knowing where to start looking, he explains. "Now there is visibility," Rawls says. Bank employees can just log in and check at which point in the process the dealer's application resides. "It helps the relationship with the dealer and with staffing," he notes. Application turnaround for dealers used to take an average of seven to 10 days, Rawls continues. With the Lombardi BPM solution, it's down to two to three days, with a one-day turnaround possible if the dealer enters all of his or her information up front, he says. Further, managers used to spend hours every month generating reports from spreadsheets, Rawls points out. Now the BPM system automatically generates reports for them, collectively saving them an average of 100 hours every month, he asserts. Then there's the cost savings. While Rawls doesn't have any hard ROI numbers, he says the bank saved $750,000 in 2007 from two new BPM implementations that were rolled out in the middle of last year. Noting that Wells Fargo Financial currently has nine BPM deployments in production and another four projects in the works, Rawls stresses that not having to reinvent the wheel saves him months of development work for each of his deployments. Project turnaround time from the initial go-ahead for a BPM project to its actual deployment, he says, is just three months. Despite such impressive results, adopting BPM and a process-centric ideology is not an automatic ticket to success. There are several important best practices and challenges associated with any BPM project, according to experts. "One challenge is making sure you understand your processes going into this," says Laura Mooney, senior director of corporate communications at Metastorm. Baltimore-based Metastorm offers BPM software as well as software for enterprise architecture and business process analysis. Mooney advises banks to define the scope of their BPM implementation up front, develop a business case and design an implementation with regular milestones. "An enterprise strategy with local projects is the key to [a BPM] implementation," adds Gartner's Cohen. "It can be a challenge, but breaking it down into small pieces is a way to make it manageable," she says. Software AG's Garimella warns banks to keep their expectations in check. "We always advise people that BPM is not a way to try to get rid of your assets right away -- it's not a rip and replace," he says. In addition, Garimella cautions, "Don't get bogged down in enterprise process modeling initiatives. ... Don't map processes just for the sake of mapping." And, as with any major organizational change, there may be some resistance from longtime staff. For example, software developers may resist BPM initiatives because the process reuse removes much of the back-end coding from the application development process, says BB&T's Liles. A BPM Center of Excellence One of the best ways to ensure the success of BPM initiatives, experts agree, is to establish a BPM center of excellence to leverage investments in BPM technology. A BPM center of excellence, however, goes beyond the typical project management office (PMO). SunTrust's Marks reports that the bank's PMO is not currently set up to deal with the BPM model of deployment, which is "iterative and agile," he says. To keep the project moving forward, Marks notes, he and his team, with support from CIO Tim Sullivan, had to educate the PMO on the basics of BPM deployments. "It helps that we had success from our first implementation," Marks says, adding that the bank currently is creating a specific BPM project management track. According to Metastorm's Mooney, BPM centers of excellence are prevalent among large organizations, which tend to have more BPM initiatives in place than do smaller organizations. She estimates that about 10 percent to 20 percent of all organizations have created BPM centers of excellence, noting that the formation of BPM centers of excellence is driven by companies' desire to make sure there is a strong business case in place for BPM initiatives. Those organizations that have established BPM centers of excellence experience greater success with their BPM initiatives, Forrester reports. According to the research firm's February BPM study, "The EA View: BPM Has Become Mainstream," almost half of all organizations that reported "clear and measurable benefits from their BPM efforts" had established a BPM center of excellence. In contrast, only 4 percent of those reporting "no BPM success" had a center of excellence in place. Forrester defines a center of excellence as "a formally appointed and documented body of knowledge and experience on a particular subject area with the goals of providing expertise, managing governance practices and supporting projects associated with the subject area." According to BB&T's Liles, the bank has a small BPM center of excellence, but it's "not formal right now." All the members of the group, he says, are from the IT organization's integration services group. They typically evaluate projects at the initial stages, Liles explains. Likewise, SunTrust's BPM center of excellence consists purely of IT staff, the bank's Marks says. But, Forrester stresses, a BPM center of excellence should include representatives from the business as well as IT. The group also should include a process visionary, a BPM project manager, a BPM tool expert, domain project experts and an enterprise architect, Forrester says. The result of all this governance is sustainable, long-term BPM success. Metastorm's Mooney notes that the core of BPM has shifted from a workflow focus to a focus on analytics and corporate governance. "There's more emphasis now on putting metrics in place and drilling out reporting," she explains. BPM delivers the ability to measure results in detail, adds Gartner's Cohen. The real benefits of BPM, she says, include results that banks can benchmark and then tie to ROI. This allows banks to quickly build business cases for future projects, which tend to be shorter and more measurable. "Success feeds additional successes," Metastorm's Mooney says. "It's a snowball effect." 7/5/2008 12:16:14 PM |
As Vendors Introduce Less-Expensive Technologies, Banks Can Capitalize on the Promise of Videoconferencing and TelepresenceBy allowing participants to see and read each
other’s body language, telepresence and videoconferencing bolster
customer confidence and satisfaction as well as enhance interoffice
communications such as training sessions, meetings and interviews. Telepresence -- which is the high-end, life-size videoconferencing -- and high-definition (HD) videoconferencing can be used both internally and externally in banking. Internally, the technologies can be effectively used in training programs. With HD videoconferencing, employees in many locations can meet for training. In addition, desktop videoconferencing is a growing technology. In the future, desktop videoconferencing for all information workers will become common. Banks also can use videoconferencing to help customers engage in transactions, such as applying for a mortgage, from their local branches even though a loan expert is physically not present in the bank. A bank can bring customers into a conference room at a local branch and then videoconference in experts at a remote location. This reduces expenses and eliminates lost productivity due to travel time. Telepresence in specially designed rooms is expensive, but vendors are introducing less expensive, "adaptive" telepresence units that can be used in regular conference rooms. HD has brought improved picture quality, and Internet Protocol has improved the voice/video sync. It's now realistic for businesses to use videoconferencing or high-end telepresence for communications, training, negotiations, meetings and interviewing. With telepresence from vendors such as HP (Palo Alto, Calif.), Tandberg (Lysaker, Norway], Cisco (San Jose, Calif.) and Polycom (Pleasanton, Calif.), it can seem as if you're actually in the same boardroom as colleagues who are at a remote location.     7/5/2008 12:12:14 PM |
Telepresence Allows Banks to Bring Together Global Resources While Offering Quick Return on InvestmentTo best utilize telepresence to improve
customer satisfaction and realize enhanced productivity, banks should
consider choosing flexible configurations and multipoint capabilities. Using telepresence technologies, banks can quickly and effectively bring together all the global resources -- from marketing and risk management to credit -- to solve client issues more quickly and effectively. In addition to increased client satisfaction, banks quickly see return on investment through reduced travel costs and higher productivity. Banks with existing videoconferencing investments should consider choosing a telepresence solution that allows them to leverage these investments within their telepresence meetings. Also, banks should choose a solution that offers a variety of configurations that meet the needs of a variety of meetings -- from large groups to one-on-one executive discussions -- and multipoint capabilities to connect four or more locations simultaneously around the globe. As time goes on, more and more banks will adopt telepresence solutions in lieu of in-person meetings as a way to further social connections, host more-productive meetings and reduce business travel costs.   7/5/2008 12:11:21 PM |
Everything You Know About Banking, You Learned in High SchoolNew research from Careerbuilder.com suggests
that one’s experiences in high school shape their career choices,
earnings and professional development. This isn't about extracurricular activities — it's not as simple as assuming that the yearbook editor will go into journalism (although that did happen). We're talking about social identities: cheerleader, teacher's pet, class clown, geek, etc. While the possibility of reinventing oneself in time for the 10th reunion is the plot of many a B movie, the Careerbuilder.com research suggests that, for better or for worse, high school caste membership is professional destiny. For example, according to the study, cheerleaders were more likely to hold a vice president role — and also to go into travel and insurance. Traditional antagonists athletes and geeks tended to end up in professional and technical services positions. Teacher's pets and student government types had the greatest number of workers serving in director/manager/team leader positions, but teacher's pets also were prominent in administrative and clerical positions. In terms of industries, according to Careerbuilder.com, teacher's pets also were heavily represented in construction and banking/finance. As a former teacher's pet/geek, with a dash of honor society, I have been trying to figure out what all this means. While the cheerleader/insurance sales path makes sense, I was less clear about why banking would attract teacher's pets. Depending on your perspective (or maybe if you were an athlete or class clown), it could be because teacher's pets are known for (choose one) diligence, intelligence, obedience or sycophancy. Regardless, maybe that's why dealing with today's business challenges often feels kind of like a psychological wedgie. 7/5/2008 12:09:22 PM |
SWIFT Expands to West CoastSWIFT opens new San Francisco office to better serve customers in that area. 7/5/2008 12:07:03 PM |
Automation Allows Banks to Better Navigate Compliance and Risk ManagementBy shrewdly leveraging existing and emerging
technology, banks can optimize risk management practices and stay ahead
of changing regulations.
In addition, more banks and financial institutions are opening alternate lending channels, such as online application submissions, that require the same level of compliance and monitoring as personal, face-to-face interactions. We don't foresee any lending outsourcing due to the availability of automated lending solutions in the marketplace. That technology is designed to make lending processes and employees faster, more accurate and more efficient. Therefore, banks can manage additional loan business and issues without dramatically increasing their staff.
    7/5/2008 12:06:00 PM |
In
general, the Internet, among other forms of media, has helped borrowers
become more educated on the lending process. This has been amplified
with the credit crisis, as more consumers want to be aware of lending
issues and trends before they apply for a loan. Thus, they are coming
to lenders with more information and questions. Therefore, it's very
important that all bank employees understand current lending rules and
regulations so they can accurately and informatively address potential
borrowers.
In Wake of Credit Crunch, Service Remains Key to ProfitsEven amid economic turmoil and looming
regulatory changes, making a profit, exceeding customer expectations
and maintaining a knowledgeable staff remain the cornerstones to good
business.
Training is crucial for maintaining a strong, experienced staff. That will never change. Institutions that cut back on training could show more adverse effects over a longer period of time. A move toward effective relationship management will drive the need for well-rounded, well-trained, knowledgeable staff. Even with the current shaking of the industry and profit margin compression, it is important to remember that customers still perceive that having someone to talk to -- someone available and concerned -- still drives the quality of the account relationship. Making a profit is still possible in these turbulent times, if the service can back up the product. While rates speak loudly, quality service is worth paying for.
  7/5/2008 12:05:19 PM |
As
the banking industry wades through the muddy waters of the times, with
access to future profits no longer as clear, strategic plans should
consider probable regulatory changes that will redefine acceptable
appraisal valuations. Attempts to standardize repayment capacity may be
on the horizon and could include required income verification rather
than the use of stated income. With the market at the lower end of the
rate curve, rate shock analysis expectations may enter the regulatory
arena, as well. Thee credit crisis leaves far-reaching consequences for the banking industryWeathering the fallout of the credit crisis,
banks will need to transform their lending, underwriting and credit
risk management practices. 7/5/2008 12:03:58 PM |
Banks Must Rely On Their Own Risk Models in FutureFinancial institutions must enter an era of self-reliance in making credit judgments. Bankers, understandably, are focusing on getting through the short term. But longer-term, it's clear that banks will have to provide more transparency into their credit and risk decisions -- and do a lot more of the work themselves. Even though the worst of the credit quagmire may be behind us, it will undoubtedly trigger regulatory changes. Already, regulators are prodding lenders to raise capital, build up loss reserves and improve risk management practices. Regulators are demanding credit-driven lending practices that put a premium on borrower credit-worthiness, and accurate property valuations and exposures. Data transparency will be a key focus, as both regulators and the investment community insist on understanding banks' rationale and ability to manage lending risks for all types of loans from both a portfolio and secondary investment market perspective. For example, it is expected that banks will have to disclose the underlying data that supports their valuations of illiquid securities and other assets. The major credit rating agencies recently agreed with the New York attorney general to improve the independence and transparency of their ratings in the mortgage-backed securities market. Further, with regard to data transparency, the ratings firms will now require that investment banks provide their due diligence data for the loan pools to be rated. The SEC also is pushing tighter oversight of credit rating agencies. In fact, transparency is going to be needed throughout the information chain, so banks must become more sophisticated about conducting due diligence on loan originations. Banks also are going to have to provide evidence of robust credit underwriting to satisfy regulators and the secondary market. This will probably mean declines in some of the more exotic types of loans offered. Clearly, the era of relying on others, such as rating agency analysts, to make your judgments is over. These capabilities will need to exist within the bank, with a new emphasis on improving internal counterparty credit assessments, analysis of bankwide credit concentrations and new liquidity risk models. These capabilities will be crucial to understanding and managing the exposures with the greatest potential for damaging the bank. Of course, the devil is in the details, and banks must focus on developing complete and consistent views of assets with common models for valuing them. A major problem leading up to the credit crisis was that models used for valuation in the absence of reliable market prices were not adequately developed for complex securities. Banks must start improving their pricing models for complex instruments such as collateralized debt obligations (CDOs) and credit default swaps. Other risk management practices, such as stress testing, should be strengthened to ensure that liquidity and capital cushions are robust enough to absorb acute adverse market events. Ensuring that financial statements reflect a consistent view of banks' holdings, valuations and outlooks completes the transparency picture. The risk and finance units must share common and complete transaction and position information, valuation models, and data to ensure consistency. This makes it clear to the investor community that the bank has improved its management control and compliance capabilities. Banks that emerge from the current environment with transparency and superior analytic capabilities are positioning themselves to deliver what regulators, investors and shareholders will demand in the coming years. Chris Thompson is a senior executive in the financial services practice at Accenture, and Tom Mataconis is a senior executive in Accenture's credit services practice. 7/5/2008 12:01:39 PM |
Not Too Early for Lenders to Regroup and Think AheadBanks are beginning to demand a variety of
new solutions that will bring them through the lending downturn and
position them for the eventual upswing. Now, of course, the latest phase of high-flying mortgage dealing has crashed back to earth. As a result, banks and other lenders are taking pause and regrouping. Yes, they must clean up the mess left by the credit crunch. But, after all, for every down cycle, there's a recovery, too, and lenders want to make sure they're ready with the right strategies and technology for the next upswing in the market. According to Ira Sleasman, SVP with Las Vegas-based Bank of Nevada, part of Western Alliance Bancorp ($5 billion in assets), the industry is getting back to basics. "You're seeing greater qualification for applicants in terms of things such as their documented income and debt levels," he says. "We're approving loans that conform to prudent credit policy. So it's becoming a more conventional market, and so are the products." The American Bankers Association's Doug Johnson, VP of risk management policy with the Washington-based organization, also points to a movement back to more conservative lending practices, as is the case whenever a down cycle occurs. "Banks are looking at their credit portfolios and making more-conservative credit decisions," he says. "That's pretty standard in this situation. It has been a while since we had a true business cycle. But that's the nature of the business, and it's a standard business cycle we're in. Banks are looking at their business and credit models and determining if they need to change the parameters of how they give credit. It's happening now, and it's having an effect." One of the ways in which this change is manifesting itself is in banks' renewed interest in the tried-and-true five 'C's of credit: character, capacity, capital, collateral and conditions, according to Clark Abraham, marketing director with Cary, N.C.-based SAS. "These represent the foundation of credit granting, and I think the industry moved away from the basics and relied too much on their models. For example, you might have a model that looks for [a history of] bad loans because that's the easiest thing [to identify]. But that doesn't take into account the fact that a borrower might pay his bills in full and never defaults. Lenders have to start looking at the nuances of individuals."Closing the Underwriting Gap As a result of this realization, Abraham, like the ABA's Johnson, says banks are beginning to recalibrate their credit models. But, he says, banks must go further, understanding that there's an underwriting gap. "There's a difference between the underwriting decisioning model and the borrower, business and market reality," Abraham contends. "The gap is between the ideal and the reality. Lenders need to start narrowing this gap with accurate loss prediction and less reliance on past prediction." Abraham maintains that this gap exists in the data, model factors, sampling and model construction. He suggests that banks look to alternative forms of credit data, that models be designed to look farther into the future than they currently do, and that a hybrid model of sampling and model construction in which broader parameters are used to understand the customer more completely be adopted. "Lenders have to take control back from their models," he insists. "You need a hybrid model that uses sound principles and science." Everyone agrees that banks and other lenders will need to be more careful going forward when evaluating potential borrowers, certainly in the subprime area, but also in the prime market. As an extension of this shift, says Robert Phillips, chief science officer and VP, research and development, with San Bruno, Calif.-based Nomis Solutions, since the credit crisis came to a head he has seen more investment in his company's price optimization solutions. To Phillips, however, banks' push to price products more strategically has a deeper meaning. "What this says is that banks are looking beyond the world of price optimization and they're hungering to really understand their customers," Phillips explains. "They haven't done a good job of this in the past. So rather than just advertising better rates, there's a real desire to know the customers better. The winners will be those who can understand their clients at a deeper level. They'll want to take a lifecycle view of their customers, looking across products and time from the initial acquisition decision."Integrating Data for a Holistic View It is this kind of approach that enhances banks' relationships with their customers, says Kevin Guenthner, CIO with Billings, Mont.-based First Interstate Bank ($6 billion in assets). "Our job is to integrate [data]," he says. "We have many platforms and technologies that deal with relationships. We take data from various channels and get a better view of the customer to create products that fit the relationship." Using the wealth of customer data the right way is the key to relationship banking, asserts Joel Pruis, director of advisory services with Carmel, Ind.-based Baker Hill. "Banks own a huge amount of data. They are doing more analysis, but the challenge is gaining a global perspective of the client and the relationship," he relates. "They want to be able to see the relationship in one place. But it's an ideal that's yet to be realized." Noting the siloed nature of banks' systems, Pruis acknowledges that "Unifying all these accounting systems becomes a nightmare." Baker Hill is attempting to address this problem with its Portfolio Risk Advisor product, which, Pruis says, is designed to help the process along by creating a more unified view of the customer. The solution brings in data from diverse areas of the enterprise, such as the credit card and small business units, so the bank can gain a holistic view of the relationship, he says. "We run rules against the data and bring it to the attention of the financial institution so it can intervene at the appropriate time [in the event of a loan going bad]." Looking on the bright side, the credit crisis was a good thing in that it "highlighted inadequacies of the monitoring of [banks'] portfolios," adds Pruis. "As they assess what happened, lenders are having a lot of 'Aha!' moments. Look at the positive aspect. How well are you treating your customers? At these times, we can become so focused on the cleanup that we sometimes ignore the ones who are doing well. The crisis has reinvigorated the need for a global view of the clients -- not just their balances, but overall activity and behavior." This type of combined lending platform is something that
Fiserv's customers have been requesting, says Jack Pence, VP, strategic
alliances, with the Brookfield, Wis.-based company, who notes that the
vendor currently offers a combined servicing platform that services
various consumer loans and is developing a combined origination
platform, as well. "The key to this," Pence explains, "will be having a
decision engine-centric design where you can easily change products and
pricing as needed and change the workflows as operations, regulations
and legislation are modified." The Flexibility to Recover This movement toward adaptable models and technologies is one of the keys to thriving in the recovery phase and beyond, according to SAS's Abraham. "The technology to give banks flexibility to work around data deficiencies will provide huge competitive advantage," he says. Abraham is a believer in the use of alternative credit data, such as utility bill payment history, in gauging the creditworthiness of borrowers. After all, he contends, the subprime market won't disappear. "The alternative area for consumers is a growing, untapped market," he says. "In some geographies, there is a lack of reliable data. By using a hybrid approach where you start with rules and collect other data on these segments, you do the data development. This is adaptive credit scoring." Eric Lindeen, marketing director with Bozeman, Mont.-based Zoot Enterprises, a company that provides credit-decisioning and other lending solutions, says lenders cannot continue to take a one-size-fits-all approach to how they lend credit in different markets. "If an institution has coverage in Florida and Montana, the economies in these states are very different," he notes. "So financial institutions now have to look at their overall territory to make credit policies that are in line with what they're seeing in other parts of the country. The geography issue hasn't really been considered much since the downturn." First Interstate Bank offers a case in point. The financial institution serves Montana and Wyoming -- areas that haven't quite felt the sting of the lending mess as badly as other regions. According to John Pannell, VP, risk/finance, in First Interstate Bank's credit card division, "We just haven't seen the same economic crisis as the rest of the country in our geography." No matter where in the country a lender operates, however, it still will face many of the same challenges around granting credit, only in a more risk-aware climate. As such, decisioning and analytics technology, for example, will continue to be at the forefront of First Interstate's lending practice, according to the bank's Guenthner, who notes that the institution is a Zoot client. "If you look historically at what the industry has done, decisioning an applicant was a very burdensome and judgment-laden process. With analytics, we're now able to compare the person to our rules-based lending system and decide if we should issue credit to him," Guenthner explains. "We want to make sure people match our criteria for lending. We use prescreening capabilities and go through our existing accounts to identify who meets our criteria."Decisioning Tech Key to Lending Success According to Walter O'Haire, a senior analyst with Boston-based Celent, the quality and speed of a lender's decisioning technology will make or break it in the eyes of customers. "The one point in time where it is crucial to have good technology is at the decisioning point," he asserts. "No matter the channel, after consumers give the lender the minimum requested information, they expect the lender to give them a preliminary decision within seconds. Their expectations are now based on their Web interactions. They want instant decisioning. The borrower doesn't care about the back end. Just get it done, fast. Lenders are starting to understand this. So if they're going to invest, do it in the decisioning area." Zoot's Lindeen echoes this sentiment. "The leading lenders have mastered automation," he asserts. "The next step is responding to market changes in real time or as close to real time as they can. You want to be able to respond quickly." In fact, says Metavante's Cy Brin, president of the Milwaukee-based company's lending solutions practice, the whole subprime problem can be traced back to the decisioning capabilities. "The technology today can greatly reduce lenders' risk for loans not meeting underlying criteria," he says. "Our loan origination system has embedded decisioning that works as early as the first conversation with the borrower." Michael Madsen, CTO and VP of product engineering for banking and investments at Fairfax, Va.-based CGI, takes a more big-picture view of the kinds of technology successful lenders will use. "What's really taking hold among banks to help deal with the lending crisis fallout and in the future is SOA [service-oriented architecture]," he explains. "SOA and BPM [business process management] are going hand in hand. It's imperative for lenders to get their heads around BPM first. This technology will help them become more agile with credit risk and their business in general. BPM will tie everything together. It will let lenders make decisions at the top and drive them down through the organization." (For more on SOA, see related feature, page 32.) Madsen also sees more lenders embracing technology that allows them to move the loan further out of the hands of IT. "Time to market is important," he says. "I'm seeing much more emphasis on technology that lets the organization move the loan further upstream out of IT. There's frustration on the business side around being able to move new products to market -- they often view the IT department as a bottleneck. So the business side wants solutions that give them more ownership and helps them bring products to market faster."A Solid Channel Lineup Another key component to a successful lending business in the future will be banks' channel strategies. According to Annette Tirabasso, a principal with New York-based Deloitte Consulting, the Web channel will take center stage. In a recent Deloitte study, "The Silver Lining in Lending," Tirabasso noted that moving much of the lending function online can yield banks from 50 percent to 80 percent in origination cost savings, in addition to meeting customers' service needs. The report also concludes that consumers tend to be happier with an online lending experience versus other channels and, as a result, are more likely to recommend their banks to others. "Banks and lenders that provide strong delivery channels will be better positioned in the market when we come out of the crunch," Tirabasso says. "This is a way for them to position themselves for growth." Metavante's Brin says this trend is starting to take hold. "I'm seeing more demand for Web portal-type capabilities a lender can implement to enable its customers to go online to get detailed information on the loan products and start or complete the application process," he relates. "This can be either online or at the branch via a kiosk." Keeping People in Their Homes Of course, getting the customers is one thing. Keeping them -- and keeping them out of trouble -- is another opportunity for lenders. Many are trying to create strategies where they work with customers who are at risk of defaulting and nipping the problem in the bud. Fiserv and other vendors offer customer/home-retention services to lending clients on an outsourced basis. They provide the lenders with the staff and technology to help them deal with an ever-growing volume of troubled customers. According to Fiserv Lending Solutions EVP Walter Morgan, the company manages multiple pieces lenders need when they approach distressed borrowers for loan modification. "Lenders just don't have the staff to handle all the calls," he contends. "They're overwhelmed. We're taking the load off. The idea is to keep people in their homes. This service is in high demand now from our customers. They're all realizing that for the vast number of borrowers, mitigating loss and making modifications to loans to help keep the house saves everyone money in the end." Bank of Nevada's Sleasman says monitoring existing portfolios is crucial to avoid foreclosures. "Lenders must pay attention to the portfolios they have. They have to use available technology to monitor them, [and] identify and evaluate existing loans that indicate trouble, such as when a customer overdrafts too much," he relates. "Work with the borrowers. We focus on full banking relationships with customers. If there are indications that there could be stress, we will talk to those people." "Retention services is a great idea," adds TowerGroup senior analyst David Hamermesh. "Opportunities like this have been talked about since last fall. The tools are better to help banks do this effectively. But there are so many factors to consider here that make it challenging. First and foremost is making borrowers aware that they have options like this. I think everyone is trying to figure out how to do this best."7/5/2008 11:57:57 AM |
U.S. Core System Vendors Face Foreign Threat, Say Analystshe $8.5 billion banks invest in core systems
will by 2013 have substantially shifted into new, possibly
foreign-owned technology, Financial Insights says. "Once T24 or somebody comes into the U.S. market and has good success, it could really change the field in the next five years," said Karen Massey, senior research analyst at Financial Insights, referring to the T24 core processing system from Chennai, India-based vendor Thesys Technologies. U.S. banks are afraid of platforms considered unproven, so they only change their core system when "feeling real business pain," added Patricia McGinnis, research director, corporate banking, for Financial Insights. "So, we're probably not going to see a lot of deals in the next 12 to 18 months." Massey, a consumer banking and credit analyst, agreed. Although many European and Asian banks have moved to more nimble technology, she said, Tier 1 banks -- which spend $6.5 billion on core processing annually -- are "looking but not buying right now." 7/5/2008 11:54:56 AM |
Alpha-Generation Platforms Promise to Speed Development and Implementation of Alpha ModelsAs the total number of quantitatively driven funds continues to
grow, demand is high for an all-encompassing platform that can
streamline workflow, and reduce development errors and time to market. The practice of quantitative analysis has moved well beyond its initial proponents in the hedge fund community and has established itself as an integral part of the overall investment process — even if the notion of quantitative analysis can differ widely from simple quantitative screening tools to completely computer-generated buy and sell signals. With a notable increase in the total number of quantitatively driven funds, the pressure to come up with the next big quant model has grown exponentially. On average, the entire process — from idea generation to implementation — can take anywhere from 10 weeks to seven months. Given the fact that certain short-term strategies remain effective for only three to four months, rapid construction and implementation of alpha models becomes that much more urgent. Unfortunately, today's market reality is littered with disparate homegrown and third-party applications tied together only by the creativity of the quants. This reality has fueled the need to streamline the overall workflow process and shorten the duration of the entire investment selection life cycle to compete more effectively. As a result, the industry has seen the emergence of alpha-generation technology platforms, which are designed to create a more centralized and streamlined process and functionality to vastly improve the overall productivity of quants. As the pressure continues to mount for faster turnaround in the alpha-generation process, the market demand for a single platform to efficiently unify the entire workflow will grow rapidly. Market Overview At the highest level, quantitative analysis can be defined as those strategies that leverage computing power and sophisticated mathematical and statistical models to identify alpha investment opportunities. Most quantitative strategies utilize number-intensive technical analysis through various inputs — such as price, open interest, volume, volatility, and other variables that might impact overall trading and market conditions. Over the years, quant firms have created very complex quantitative strategies that employ not only technical analysis, but also fundamental variables, economic indicators and even digitized news feeds. Aite Group's (booth #4123) estimates on the actual size of the global quant market include all traditional investment management firms and hedge funds that go well beyond simple stock screening and apply quantitatively driven monthly, daily or even intraday predictive models to drive investment decisions. In this much larger universe, 12 percent of all global assets under management (AUM) was driven by quant analysis at the end of 2007, representing US$6.65 trillion. This figure is expected to reach US$12 trillion by the end of 2010. In the hedge fund community, rapid growth of AUM in more sophisticated investment strategies (i.e., statistical arbitrage, relative value, equity market neutral, event-driven, etc.) has fueled adoption of quantitative investment analysis, accounting for close to 75 percent of all global hedge fund AUM. From a regional perspective, North America leads the market,
accounting for approximately 50 percent of global quant AUM at the end
of 2007. However, Europe is not so far behind, and is expected to reach
close to US$4 trillion in global quant AUM by the end of 2010. The Quant Analysis Infrastructure
Some of the key components of the current quant analysis infrastructure ecosystem include the following:
Integrating and working well with all of these different components
represents a significant hurdle for most firms. Alpha-generation
platforms have emerged in recent years in order to unify the different
components and also to provide an efficient alpha-discovery development
environment. Key characteristics of alpha-generation platforms include: This table presents a sample group of firms in the alpha-generation platform market.
 Market Adoption and IT Spending
The demand for alpha-generation platforms clearly exists in the hedge fund community as funds continue to battle fiercely to capture additional alpha in an increasingly crowded marketplace. However, with the concept of quantitative investment analysis expanding into the mainstream investment arena, the need for a single platform to streamline the overall workflow will increase even more among traditional asset managers. Aite Group estimates that at the end of 2006, firms had spent approximately US$12 million on alpha-generation platforms. However, driven by the continued adoption of electronic and algorithmic trading, the explosion in data messaging volume and type, and the growing market clout of low-latency players, the overall market demand for alpha-generation platforms will skyrocket over the next few years, reaching close to US$120 million by the end of 2011 (see chart).
 Once
shrouded in mystery, the quant world is gradually shedding its veil. It
seems clear that the quant market is undergoing an evolutionary
process, moving from the secrecy of the few to a more open and highly
competitive landscape where every second counts. As competition in the
quant world continues to increase, the demand for an all-encompassing
platform designed to reduce development errors and time to market is
destined to grow dramatically. Those firms able to implement a highly
efficient process for alpha discovery will gain a significant
competitive edge for years to come.
7/5/2008 11:53:13 AM |
Survey Finds Financial Professionals Dissatisfied With Market Data QualitySIFMA show poll found 79% of financial professionals have market data quality issues. According to a recent survey, 79% of
financial professionals believe that market data quality is an issue
for their organizations. The survey, which was conducted by Xenomorph at the SIFMA technology show last month, polled financial professionals about their experiences with market data. More than half of the respondents spend significant amounts of time validating data rather than performing productive analyses. According to the survey, fewer than one in four financial professionals classified the quality of their market data as very good or excellent. In addition to adding unnecessary risk, poor market data quality can have a significant impact on organizational resources. According to the survey, 20% of asset managers, investment bankers and hedge fund professionals spend between 25%-50% of their time validating data. This investment of time and effort on manual data manipulation and analysis is time away from tasks that contribute directly to their organization's bottom line. "Over past months, there has been much discussion within the financial services industry about the need to improve risk management processes " whether it is to satisfy a regulatory need or strengthen internal risk control," said Brian Sentance, CEO of Xenomorph. "Given these pressures, the biggest risk any financial organization can take is to base its decisions on stale or bad market data. Even the most sophisticated of risk models are worthless if they are being fed by dirty and incomplete data." 7/5/2008 11:50:45 AM |
Deutsche, Merrill Reveal Recession-Proofing IT StrategiesTop Wall Street IT executives share their strategies for
keeping their IT organizations, their staffs and their careers moving
forward even in economically challenging times. "Technology is a lifeblood now," explains Sean Kelley, CIO, group technology and operations, at Deutsche Asset Management. At the end of April, Deutsche announced its first loss ($220.4 million) in five years as the result of a write-down on loans for leveraged buyouts -- bad news that was modest compared to the fallout from the credit crisis at many other firms. "The last thing people want to go after during challenging times is IT. Where people might have turned to IT cuts in the past, today I'm finding people are looking last at IT due to its strategic importance." Although Merrill Lynch reported a $1.97 billion net loss for the first quarter of this year, "IT is critical in any market environment," says Alok Kapoor, the firm's head of global technology services. "Even in this cycle, volumes and volatility are at all-time highs, and capacity and performance are especially critical. And while we are focused on running the plant, we can't lose sight of making prudent investments that will ensure our competitive position. Further, our businesses continue to demand higher productivity returns from their technology investments." After all, notes Tom Price, a senior analyst in the securities and capital markets research service at TowerGroup, at some point, the markets are going to take a turn for the better. Those firms that haven't ravaged their IT departments, he says, will recover soonest and have a competitive advantage. But the CTO of a large Wall Street firm that had a demoralizing first quarter (who spoke off the record) is more pragmatic. Offered the notion that firms that maintain IT investments will have an advantage when markets recover, he notes that that depends on two things: first, whether they survive to the end of this cycle; and second, whether their investments are being made in the right places. "You shouldn't cut strategic programs, which we haven't done," he says. "On the other hand, there are a lot of things you look at and say, 'You know, that looked like a great idea a year ago but today it's not so interesting.' " These firms and others are making smart, recession-proofing moves to keep their IT organizations trim and ready for potentially worse economic weather while remaining prepared for sunnier days. Among other strategies, they're consolidating platforms, allocating IT dollars more judiciously, shifting more IT work to cheaper locations, leveraging computing-on-demand resources and tapping hosted software solutions. Platform Consolidation A common thread among Wall Street recession-proofing/IT efficiency initiatives is platform consolidation. "Over the years, a lot of the investments that large Wall Street firms have made have been based on speed to market: 'I'm launching a new financial product, I'm opening a new location -- let me optimize to get that product or location up and running quickly,'" relates Bob Gach, global managing director, capital markets, at Accenture. For these reasons, and through mergers and acquisitions, many firms have acquired a plethora of trading platforms, customer databases and even e-mail systems, for which the costs of operation and maintenance alone eat into the IT budget. "The problem is that that suboptimizes for the longer term," Gach continues. "Decisions have been made that were truly market relevant for an individual department, but the net result is that the total cost of ownership and the cost of feeding the monster year in and year out are far greater than if you had one trading platform, one customer database, one reconciliation system." Gach says firms should be spending at least 50 percent of their technology budgets on new development. "If it's lower than that, you're maintaining too much and unable to invest in the future," he contends. "If you have too many platforms and overlapping technologies, the costs for just keeping the lights on get to be so high that you don't have any money left over for innovation." Deutsche's Kelley compares his recession-proof IT strategy to investment portfolio management. "We manage a portfolio -- a rather large one -- and we have to constantly optimize it against the market," he explains. "A portfolio manager streamlines the beta in a portfolio -- in other words, that which tracks the market but doesn't outperform it," Kelley continues. "You always have to have some of that in your portfolio. We've streamlined our IT beta to make it simpler, more global and more efficient. Then, as it's become more efficient, we've moved the returns from that efficiency gain into the alpha side of our portfolio -- activities where we can beat the benchmark." Beta Fuels Alpha The beta period began when Kelley arrived at Deutsche in
December 2004. The asset management division had been cobbled together
through a series of acquisitions -- Scudder, Zurich and Bankers Trust,
among others -- that hadn't been truly merged. "We had this complex
labyrinth of technology," Kelley says, noting that there were 15
different equity trading systems, for example. "At one point in time,
there was one application for every 10 people [roughly 650 applications
and 4,100 staff], and asset management is not a complex process," he
adds. To streamline, Kelley's group methodically eliminated redundant applications, choosing one platform, or "backbone," for each of the eight basic functions of asset management (e.g., client acquisition, trading, research, accounting). Kelley calls this initiative "oneness," or "getting to one," and says it took three years to accomplish. To continue making these basic, beta applications more efficient, Kelley relates, his group now is looking at how to best wrap each application in a Web services framework so that it can be called and recombined with other applications. On the alpha side, the group has begun working on more-advanced projects, such as creating new decision-support tools, incorporating sell-side trading techniques into execution management systems, crafting better portfolio construction tools and making more extensive use of Web 2.0 techniques to reach clients. Kelley says the investment portfolio approach has enabled these projects to be self-funding. "We didn't go to the bank and say, 'Please give us 250 million euros because we want to blow the place up and put it back together,'" he says. "But we said, if we do this more efficiently, get rid of useless assets and better integrate the assets that are useful, we can squeak out tens of millions of euros that we'll then invest in trading, risk and research technology. We've sizably reduced what it takes to run the place and put it back into things that change the place." According to Kelley, in the past four years, although transaction volumes have risen 50 percent to 70 percent in the asset management division, the IT infrastructure has remained consistent and, in some cases, even shrunk. "Now that our use of OTC derivatives, structured products and alternatives has grown over 250 percent, we are looking to further enhance the beta platform to handle these often low-STP processing needs," he relates. "It's recession-proofing by good discipline, being consistent and sticking with the plan," Kelley adds. "If we hadn't done the beta work, there's no way we could be doing the alpha." Rethinking IT Supply and Demand Another way firms are recession-proofing is by reexamining IT demand and capacity. "We're seeing a higher level of scrutiny of discretionary spend," says Christopher Connors, director of business development at Citisoft. "We're seeing a lot less willingness to spend, and firms are looking for more of a return on smaller spend." In the past on Wall Street, successful business units, such as star trading desks, have been able to pretty much get whatever IT resources they asked for. Today, IT spending decisions are becoming more centralized. "We look more closely at actual business demand rather than looking toward a spending limit -- the spending will come out of the demand for capacity," says the CTO who spoke off the record. "If we need 8,000 PCs, we need 8,000 PCs; we may wish for them to cost $12 each. We try to be as transparent as we can with the businesses about the financial implications of the decision, so they can then adjust their demand if they have specific targets they'd like to achieve." A sophisticated cost-allocation model provides information on
unit costs and demands at all levels, he explains, enabling the IT
organization to do two things at once -- one, help businesses that are
not managing their demand well to improve; and two, go through unit
costs and find opportunities to improve productivity in delivering that
service. As part of this process, the firm, like most, continually
reviews vendor contracts and pricing to see where a better deal may be
sought, the CTO adds. On-Demand Computing
Firms such as Deutsche, Wachovia, Merrill Lynch and others also are managing demand by taking the idea of virtualization and grid computing (which, in large-scale mode, boils down to running applications across a pool of servers, rather than running one or two applications per server) to the next level: on-demand, just-in-time or "anticipatory" computing. "Our central infrastructure team is monitoring capacity enough that we can deploy blades and servers on the fly," relates Deutsche's Kelley. "In the old model there was a long time between needing capacity for new applications and providing that capacity. We've cut provisioning time by about 20 times, from two weeks to about two hours." By optimizing this on-demand model, Deutsche avoids having extra servers sitting around the data center taking up space, cooling and power, Kelley notes. "We've gotten a bit smarter in reading the signals, being able to bring more hardware online when we need it," he says. In a variation on the same theme, at the end of May, Merrill Lynch will start rolling out what it calls a "stateless infrastructure." In this new data center architecture, stateless servers (servers that have no operating system or applications installed on them) will boot and load operating systems over the network and access applications on an as-needed basis from a network enterprise file system, according to the firm. "It's more like the way the Web works rather than the traditional way applications are aligned with physical or virtual servers," says Jeffrey M. Birnbaum, chief architect at Merrill Lynch, adding that this will eliminate the software-installation process. "There's a tremendous efficiency around operating expense because you're not building environments and then sticking them into data centers; you're loading them when you need them and getting absolute consistency across each system," Birnbaum says." Merrill first will take its grid software stateless, then will progressively roll out other applications throughout the rest of the year, according to Birnbaum, who declines to name the vendors with which the firm is working. IBM, however, recently rolled out a stateless server solution, and many blade vendors offer stateless versions of their servers as well. Shift to Hosted Apps
Some firms are choosing not to host certain applications at all, turning to hosted software to improve IT efficiency. With an application service provider (ASP) model, not only does a financial firm not have to develop and maintain its own software, but IT support and data center management (for the hosted application) become the ASP's burden. Hosted software on the Street started with small, generic programs, such as Salesforce.com's widely used CRM software. But many vendors of heavier-duty applications used on Wall Street -- including Broadridge, SunGard and Xignite -- now offer their software in hosted form. In the course of Deutsche Asset Management's IT reformation, the firm's Kelley says, the last thing his group wants to do is build new software. "I try to use whatever is out there," he comments. "There are a lot of smart people out there." Deutsche is a big believer in the Software-as-a-Service (SaaS) proposition, Kelley notes. The firm has more than 1,000 users on an SaaS CRM platform around the globe and is looking for ways to utilize the underlying applications framework to develop and deploy new applications, he relates. "The fact that I can build an app and never put it in any of my own data centers is really nice," Kelley says. "Our SaaS vendor worries about things like computing power and electricity and cooling." Kelley notes that he also is considering adopting hosted office productivity software. "About 50 percent of our business workforce does not need all the functionality found in current shrink-wrapped offerings," Kelly says. "They need a word processor, presentation software and a spreadsheet. Why can't I use those commercially available in 'open form' on the Web [such as Google Docs and IBM's open series software] to satisfy these basic needs at a significantly lower price point that is far easier to deliver and support?" Kelley adds that he is interested in combining Web 2.0-style tools and cloud computing (collaborative development) with hosted software. "What's available in the collective intelligence of the universe has got to be a lot more powerful than what's available within the four walls of a corporation," he opines. "This is one of our big alpha pushes -- if I can deliver an environment of externally and internally developed applications to the portfolio manager and his investor and make it easy enough for them to use, he can develop something 10 times better than I would by using mashup tools out there." This is part of what Kelley refers to as the third phase of his IT strategy. "You've gotten down to a sensible number of applications; you've 'SOA-tized' them -- now present them in a way that wraps around the client, be it a portfolio manager or an external client, so that [he or she] can easily identify with [the applications] and then make them their own." Kelley points out, however, that he doesn't envision financial firms all throwing applications into a hosted cloud and sharing with one another -- the industry is too competitive, he says. But he does see value in using the concepts and techniques of mashups and cloud computing within the firm. "If we can find the sweet spot between using what's available in the cloud and making it secure, but leaving people to do what they need to do above that, we would have a much better experience at the desktop," Kelley asserts. Return to Outsourcing/Offshoring In addition to these innovative approaches to improving IT efficiency, firms also are considering an old standby. Outsourcing usually is considered in any IT efficiency initiative -- if a company in India can do the work just as well for half the price, why keep it in-house? Although the industry started to move away from IT outsourcing a year ago, the tough first quarter may trigger a resurgence of the practice. "We've seen from our clients more willingness to explore offshore locations for assorted functions, whether they be IT or operations," says Citisoft's Connors, who points to India, China and Eastern Europe as the current outsourcing hot spots among his Wall Street clients. Noting that firms have become more selective and more methodical about outsourcing decisions, Connors says development and support are the most commonly outsourced functions, as has been the trend for some time. Certain back-office tasks also are going overseas, he adds -- for instance, China seems to be a popular place to send reconciliations these days. Deutsche Asset Management outsources "deeper back-office" functions, such as reconciliations and bookkeeping, to firms that focus and specialize on those tasks, according to the firm's Kelley. "Then we take the internal people who were doing those functions, retool them and move them up the food chain to help with performance and attribution reporting, client reporting, supporting next-generation trading strategies, or working with researchers," he explains, adding that constantly moving people up the stack reduces recruiting costs and keeps employees motivated. "We call that a 'move to alpha.'" Recession-Proof Apps: Compliance Few applications could be called "recession-proof." However, these days compliance software comes close to earning this label (see related sidebar, page 40). "You don't have a choice," notes TowerGroup's Price. "If you need to prove best execution, you need to prove best execution." The anonymous CTO of a large global investment bank agrees. "For a vendor, the more recession-proof technologies are those that play to the regulatory environment," he says. "The regulators frankly don't give a damn about the [economic] environment -- they just care about doing their job. So the people who are providing products and services that help meet obligations seem to hold up better. Even there, though, there will probably be pressure." With all the talk of recession-proofing IT, how do IT executives keep their careers on track? "I don't know -- I'm still trying to figure that one out," says Deutsche's Kelley. "If you focus on your work, deliver valuable products and work hard, people want to have you around." 7/5/2008 11:49:21 AM |
Instinet Co-CEOs Reflect on Year One and Share Whats Ahead
 Nomura Holdings closed its acquisition of Instinet in early 2007 and soon appointed two new Co-CEOs to take the helm at the global agency brokerage. The two executives appointed just about a year ago, both from the Nomura side, were Fumiki Kondo and Anthony Abenante. As the duo approaches the one-year mark at Co-CEOs at Instinet, Advanced Trading sat down with Kondo and Abenante to hear how their roles are playing out, how the two firm's are leveraging each others assets, what new offerings clients can be expecting soon and how Instinet's subsidiary Chi-X is faring in Europe and beyond. Kondo previously served as Executive Vice President of Nomura BlackRock Asset Management, while Abenante was Managing Director responsible for U.S. equity and global program sales and trading at Nomura Securities International. The discussion comes on the heels of Instinet's first combined product offering. The recently released Instinet Execution Experts algorithmic trading suite leverages the best of both Instinet's and Nomura's algorithms.
Advanced Trading: - How do you break out your roles as Co-CEOs? Who is responsible for what? Fumiki Kondo: Basically both of us run the whole business together but I'm in charge of Asia and Europe operations and Anthony oversees the U.S. operations and global technology along with the CTO. I also look after the more corporate issues. Anthony Abenante: It's actually worked out very well because we have complimentary skills. I've been here learning more about the global markets and extending the model. Kondo was EVP at Nomura BlackRock and he knows the operating side very well. Has been helpful as we try to rationalize things here. The firm is in a much better spot now. Kondo: We have completely different backgrounds and I don't compete with Anthony when it comes to the execution and technology business. I'm learning every day from Anthony while my role is making sure the Instinet business model is not deteriorated because of the new company model. We are very careful not to mix the brands of Nomura and Instinet. AT: Where are you working to combine Nomura and Instinet's expertise and technology offerings? Abenante: One of the first synergies we recognized was in the U.S. equities space. Clearly (Nomura didn't have) the scope of what Instinet had from a liquidity standpoint. But Nomura had a rich set of analytics; microstructure research and a broad component based algorithmic system, which we called the Execution Experts. So we saw it best to take the U.S. businesses and merge them together with Instinet remaining as the brand for U.S. equity and program trading. That began last fall and we finished up pretty quickly over the course of a few months. We will be generalizing the algorithmic suite for global and for multi-asset trading as well. Those are our two next steps as far as the algo suite and the personnel side as well. The Nomura algo suite was based on newer technology, it was built form scratch in Nomura starting at the end of 2003. So when I first got to Nomura I brought a team with me and the attractive aspect was that we could build from scratch. Kondo: We also wanted to emphasize the Instinet agency model " the unconflicted trading model. Nomura does have a proprietary desk so what we did was separate very clearly what Nomura offers and what Instinet offers. We appreciate Instinet as an agency only broker and when the team came to Instinet it didn't bring anything involving proprietary trading. Abenante: Instinet has a very broad swath of clients from hedge funds to traditional asset managers. And as we looked at the complementary relationships it was amazing. We've increased our penetration and wallet share with some very large institutions here because of the some of the relationships. It's all about best execution but how do you improve that? At the end of the day we need to traffic in being more intelligent around our trading by layering in more research and mathematics into the great distribution footprint and liquidity pool we have here. AT: When will the new algorithms for multi-asset trading be available and what will they cover? Abenante: It's hard to say when exactly because the globalization side is job number one now. We are going through the globalization process so we can generalize at the same time and put them together. We'll be taking the infrastructure and having a practical application available in Europe and Asia first for cash equities. We hope to have all that done by the end of the year. So I would expect it would be a 2009 initiative that would look at multi-asset algorithms. I think it's a great growth opportunity for us. The initial area of focus for us will be listed equity options and listed futures. I think its' a natural extension of our business. I posit that the listed equity options business looks a lot like the cash equity business 8 years ago with the same phenomenon around market dynamics and moving to algorithmic and direct access. AT: Chi-X Europe, the pan-European multi-lateral trading facility and Instinet subsidiary launched last year, has been gaining momentum and volume. What do you see happening going forward in the European MTF/ATS space? Abenante: I think the backdrop in Europe with MiFID gave our firm a unique opportunity. There have been other attempts by ATS' gain traction but we clearly have an operating expertise in the space. There are plenty of people moving into that space now. We never expected to be the only one in the space, but we benefited from being first mover so our hope is there will be some stickiness to liquidity. With that said we're not resting on our laurels. We continue to work on the underlying technology, the matching engine, getting more efficiencies and continuing to reduce latency. We've also launched Chi-X Global and Chi-X Canada is in a soft launch there and we've seen some decent market share growth. We think that the Canadian market has great growth opportunity. I think there are inefficiencies in that market that make a facility like Chi-X attractive. It will allow some of the high frequency traders there to run models there that they haven't been able to in the past. We've also filed paperwork to launch Chi-X ATS in Australia and we're waiting for comment. We think in the Asian area we think that will be the first market that will set precedence from a regulatory standpoint and we're hoping some of the other Asian markets will take that lead. AT:Do the ATS' leverage the same technology? Abenante: Yes the majority of the technology base will be the same, then given the microstructure issues in each of those markets, there will be some additional code. We think that's an operating advantage. We developed the platform from the ground up with the idea it would be a global matching engine. AT: How do you work to bring down latency? Abenante: Our software engineers are constantly working to optimize the code and achieve performance gains. We've seen continued improvement but we'll also continue to re-optimize the model we have. Beyond latency, capacity is a huge thing people are focusing on. It's one of Chi-X's key positions and latency and capacity definitely go hand in hand. Ultimately the whole idea is to continue to increase throughput. As we want to add other features into he exchange we're careful not to do anything to the core-matching engine. It has been designed to provide a very efficient processing environment.so when we do other things such as add-ons; we have to be cognizant of what the performance is going to be.
AT:Are there any new features you're working on for Chi-X Europe? Abenante: The routing piece will be very important, we don't run the smart order router in Chi-X Europe right now. We're in the process of merging that code into what we've done in Canada. That will be a huge new feature. Part of how successful you are depends on the having the makers and takers. How do you get people to make? One way is to ensure they won't have stock trade around them. So having a router that allows you to post flow on a new fledgling exchange is a very powerful tool. It allows you to say if I see a better price in a different market I can go out there and do it. That will be a very significant add-on to Chi-X Europe. We're working on that and expect it will be done sometime this year. AT: Do you think the volume in dark pools will continue to grow? Abenante: Ultimately I don't think the market is going to go 30 or 40 percent dark unless you have substantial amount of market making being done by the bulge bracket guys putting prop flow in the dark pool. I think what's going to happen is that people get smarter and smarter in understanding the cost of trade. We build TCA tools and we'll continue to evolve in that space. Especially when markets aren't like they were in bull markets people become more aware of the cost of implementing ideas. AT: How exactly do you see TCA evolving? Abenante: The important thing about TCA is maintaining a consistent approach. So whether you think the methodology is flawed and I think you could argue any of the market impact estimators people use and incorporate into TCA has some flaw. It's hard when you get over a certain threshold say 100 percent of a mid cap or small cap name - how do you model that? I think to some degree a matter of maintaining a consistent approach. Also, by brining in more risk modeling techniques into TCA side. That's something we're focusing on— giving our clients more real time feedback as to what their trades are doing. When we give pre-trade feedback obviously its based on historical data and we don't know what the market is going to do that day so it's static. What we're building now—we're calling it Instinet Insight— is a full analysis suite of pre and post and also intra trade analytics. When you look at portfolio trading typically its the tails that kill youthose two or three sigma trades that kill you. Our thoughts are let's give people information earlier in the day not at 4:15. We'll give you the tool kit to see what's happening and our sales traders will have it as well to provide better color. Part of Instinet Insight will be a Web-based product where users can look at how trades are doing within each of their algos, giving them real feedback to perhaps the opportunity to change tactics. I think people will focus on intra trade as the next cycle of TCA evolution. Instinet Insight is used internally right now, but we hope towards the end of the summer to be pushing it harder. We have some integration into our Newport EMS. A richer set of features will exist on an application that will then communicate with Newport. We're focusing on Web-based technology, the delivery is much more simple. 5/26/2008 6:06:22 PM |
Anthony Abenante (left) and Fumiki Kondo (right) co-CEOs of Instinet.
Photos by Stephen Aviano
Instinet's co-CEOs on the trading floor
Gaar compliance series flags potential appraisal problemsNew Product Addresses Home Valuation Code Issues 5/11/2008 8:27:05 PM |
Analytics Are Becoming Increasingly Important Tools in Banks Customer Retention StrategiesPredictive analytics tools are helping banks
understand customers’ behaviors and meet their unique needs with
tailored products and services, improving customer retention as a
result. The ability to predict when a customer may jump ship for a competitor's offerings would be gold to banks, allowing them to focus efforts on retaining that customer. While they can't look into the future or read customers' minds just yet, banks increasingly are realizing the benefits of analytics tools in retaining existing patrons. Charlotte-based Wachovia ($782.9 billion in assets), for example, looks to analytics to anticipate customer events, according to Dan Thorpe, SVP, director, of the bank's statistics and modeling group. The bank, he says, builds attrition models to predict if an individual or household might defect. "We want to anticipate and understand the needs of the customers so we can reach out to them before the need arises," he explains. "We want to understand this across all channels as appropriate." Insiders agree that the prospects for organic growth in banking are starting to slim. As a result, banks' customer-retention efforts are more important than ever. "This is becoming an increasingly important problem," says Alenka Grealish, managing director of the banking group with Boston-based Celent. "These are challenging times. [Mergers and acquisitions] will continue and banks will continue to acquire new customers. But organic growth is hard to come by and will get more difficult with the economy, so they're going to go for the higher-hanging fruit by using customer predictive analytics." Adding to the problem, banks' marketing departments will find it more difficult to advertise their messages to both prospective and existing clients due to some of the consumer privacy regulations enacted recently, claims Charles Nicholls, founder and CEO of SeeWhy (Windsor, U.K./San Francisco), a provider of real-time event intelligence. "The proportion of people banks can market to is shrinking with all the spam rules and opt-out programs," he states. "You may have a million customers, but the addressable pool is only half that. So retention through superior service becomes more vital." Robert Phillips, founder, chief science officer and VP, research and development, with Nomis Solutions, a San Bruno, Calif.-based maker of price optimization systems, agrees that banks face challenging times ahead in finding and keeping customers. "Organic growth is not great in the developed economies, and there is only so much M&A you can do. So banks are starting to look to the customers they already have to see how they can make them more loyal," says Phillips. "Technology, the economy and competition are all contributing to banks' greater focus on analytics." Kate Stackhouse, SVP and director of sales integration at Columbia, S.C.-based First Citizens Bank ($16 billion in assets), believes that analytics are increasing in importance in the industry today for understanding the behavior not just of individual customers, but of markets as well. "You want to look at the competitive landscape and how your individual branches are keeping pace with consumers' needs. Understanding this helps shape marketing plans unique to each market," she explains. "There's so much conversation around predictive analytics for individual customers -- yes, that is important, but you need to understand the needs of the broader market, too."Harnessing Data For years, analysts and other industry observers have criticized banks for concentrating more on acquiring customers than on retaining those they already have. They usually cite the fact that although banks have truckloads of data on their clients, they just don't seem to know what to do with all that information. Celent's Grealish says that the technology to enable banks to look in-depth at their customers has always been there. What they lack, she adds, is the ability to use that data. "Banks' organizational capabilities to harness that technology isn't there," Grealish asserts. "The ability to structure a credible ROI and get a piece of the pie that they seek is missing. They have quite a bit of data, but it's hard for them to harness it." Grealish notes that most of the leading retail banks use analytics to some degree. However, "Where predictive analytics gets challenging is around the infrastructure required to first formulate what they want to predict and the ability to let them act on that," she says. One notable exception is in the credit card area. Grealish and other experts point out that the use of predictive analytics in this space is actually quite mature. According to Laurent Desmangles, a principal with New York-based Oliver Wyman, predictive analytics have worked best in the card industry to identify customers who are at risk for leaving. "The credit card is a transactional product with a good data trail," Desmangles explains. "Other bank products don't quite have the same kind of data trail as cards. Tools for identifying 'churners' and for launching retention tactics have had a mixed record and haven't traveled well out of the consumer finance realm." The road to employing predictive analytics to their fullest capabilities likely will be long and bumpy. But banks understand that they must start somewhere. According to Michael Nicastro, chief marketing officer with Glastonbury, Conn.-based core systems provider Open Solutions, a good place for banks to begin is in changing how they operate. "Banks have to think differently to use predictive analytics," he says. "They have to stop marginalizing and commoditizing their core systems. Legacy systems are great transaction collection systems, but they don't tell you anything about the data -- it's unfiltered data. The fundamental problem is the base information about your clients." The basics need to be hammered out first, agrees Dinesh Sheth, CEO of uMonitor, a Memphis-based provider of solutions for customer acquisition and retention. "Are banks ready to use predictive analytics?" Sheth poses. "If they still have trouble with their basic systems -- such as running an inefficient system that makes new-account opening take an hour to perform -- it doesn't make sense to use predictive analytics yet. They need to get the basics right and then look at how they can improve customer retention." Open Solutions' Nicastro, however, sees the movement by many banks, especially on the international front, to implement new core systems as an impetus to employing more analytics. "As we see a global shift to implementing new core systems, analytics will become more of a reality," he explains. "Retention is about knowing how to play against your biggest competitors. Our bank clients are competing with PayPal now. PayPal analyzes every transaction in real time, and they know exactly what to say the next time they deal with a customer. Their core information is good. Getting this information is the key before a bank can even start to use the analytics." Still, many banks are taking the first steps to better anticipate their customers' needs and intercept any churn before it happens. Although most aren't using analytics throughout the entire organization, they are taking a measured approach so that they can see what works and what needs improvement.Improving the Entire Customer Experience For Cincinnati-based Fifth Third Bank ($111 billion in assets), retention boils down to providing an overall positive customer experience at the bank, relates Mike Menyhart, SVP and director of customer experience. To better understand "the voice of the customer," he says, the bank partnered with Washington, D.C.-based The Gallup Organization, tapping the firm's CE11 tool to gauge customer engagement levels and financial performance. Gallup's approach combines methods for assessing employee-customer encounters with a process for improving customer engagements. According to Menyhart, Fifth Third also recognized just how instrumental working with the technology side of the bank would be to its customer service efforts. "Partnering with technology brings that customer experience to life," he explains, noting that the bank's key technology investments to keep its customers happy were in the areas of problem resolution and management escalation for first-contact resolution. Part of banks' problems in satisfying customers, adds Menyhart, originates from the institutions' siloed infrastructures, which prevent systems and lines of business from talking with one another. The close collaboration among Fifth Third's business and technology leaders helped break down many of the bank's silos to provide a more consistent customer experience, he points out. One of the key enablers of Fifth Third's strategy to improve the overall customer experience, and thus customer retention, is the bank's enterprise customer information file (CIF) project, Menyhart notes. "We did some major work from an infrastructure perspective that's paying huge dividends, such as our enterprise CIF project," he says. "We are bringing all of our customer information to one spot and making it accessible to different channels. All this data makes us better predictors [of customer attrition and needs]." Raymond Dury, Fifth Third's EVP and CIO, adds that the infrastructure work is ongoing. "We built the foundation and now we're finding ways to take advantage of it," he says. "We're becoming more of a customer anticipatory organization this way." Yet this infrastructure foundation is just part of the equation. Predictive analytics still are required to turn data into actionable information. "We're in an alternative-delivery world," says Menyhart. "We used to see the customer in the branch monthly. Now it might just be yearly. We want to be sure the experience they have with us is worthwhile." To enhance that experience, Menyhart continues, Fifth Third set out to customize it for each individual customer. "We created a tool that can provide predictive, targeted best offers when the customer comes to us -- when appropriate," he says. "We'll either follow up on a problem to see if it was resolved, or we'll make a relevant product offering." Menyhart declines to name the vendors with which Fifth Third worked to develop the predictive analytics tool, but he notes that some of the work was done in-house. The appropriateness and consistency of targeted messages always are top of mind for the bank, adds Dury. "The offers have to be relevant, otherwise it can become a negative experience because the customers will feel the bank knows nothing about their relationships with us," he explains.Seeking Foresight Like Fifth Third, Wachovia also sees the implementation of a predictive analytics approach to customer service as an ongoing process. According to Wachovia's Thorpe, however, the bank's new head of insight and innovation (which is part of the marketing division), Ramin Eivaz, who comes from the consumer packaged goods industry and oversees the statistics and modeling group, has challenged Thorpe and his team to look for best practices in analytics and retention from other industries. "Our [retention] strategy now can best be described as having three tiers," Thorpe explains. "At the bottom is 'hindsight.' In the middle is 'insight.' At the top is 'foresight.' We're in the 'insight' phase right now. We have a very large data warehouse and many legacy systems that we're reorganizing to get the information more quickly and model more broadly." The ultimate goal, Thorpe continues, is to achieve foresight so the bank can predict attrition before it happens. "We've always been good at attrition analysis," he says. "Now we're building life models -- how the customers evolve over the lifetime of their relationships with us -- to anticipate their needs and make product recommendations that are more relevant so we don't see the attrition." Thorpe notes that Wachovia takes a hybrid approach to building its analytics capabilities -- part in-house and part vendor-built -- but he declines to name the vendors with which the bank is working. Toronto-based Royal Bank of Canada (US$605 billion in assets) is taking a more targeted approach to analytics, deploying the technology specifically in its lending business, another area, in addition to cards, where analytics are more widely deployed across the industry. According to Neil McLaughlin, the bank's vice president of personal lending, analyzing the right price points for its customers is one way to keep them from leaving. "By using analytics tools to dovetail our pricing and personal marketing strategies, we were able to tackle problems we had around our relationship strategy," McLaughlin explains, adding that although RBC built its own predictive models, the bank is employing price optimization software from Nomis Solutions. Bringing the Nomis solution on board involved a very large, cross-functional effort to bring together the data and feed it into the Nomis product, McLaughlin notes. "We rolled it out for originations initially," he says. "We tested it geographically and did a pre/post analysis to look at the spreads within those geographies. We saw positive results from selecting a better price for loans. We were able to go underneath and understand where the customer sees value in the product." McLaughlin stresses that the bank gives employees discretion in terms of augmenting the suggested pricing models based on their own market knowledge. "Understanding the price of convenience and rate sensitivity to customers is important, especially as rates on personal loans increase," he says. "There are many benefits to pricing the loan right in the first place."Listening to What Customers Have to Say Large banks, such as Wachovia, Fifth Third and RBC, aren't the only financial institutions that can benefit from predictive analytics. Vectra Bank Colorado ($2.6 billion in assets) is a Denver-based subsidiary of Zions Bancorporation (Salt Lake City; $50.8 billion in assets). Erica McIntire, Vectra's SVP and director of marketing communications, says the community bank also seeks to use analytics to prevent customer defection and boost retention. To improve retention and service, however, Vectra looks beyond what customers do; it also listens to what customers tell the bank, McIntire relates. Key in Vectra's analytics arsenal is the suite of enterprise feedback management solutions offered by South Jordan, Utah-based Allegiance. Vectra uses the Allegiance Engage platform to capture customer feedback garnered with the vendor's CustomerPulse survey tool. "This tool measures customer engagement and allows us to learn how they feel about our company and the extent to which they are engaged with our company rather than just satisfied with what we're providing," explains McIntire. "CustomerPulse provides aggregate totals and trend data, which allows us to pinpoint the areas where we're the weakest and where we could put our time, energy and dollars to get maximum improvement," McIntire continues. She notes that the bank is able to drop in "business markers" to measure changes in customer feedback that may result from changes made by the bank. CustomerPulse, along with CustomerVoice, a feedback tool, are both Web-based and integrate with the bank's existing Web infrastructure, according to McIntire. The CustomerVoice system uses a case management approach to monitoring feedback so customer compliments, concerns or questions are tracked and escalated until a satisfactory result has been achieved, she says, adding that results from CustomerPulse surveys help Vectra identify key drivers that affect customer actions while helping to sort customers by demographics. Rather than focus on individual customer behavior, First Citizens Bank uses analytics to examine the broader market. According to First Citizens' Stackhouse, the bank uses technology from MapInfo, a Troy, N.Y.-based company that provides location intelligence solutions, to help determine in which of its markets the bank should focus on retention and in which it should focus on acquisition.Setting Goals First Citizens has been using the Perform portion of the MapInfo solution since 2006 in its goal-setting process, Stackhouse relates. "Previously, our goal-setting methodology was very labor intensive, internally and historically focused," she explains. "It didn't help us understand the differences in our markets or establish goals our individual branches could achieve." Once First Citizens began using MapInfo's solutions, Stackhouse adds, the bank was able to drill down further into its branch segmentation efforts. "We bucketed the branches and used the goal-setting methodology similarly," she comments. "That's why we decided to change. Our branches were growing more sophisticated and diverse -- they didn't like to be lumped into one group or another by the old system. Now we can have as many segments as we have branches. It also went from a two-month-long process to a one-week process." Stackhouse says the bank is able to arrive at a starting point more quickly, leaving more time to discuss the goals with individual branch managers. "The branches can focus their activity planning more quickly than they once did," she relates. "They see whether opportunities are inside- or outside-sales focused and mine the existing database or find new customers according to their goals." The results of this change in branch goal setting have been quite favorable, Stackhouse claims. With a clearer segmentation and more focused service goals, the bank has moved from making cold sales calls to calls that are more service/courtesy oriented. "We are seeing ROI on this technology -- we have better retention of healthy balances among those customers we reach out to," Stackhouse asserts. According to Stackhouse, First Citizens' retention/analytics efforts primarily are focused on the branch and, to some extent, the call center. But other banks, including Fifth Third, are taking a more multichannel approach to analytics. Fifth Third's Dury says the bank rolled out a consistent retention strategy on the Web, on its newer ATMs and at its branches. Wachovia also is taking a multichannel approach to retention-related analytics efforts. "We already have a central point of contact for all our channels, so we're not siloed," says the bank's Thorpe. "All the channels are our universe for implementing [predictive analytics]." RBC employs a "channel agnostic" retention strategy, according to the bank's McLaughlin. He points out that RBC uses an architecture in which the pricing is centralized across all channels. What is most important to remember, says Open Solutions' Nicastro, however, is that no matter which channel is used in a bank's retention strategy, the institution must follow through to the end. "Cross-selling is good, but you can't just be good at the teller line and then let it go," he says. "You need to do follow-up, and that's where these efforts often fall apart. You need follow up in the system." 5/1/2008 7:11:23 PM |
Content Router Delivers 10 Million Trade Messages Per SecondSolace has upgraded its hardware messaging solution with a larger chassis, a trade data router and a network accelerator Solace Systems today is introducing a new
version of its content-routing technology -- that is, hardware-based
messaging that competes with high-speed messaging and middleware
software from 29West, BEA, IBM, Tibco and Oracle. The solution is used
by some Wall Street firms to handle market data delivery and order
routing. New today is the Solace 3260 Content Router chassis, a four-rack-unit high device (the previous version was two units high) that can hold as many as 10 special-purpose hardware networking blades. Also new are two specialized blades: a topic routing blade that routes messages based on simple market data rules at a rate of 10 million messages per second with 10 microseconds of latency, and a network acceleration blade that enhances data delivery speed -- one acceleration blade can deliver eight million messages per second, two blades can handle 16 million messages per second. Content routing solutions actually read each message and base routing decisions on the topic of the message. They can change the formatting of messages if necessary so they can be read by particular applications. Solace's routers run over any TCP/IP network; the vendor envisions this solution as a messaging middleware layer to be shared by all applications that need it, whereas today typically each application has its own messaging mechanism. The Solace configuration can automatically rebalance the workload, executives say, as new router blades are plugged in. Why handle messaging in hardware rather than software? "With software, you end up switching control between operating systems, the applications, the network card, and so on," says Larry Neumann, senior vice president of marketing at Solace. "Every time you make one of those switches, you chew up some microseconds. When you try to do that hundreds of thousands or millions of time per second, it creates too much overhead. By baking all that into chips, all those issues go away. Data comes straight off the wire, there's no protocol stack, no operating system, even the data processing is all performed on the same chip or set of chips. As a result, we can reach higher rates of throughput with predictable latency." Solace's routers, he says, are ten to 100 times faster than comparable software products. A common critique of hardware-based solutions is that they tend to be hard to change and upgrade. "That's certainly true if you're building chips on a motherboard that never change," Neumann says. But Solace puts its code on reprogrammable chipsets, such as field programmable gate arrays and network processors, whose firmware can be updated on demand, he says. Pricing for this system varies by number and type of blades, but typically run $75,000 to $300,000. 5/1/2008 7:01:55 PM |
Buy Side Seeks Independent Valuation Providers for OTC Derivatives After Credit CrisisWith the credit markets in turmoil over OTC derivatives
valuations, buy-side firms are tapping vendors to avoid the conflict of
interest inherent in broker-determined prices. As
the credit crisis continues to rock the U.S. economy, buy-side
institutions that entered into OTC derivatives contracts with sell-side
firms are taking steps to price the over-the-counter derivatives with
independent, third-party sources. In the past, buy-side firms mainly
obtained prices from their counterparties -- the investment banks that
created the OTC derivatives instruments and calculated the prices with
their own proprietary models.
"If I'm an investment banker creating these derivatives, who knows more [about them] than me?" says Paul Migliore, CEO of investment management consulting firm Citisoft North America. But since the broker-dealers often are on the opposite sides of these transactions -- and they stand to profit or lose money depending on the direction of the market -- relying on their calculations could pose a conflict of interest, he explains. "The big thing in the market is that no one trusts the dealers to price these instruments," Migliore adds. Part of the problem is that OTC derivatives -- opaque, complex instruments that are linked to the movement of equities, interest rates, currencies and commodities -- are not traded on exchanges, so a true market price is hard to determine. Additionally, some derivatives are illiquid, making it even more difficult to value them. >> Of course, as the credit crisis in subprime mortgages magnified and investors turned away from complex derivatives, including collateralized debt obligations (CDOs), dealers had an even harder time pricing them. Eventually, the dealers were forced to write down $150 billion in losses (as of press time) as a result. Now the sell-side financial engineers and math whizzes responsible for valuing the OTC derivatives don't appear to be so smart. "Clearly, the sell-side has not done a good job of pricing these products," comments Michael Henry, the head of Accenture's financial services strategy practice in North America. With uncertainty over how to price OTC derivatives roiling the entire fixed-income market, the buy side is seeking independent sources to validate The Street's bids and offers. "As a fund administrator, I need to find data points to come up with that valuation," explains Joseph Holman, founder and managing partner of Columbus Avenue Consulting, a hedge fund administrator based in New York with $6.5 billion in assets under administration. "A market price, or any price, has to be observed; and to be observed, someone has to transact," Holman continues. "In the credit markets, where there's talk of a lack of liquidity, people aren't buying anything, and that affects valuations." While mutual funds and hedge funds have been moving toward independent valuations of OTC derivatives for the past few years, the credit crisis has accelerated the search for neutral third parties to calculate and sign off on derivatives prices. "The CDO market environment was a wake-up call for the entire financial services industry," comments Judson Baker, derivatives product manager at Chicago-based Northern Trust, which offers an asset-pricing service for listed and OTC derivatives. Independent Derivatives Pricing Gaining Momentum
The trend toward independent pricing also is gaining momentum due to the explosive growth in OTC derivatives trading by traditional asset managers and pension funds. Some asset managers have hundreds and even thousands of open derivatives contracts on their books, which they must mark to market from an accounting perspective, explains Citisoft's Migliore. "If one position is losing money, you have to go out and create another, synthetic derivative to offset the first derivative," he says. According to Northern Trust's Baker, even though none of the clients of his firm's independent valuation service held customized CDOs, the subprime mortgage meltdown has had repercussions for pricing all derivatives. "The collapse of certain instruments [CDOs] had a profound ripple effect across all derivatives and their valuations," he says. "It's a call to arms for having robust and transparent valuations for your OTC derivatives." Northern Trust began offering its OTC derivatives valuation service three years ago when it noticed a large spike in the number of derivatives its clients traded as well as a spike in the number of clients -- traditional pension funds (public and private), corporations, endowments, asset managers, hedge funds, mutual funds and private equity -- that had grown more comfortable with the use of derivatives. "We've seen tremendous [derivatives] volume growth in the last five years that outpaced the industry, sometimes three to five times over that," Baker relates. "We recognized the need to provide enhanced services for OTC derivatives," he adds, noting their offerings cover derivatives processing, independent derivatives valuation and collateral management. To create the valuation service, Northern Trust hired three specialist firms: Markit Group; Bear Direct, a service of Bear Stearns; and SuperDerivatives. "That is their business -- to run models and collect data and to independently provide OTC derivatives valuations," says Baker. According to Baker, Markit is a well-rounded provider in that it covers credit, interest rate, commodities, currencies and equity derivatives, and can handle all asset classes. SuperDerivatives, he says, specializes in currencies, equities and interest rate derivatives, but is getting better in commodities and is starting to cover credit derivatives as well. Baker adds that Northern Trust used Bear Direct for interest rate and credit derivatives because that is their strength as a sell-side firm; he notes that Bear had a "Chinese wall" between the trading desk and the asset-pricing service. In light of the collapse of Bear Stearns and its fire sale to JPMorgan Chase, however, Baker says Northern Trust is reexamining its relationship with Bear Direct. "After the issue with Bear Stearns surfaced, we have closely monitored their output and service," he notes. "We continue to use Bear Direct, but have reverted to using them as a secondary source. We are assessing their business model and will soon determine if and how our relationship will change." Avoiding Conflicts of Interest
Before Northern Trust launched its valuation service, the bank's clients relied on their investment managers -- who either used their own proprietary risk management models or counterparties' (i.e., brokers') prices -- to value derivatives, Baker reports. But "having your investment manager supply a value that they could manipulate is not objective," he stresses, adding that this potential conflict of interest was a major driver behind Northern Trust's decision to develop a more independent audit check for its clients. Another reason that drove Northern to develop a more independent audit check was their focus on governance best practices. If the investment manager has control over the pricing model, "They could tweak the model and they could manipulate the price to something they want it to be," suggests Baker. "It's not in the client's best interest, and sometimes the investment manager's compensation is based on the performance of that derivative. They could inflate the price of that derivative, and their compensation could be based on it. So obviously we saw a conflict of interest there." This apparent conflict of interest may be the No. 1 driver behind the buy side's push for independent derivatives pricing services. "Investors are saying they want independent looks at the books," asserts Ed Crouch, global head of corporate and strategic development at SuperDerivatives. "Auditors say they want independent looks [too]. These two things have led the revaluation part of our business to explode." According to Crouch, SuperDerivatives is seeing a dramatic increase in demand from buy-side firms for valuation services in order to put a fair market value on their books of derivatives holdings. "Global custodians are saying they have trillions of dollars of this paper and it hasn't gone away, and they need an independent market of that book," he comments. At the same time, hedge funds also are pressing their fund administrators to obtain an independent price source. In January, for example, Columbus Avenue Consulting selected SuperDerivatives' Credit Derivatives Platform, SD-CD, to price its hedge fund clients' portfolios of credit default swaps. The firm uses Bloomberg to price equities and spot currencies. Buy-side participants maintain that vendors are more neutral than broker-dealers because they are not involved in the trades. "The vendors have no idea which side the trade is on," says Northern Trust's Baker. "They don't even know the quantity [of the positions]. We don't share client data or even which side of the trade our client is on. The notionals and quantities remain protected. They value the instruments by collecting data for their models. It's not skewed to the bid or ask side either," he adds, noting that the vendors' valuations typically fall at a midpoint price. Further, there are a number of vendors in the derivatives valuation space to choose from. "We think with those three primary firms we get best-of-breed independent valuations," Baker says, referring to SuperDerivatives, Markit and Bear Direct. Northern Trust, he explains, gets values back from two or three of those sources and then compares them to see how they stack up against each other. Baker calls this a valuation hierarchy. Columbus Avenue Consulting's Holman confirms that the industry is reducing its reliance on single sources for derivatives prices. "You see a lot of reliance on a variety of sources," he says, noting that there are different methodologies for comparing the various sources. "We use multiple pricing services now, which I would never have considered [previously]," Holman adds. "It used to be that you looked at one broker quote -- you looked at the bid or took the mean of the bid-ask. Today we're creating matrices of broker quotes. We'll take three broker quotes and we'll come up with an average bid-ask spread, and we'll take the average of that bid-ask." Different Pricing Strokes for Different Folks According to Mayiz Habbal, SVP of Celent's securities and investments practice, the buy side has three options when it comes to figuring out the right approach to pricing OTC derivatives. The first choice -- the easy approach -- is to use the counterparty price when valuing the position, he says. The downside, of course, is that there's no transparency into the sell-side's model. "Since it's not independent pricing, there may be errors, and the counterparty doesn't provide the price on a regular basis," Habbal comments. "If you want to do it cheaply, that is what you would do. [But] then you would be exposing yourself tremendously." The second approach, Habbal says, is to set up an internal valuation entity within the asset management firm. This method hearkens back to the mid-1990s when the investment banks came up with analytics to manage the derivatives they were selling. "The differentiation is how [sell-side firms] manage the risk for what they are selling," Habbal explains. "Jumping over to the buy side, you see the buy side trying to do the same." If a buy-side firm has deep pockets and enough knowledge of derivatives, Habbal adds, it will set up an internal valuation unit. A perfect example of this is hedge funds that internally price OTC derivatives to figure out if there are any arbitrage opportunities. The advantage of this option is that the buy-side firm has complete control over and transparency into the pricing process. In the long run, it's helpful to understand the instruments, Habbal says. However, on the downside, this entails heavy infrastructure costs and investments in market data implementation and people. "You will add another complex process that will also consume a lot of internal resources," Habbal warns, adding, "Once you have the function, you have to keep pumping money into [it] to keep it going." While some analysts say the buy side, with the exception of hedge funds, lacks the expertise to undertake a project of this kind, Putnam Investments developed its own internal OTC derivatives calculation engine to gain competitive advantage. "We have financial engineers on staff that understand these instruments -- that understand the modeling -- almost as well as the business," says Eric Meltzer, Putnam's head of investment technology at Putnam Investments in Boston. The third option, according to Habbal, is to find an independent evaluator. Vendors typically offer valuation services via an application service provider (ASP) model, in which the asset manager sends its trades, terms and conditions over the Internet to the vendor and gets prices back, he notes. The benefits of this model include cost efficiency, scalability and flexibility, says Habbal. One negative, however, is that "expertise will not be nurtured internally," Habbal points out. But while many of these services are "black boxes" that offer the buy side little transparency into vendors' models, the vendors often will share some details, he adds. Banks that have the money, Habbal predicts, will develop their own internal OTC derivatives valuation capabilities and also explore third-party pricing services. "That is the ultimate [solution]," he says. Citisoft's Migliore, however, says he doesn't know of a lot of asset managers building their own models to price derivatives. "We're not seeing anybody wanting to build their own OTC derivative valuation systems themselves -- they are looking at vendors and products out there," he contends, pointing out that "There are third-party pricing services that are out in the marketplace right now that [asset managers] can bring in-house to price their assets." In addition, "Buy-side firms are looking to their current third-party custody bank relationships and fund administrators to provide this stuff," says Migliore. "A lot of asset managers are asking their custodians to price OTC derivatives." Global custodians "sit in the middle -- they work with the asset managers and the broker-dealer community, and they do the settlements," Migliore explains. The Data-Collection Burden For its part, Northern Trust decided to partner with vendors not only to increase speed to market, but also to relieve itself of the burden of OTC market data collection and the interpretation of that data, according to the firm's Baker. "The hard part about valuation is not the model, because the models are so standard now," he says. "It's more about collecting the data." Data collection involves polling brokers and arranging to have multiple broker-dealers transmit live trading information back to the firm, Baker says. In the end, Baker adds, the goal is to provide complete transparency into the OTC derivatives pricing process. To do that, a firm has to be able to show which entity provided which value, how and when the price was updated, and whether the price was fresh or stale, Baker notes. In addition, the firm must monitor the sources of data to provide a consistent and accurate source of data day after day and month after month, he says. "It's very difficult, very risky and it's not where we are positioned," Baker explains. But even though Northern Trust relies on vendors to aggregate the information on which derivatives prices are based, the firm still is heavily involved in the valuation process, Baker stresses. "We're constantly reviewing how actively that data is updated, and if there is a concern the inputs are stale, we do everything we can to initiate better inputs," he says.
Further, Northern Trust continually is expanding the coverage of its
service to keep pace as its vendors pick up other derivatives
instruments. "There's always development taking place -- there's always
capital assigned to [the asset service's] expansion," Baker says.
"[Independent derivatives pricing] is definitely one of the crucial
parts of the industry." 5/1/2008 6:59:11 PM |
The Time Has Come for Fixed-Income Electronic Trading In October 2005, I wrote a commentary, "Bonds Ain't Stocks," for Wall Street and Technology on the growth (or lack there of) in electronic fixed-income trading. The gist of the article was that the products were so complex, the issues so numerous and so important, and the dealers so concentrated that it would be a cold day way south of the border before fixed-income electronic trading platforms would be successful. That was two and a half years ago, and, for the most part, that statement still holds true today. While a few more buy- and sell-side firms are leveraging algos and dealer linkages to interact in the interdealer market, by and large the majority of fixed-income trading still is phone-based or request-for-quote-driven TradeWeb and MarketAxess transactions. So why am I writing this if nothing has changed? Well, the time may be right for revolution. Let's review. In the past eight to nine months, there has been a subprime meltdown, the mortgage-backed and asset-backed market has ceased, asset-backed commercial paper markets dried up, auction rate notes aren't auctioning, Bear Stearns was sold to JPMorgan for $10 a share, dealers and banks have pulled back on offering credit, and, in effect, the fixed-income markets are going haywire. If ever there was a market dislocation, this is it. While the premise of my first commentary was that the markets wouldn't open up because it was not in the dealers' interest, this may no longer be true. The opportunity may be right to open up the fixed-income markets to alternative execution, which actually may be in the dealers' best interest to open up. The write-off of billions of dollars by dealers will force three things to occur: Dealers will increase their investment in risk management, new risk management strategies will force dealers to reduce their proprietary trading and Value at Risk, and dealers will reduce costs in line with revenues (both personnel and technology). We are seeing this playbook role out at virtually all dealers around the globe. But what does this mean for the thousands of fixed-income institutional investors? Are their bonds slated to stay in inventory till maturity, or will someone or something develop to facilitate greater transparency, mitigate risk and allow investors to dispose of their unwanted inventory for more appropriate product? Sounds like the market is in need of an exchange, ECN or interdealer platform open to investors, doesn't it? I am not saying that developing an agency-exchange model is a slam dunk; however, it may be time for the dealers to think about an alternative to always being a principle. With dealers downsizing their desks, directing fewer people to cover more accounts and seeking to take less risk, and with technology getting to a point where newer and possibly more-technology-savvy and less-capitalized players (e.g., quant shops, hedge funds, etc.) perhaps more willing to step into the role of market maker, it may be time to embrace a central counterparty trading model. While I am not calling for anarchy where the buy side trades directly with other buy-side accounts and no one manages risk, the industry may need to migrate from a traditional OTC market without a central venue to a more traditional exchange model in which there are not only liquidity providers making two-sided markets but a vibrant agency model as well. In this model, investors work with brokers on a commission-basis and trade on behalf of their clients in a more transparent and open community. While this may seem like heresy to the fixed-income world, unfortunately that constituency is becoming smaller and the demands from the buy side are becoming greater. The big question is: Who will champion this cause -- institutional investors searching for liquidity, dealers looking to reduce risk or regulators in search of a solution? Either way, the time is right. 4/19/2008 12:02:56 PM |
Merrill Lynch Speeds Up Application DevelopmentMerrill Lynch developers are turning Microsoft’s Windows
Workflow Foundation framework into a customized platform for rapid
application development. To streamline the work of highly skilled (and highly paid) developers in its Global Wealth Management Technology group, Merrill Lynch is building extensions to Microsoft's Windows Workflow Foundation, a platform for building workflow-enabled applications, that make the tool set a productive platform for automating processes. The group already has used the Microsoft platform to create a financial adviser program and a client data middleware tier that delivers up-to-date client information to applications, and more wealth management workflow projects based on Windows Workflow Foundation are on the drawing board. As its name suggests, Workflow Foundation, a component of .NET Framework 3.0, allows developers to design custom workflow solutions by dragging and dropping task objects onto a flow diagram. The platform is a combination of programming model, runtime engine and developer tool. (For those new to the term "workflow," think of the process for filing an expense report -- you send it to your boss for approval, and he or she either approves it or sends it back to you with questions; after your boss approves the expense report, it goes on to accounting, which also either approves or sends it back, and eventually someone cuts you a check. This is the type of process that can be automated with workflow software.) "Before, we had to build workflows from the ground up, which takes a lot of time," says Kumar Vadaparty, director of Global Wealth Management Technology at Merrill Lynch. "In addition to that, the software captures all events and puts them in one SQL database -- this would also take a lot of time to do ourselves." Building a Better Workflow Tool Vadaparty's group of six developers, which supports the wealth management application developers, began playing with Workflow Foundation before it was generally available. Although it met some of their requirements, he relates, the group felt that certain pieces were lacking, so it fashioned them with help from Microsoft engineers. According to Vadaparty, the first extension supported parallelism. "Say a particular request comes in and you have to send four calls to the appropriate sources to get the information," Vadaparty explains. "You would need to wait for those calls to complete, one after the other. To make it more efficient, we needed to make the four calls parallel and have them come back together." If each call takes one second, parallelism reduces response time from four seconds to one. Vadaparty notes that although the concept of parallelism may sound simple, its technical implementation is fairly sophisticated. In the past, an application programmer had to write parallel code by hand and carefully test it, "because parallel programs can get you into trouble quickly," Vadaparty says. Using Workflow Foundation with the parallelism extension, orchestrations that previously may have taken several days or weeks (based on the complexity of the problem) to build and even more time to test can be written in a much shorter period and tested much more easily, he adds. The second extension enabled the abstraction of certain activities for reuse, reducing the amount of code application programmers need to write. "We would like not to require talented software developers" to have to write code for event-handling activities, Vadaparty says. "This means we need to abstract away the implementation intricacies." Another extension the group plans to add to Workflow Foundation in the near future will provide business activity monitoring, according to Vadaparty. This will allow the IT department to watch transactions as they pass through a workflow, he explains. Leveraging the enhanced Windows Workflow Foundation, Vadaparty reports, the Global Wealth Management Technology group built a program last year that helps financial advisers obtain the right information efficiently for their clients. Vadaparty declines to offer specifics. Another major project, which still is under way, that leverages the enhanced Microsoft platform is the construction of a client data tier to provide a single service interface to access all account, profile and relationship data that financial adviser applications require. The business goal of the client data tier, Vadaparty says, is to give financial advisers a unified version of client data. The middleware will have the intelligence to decide which services and/or data providers are the authoritative sources for client information and to retrieve it, combine it and return it to the calling application, he explains, noting that it will serve 30,000 financial advisers. "This software will only work if we have the required low-latency [data retrieval]," Vadaparty says. "We are confident [that] can be achieved with Workflow Foundation and its extensions." Why Microsoft Workflow Foundation? Microsoft's new workflow solution, Workflow Foundation is embedded in document-sharing solution SharePoint 2007 products today, and later versions of BizTalk, Microsoft's business process management software, will use it as an orchestration engine. Workflow Foundation's workflows can be designed in Visual Studio. One thing that attracted Vadaparty to Workflow Foundation was the promise of short development times for new applications, due to its visual, drag-and-drop nature versus the C# coding often required. "We want our projects to be done faster and finish on time," he says. "We so often hear, 'You haven't done it yet? You're already late. The user requested it yesterday.'" There's also a lot of pressure to deliver new applications cheaply. And while many applications, such as Tibco Rendezvous, enable firms to create automated workflows and cut development time, Workflow Foundation is free with the .NET platform. While Rendezvous offers a larger, more comprehensive middleware tier, it's expensive. "Unlike other vertical tools that provide workflow-type functionality among autonomous services, such as Tibco, Microsoft's Workflow Foundation provides a library," Vadaparty says. "The major advantage with Workflow Foundation is that it is not an entire solution that needs to be fit into your infrastructure. It's a library that can be incorporated into an application program like any other Microsoft library. This helps in efficient middle-tier latencies." 4/19/2008 12:00:49 PM |
Huge Trading Floors are Back in Vogue, But Traders are Outnumbered Despite the rumblings a few years ago that the large-scale trading floor would become obsolete, most trading floors actually are retaining their footprints or increasing in size. But the constituencies on the floor are very different from what they once were. And surprisingly, traders are vastly outnumbered on most "trading" floors today.
For example, the equity group on UBS' floor, the largest trading floor in the world, is comprised of 600 people, but only 110 of those are traders. The remaining equities staff on the floor is comprised of sales traders, trade support teams, IT developers, quantitative analysts and other support employees. At many firms, positions such as compliance and legal staffers also are being integrated onto the trading floor.
Support positions have always been important. But technology and compliance positions, for instance, never sat alongside traders. The growth of electronic trading, however, has brought to light the critical need to have support teams on the floor and immediately accessible to traders. In addition, as the broker-dealer transitions to a role of buy-side execution consultant, it is essential that traders have access to all of the firm's service providers, such as algorithmic trading, quants, TCA specialists and technologists. Having an open floor housing all of these teams facilitates communication, which is being recognized by firms as critical to success.
Communication was a factor in creating the mammoth floor at UBS (featured in Advanced Trading's "Anatomy of a Trading Floor" photo gallary). "The open architecture design of the floor promotes integration across functions, seamless working relationships and virtually no line between the business, technology and management," according to a UBS spokesman.
A second trend fueling the growth of the trading floor is the creation of multi-asset floors, which enhance the need for more support positions on the floor, such as risk management and compliance. As multi-asset trading takes hold, trading floors are being created to group multiple assets, particularly products that correlate to each other. The idea is to create "pods" of various groups and functions that interrelate on the floor. At UBS, the 1,400-seat trading floor houses trading for all products. Other firms are establishing multiple large floors that each house groups of related products, such as cash and derivatives.
Yes, electronic trading has displaced a good number of traders. But from the looks of existing trading floors — and more important, the recent rush by broker-dealers to secure space to build new floors — the large and soon-to-be-even-larger trading floor still reigns supreme. And while they might be sharing space with various colleagues, the limelight still belongs to traders. Just take a look at our cover. 4/13/2008 9:13:46 PM |
The Inside Scoop on Nasdaqs Options Strategy
By
Ivy Schmerken March 24, 2008 As more institutional traders and hedge funds adopt options trading, Wall Street is about to get its seventh options exchange. In a move to diversify its revenues from equities into derivatives, Nasdaq OMX is preparing to go live with the Nasdaq Options Market, a new electronic options trading offering.
 Approval came two weeks ago from the Securities and Exchange Commission (SEC) for the rules associated with the new Nasdaq Options Market, whose architecture is based on the high-speed INET platform that has proven to deliver low-latency trading to equities. Nasdaq OMX is leveraging its expertise in equities to break into options trading. "The general thought process we had was we're going to take what we have for equities and we're going to make the modifications we need to trade options," explains Adam Nunes, VP Nasdaq Transaction Services, who is in charge of the options initiatives through Nasdaq Options Services LLC. Nasdaq has been testing the system since August and the go-live date, according to a company release, was set for March 31. Nasdaq OMX is jumping into the options market at a time when options trading volume is exploding, volatility in the U.S. equity market has returned with a vengeance and institutions and hedge funds are trading these instruments either to hedge risk or to add alpha to their portfolios. Options trading soared to a record 2.8 billion contracts in 2007, amounting to a 41 percent jump from 2006's prior record, according to TABB Group report, published in February of 2008. "All the clients we see in equities are diving into options," says Chris Concannon, EVP, Transaction Services at Nasdaq OMX in an interview Advanced Trading. But the question is with six options exchanges competing for multiple listed equity and index options, and with liquidity dispersed across the different venues, what is Nasdaq going to bring to the table that is not already out there? See Sidebar In a major role reversal, Nasdaq OMX is also finalizing its acquisition of the Philadelphia Stock Exchange (PHLX), which means Nasdaq OMX will be operating a trading floor with specialists for the first time in its 36-year history as an electronic market. PHLX has a hybrid model comprised of a trading floor and an electronic trading platform called PHLX XL. Nasdaq agreed in November of 2007 to buy the PHLX, the nation's third largest options market, for $650 million. The general consensus on the Street is that Nasdaq is acquiring PHLX to pick up its 15.21 percent market share in equity and index options. (These market share numbers are as of March 20, according to the Options Clearing Corporation.) The transaction is expected to close by the end of this month. When the deal closes, Nasdaq OMX will run two separate exchanges. "They'll be two separate legal entities," comments Kevin McPartland, senior analyst at TABB Group in New York. "The point is they're going to have two markets with two different market structures," adds McPartland.A Battle Between Two Market Structures Nasdaq Options Market is choosing a price-time priority model, where whomever is there first, trades first and gets the entire order. This is more akin to what NYSE Arca and the Boston Options Exchange (BOX) are doing, but completely different from how the other options exchanges - International Securities Exchange, Chicago Board Options Exchange and the American Stock Exchange- work, says Nunes. In that more hierarchical market structure, customers go first in time priority, and then the specialist gets an allocation. Usually 40 percent of an incoming order is the standard allocation that the specialists get after customers step ahead, according to Nunes. Then other market makers receive a pro-rata allocation and then non-market maker firms get a piece of the order, he says. For example, If "you come in with 100 contracts sitting at the inside, by the time everyone has joined you, you're going to get 10 contracts," says Nunes. "The key driver of that (price-time priority) model is penny pricing. In the current nickel world four-or-five or six exchanges are all on the inside bid and the inside-offer, he says. So all the exchanges are at the inside price, but what usually breaks the tie is payment for order flow. But if the minimum quoting increment in options is changed from nickels to pennies, instead of 20 price points, there will be 100 price points per dollar. Then, there is more incentive to drive the quote in the price-time priority world and if there are different market structures, there will be more competition, says Nunes. Nasdaq executives contend that running two different types of market models for options trading could be a winning formula. "I do believe that having the two models puts us at a huge advantage over everyone else," says Concannon. In the traditional model, there is a hierarchy where customers get priority over market makers. "A customer order jumps ahead of someone who spent $1 million on a Google bin," says Concannon. "If I'm a dealer expecting to get 40 percent of every order and someone jumped ahead of me, my economics just changed," says Concannon. While the price-time priority model is a bit new to the options market, there are indications that that's where the market is headed, says McPartland. "But that's not how the options markets were created," adds the analyst, noting that the AMEX, CBOE, ISE and PHLX are all pro-rata quote driven models, while the newer electronic options exchanges Nasdaq, Arca and BOX are all "make or taker" models which reward liquidity providers with rebates and charge fees to liquidity takers. "We're talking about Nasdaq coming from the equities world and developing the options market in a very similar way," says McPartland. In options, exchanges usually charge 30 cents per 100 contracts to take liquidity and pay a rebate of 15 cents per 100 contracts to add liquidity, says McPartland. "Those incentives have worked in other markets, such as equities with BATS (ECN) and NYSA Arca Options has a similar model," notes McPartland. "That's one of their incentives," says the analyst, referring to Nasdaq OMX and the second incentive is their technology. Everything is built new and built for today's world." But one options industry source, who requested anonymity, doesn't understand why Nasdaq-OMX would want to buy the PHLX trading floor when it costs far less to trade options electronically. "They were so far ahead of the curve and now they're taking a step background," says the options source, who is an options professional with over 20 years of experience in the industry. "I don't think it makes a lot of sense to keep the Philly
exchange there. I think there has to be something more to it than meets
the eye," says the source. According to the source, there is speculation in the industry that the Nasdaq purchase of the PHLX was a way to reward the six largest institutional shareholders of the PHLX, in hopes that they continue to do their options business with Nasdaq/PHLX. These six shareholders - Citi, Credit Suisse, Morgan Stanley, UBS, Merrill Lynch and Citadel Derivatives took minority stakes in the PHLX in 2005. "Some sources feel that the merger might be nothing more than thanking the six institutional owners for their previous use and continued use of the PHLX floor," says the source. Nasdaq's Nunes declined to comment on this speculation. But why would Nasdaq, with its background in electronic trading, want to run a trading floor? "As we have said in the past, we will maintain the floor as long as it continues to provide value to our customers," says Nunes, who notes that the PHLX floor is important for the execution of multi-leg institutional orders. But, the source points out that ISE handles complex orders on an electronic basis. According to Nunes, for the most part, those complex orders are going to be two-legged transactions. "You can have institutions with four-to-six or-eight legs on a trade and none of the complex order books support that." "Since the job of building a system for four, six or eight legged transactions is ten times more complex. It's not worth it," says Nunes. "Since there's a floor at Philly, institutions would just go to the floor for those types of transactions," he says. However, Nunes adds that PHLX is coming out with electronic complex orders this spring. Meanwhile, more of the options trading done by institutions and hedge funds is going electronic, which should favor electronic exchanges. According to the recent TABB report, 30 percent of hedge fund order flow is going electronic for options in 2008 and that is estimated to increase up to 63 percent by 2010. However, there's still going to be a lot of institutional business done over the phone due to the lack of liquidity, said the report. "There are so many price points, there's no way there's going to be a liquid market in any one of them. That will keep the high touch market; and the floor-based model can play into that," says McPartland. With penny pricing probably expanding to more options, it's going to be difficult for institutions to find large size liquidity. Nasdaq Options Market will focus on providing tools to help some of the algorithmic trading firms do in options what they've done with equities, according to Nunes. "Low-latency is important to these guys. We have reserve (orders) and our initial filing had non-displayed liquidity in it," says Nunes. "We really need to look for tools that allow people to trade in an environment where putting up the full size of the order may not make sense," he says. "On the other hand, when it comes to helping firms put up large orders, that would be a natural for Philly," he says, referring to block trading. Whether having a floor is an advantage, is still an interesting question, says TABB Group's McParltand. "A lot of people get the feeling that the floor is going away. Yet, there are floors that are seeing good volume and liquidity," he says, pointing to the CBOE's floor hybrid model and the CME floor. "In certain contracts there is still value to that floor model," he maintains. "Time will tell if the floor provides them (Nasdaq) with the value that pays for the cost of the floor. There is definitely potential for it to work together." Nunes says Nasdaq will support two models for the next several years, as long as there is value to the floor. But Nasdaq is not looking at the PHLX floor as something to protect, says Nunes. "As long as that's a good business for us to be in, we're going to be in it," he says. But if ISE or another competitor develops an electronic tool for something that is done manually, there will be demand for it, he says. "Were going to lose that flow, if we're not doing it as well as our competitor is," says Nunes. "We need to be competitive with those tools and we need to do that on the PHLX to keep the value there," asserts Nunes.4/13/2008 9:11:47 PM |
Centralized and Single-Platform Operations Reduce Overall Trade Finance RiskBurdened with stricter compliance and regulatory requirements, banks with centralized operations and banks with all of their operations on a single platform face lower risk in expanding their trade finance operations. The global credit crisis has emphasized the importance of trade finance. What new demands will corporates place on their banks in the current uncertain economic environment, and how can banks pursue growth opportunities in global trade finance in, for example, emerging markets? What technology investments must banks make to meet these new demands and capitalize on these opportunities?
These will include the ability of the particular bank to expand product offerings intelligently and in line with its particular business model, the ability to provide up-to-the-minute technological solutions to clients and, most important, the wherewithal to do all of these things profitably. These objectives are difficult to manage in an environment where demands for investment are high and returns on trade businesses are low. Many banks are investing significant amounts of capital trying to build solutions, which is extremely difficult to do profitably in the current market. Success in emerging markets assumes a bank has the capability to work through increased regulatory scrutiny and offer a complete product offering to clients that is within the confines of that bank's credit tolerances. Clearly, in emerging markets there's often a tendency on the part of some banks to expand credit and/or go down-market as a means of growing revenues and market share. However, the earnings potential of any emerging market's growth strategy based on expansion of credit has to be measured against the regulatory scrutiny associated with this and the risks and probability of loss associated with this kind of growth.
4/10/2008 11:26:02 AM |
Banks must ensure that all of their processes and operations are correctly and appropriately equipped to manage the scrutiny associated with Basel II and generally stricter compliance and regulatory requirements. Banks with centralized operations and banks with all of their operations on a single platform will have the distinct advantage here because there is lower operational risk generally associated with these structures. As a result, there should also be a lower risk of failing to apply these new, stricter standards to all processes and operational locations.
These May be the Best of Times for Some Bank Tech VendorsBy Art Gillis A few years ago, the stats were telling me that the #1 business (new core sales) for bank tech vendors was leveling off. Not dying, mind you, just leveling off from about 8 percent of the population to about 3 percent. The sale of core apps solutions is the sweetest sale any vendor can make for these reasons: It's the biggest thing every financial institution (16,881 in the U.S.) does. All FIs do it every day. It's so critical that FIs would be subjected to huge risk if just one night's processing didn't occur. And from a vendor's standpoint, that's where the money is. For example, each of the top three banks in the U.S. spends $5.25 billion a year on core processing. If Fiserv and Fidelity National had only one of the top three banks as their only customer, each company would earn more revenue than the thousands of banks that Fiserv and Fidelity work for now. This slowdown occurred because after 40 years of building, coupled with a fear of the "root canal procedure" of all conversions, bankers said, "We're done with core systems." And this milestone had absolutely nothing to do with today's sour economy. Now that the economy is sick, however, and after Ben gave it the kiss of death with the "R-word," several pundits are proclaiming a slowdown in IT spending among banks. With all due respect for the big consulting firms that are borrowing bankers' Rolexes to tell them what time it is, it's the FUD factor, stupid, not the economy. I found that out because I'm getting out more these days. While working in NYC, recently I contacted a Park Avenue psychiatrist to find out what causes bankers to hunker down on IT budgets when other things appear to be going south. I first thought of going to Woody Allen's shrink, but after Woody married his "daughter," I figured he wasn't receiving the best therapeutic help money can buy. The guy I chose was quite good according to all the things I learned on TV. He kept asking me, "What do YOU think of that?" So I did all the talking which is my favorite thing in the world. When the hour was up, and I knew it was up because he said, "Our time's up now," I managed to squeeze in my last shot. For some reason I had an overwhelming urge to ask, "What's up, Doc?" but instead I asked him to give me the answer regarding banker behavior. He said, "FUD." You mean like in Elmer? No—Fear, Uncertainty and Doubt. I handed him the twelve hundred dollar fee in cash, took one more kleenex, and left. As I was leaving the antiques-furnished vestibule, his administrative assistant asked me to sign a release so they could use our most unusual session for an episode of "In Treatment." I declined, but I felt good because she was offering my cash that came to her in a tube just like the ones at drive up tellers. I realized then that this guy knew banking, and I was in the right place. Just because bankers are scared out of their wits over the credit crunch, subprime mortgages, consumer pullbacks and an "R-word" economy, doesn't mean that they should ignore opportunities to beef-up their technology. Here's what smart bankers are buying, and have been buying for the past couple of years: • Protecting the Bank: fraud detection/prevention, regulatory compliance, data security It seems that alert bankers have recognized the need to shift their focus from "building the factory" to enhancing the value of the "system" where system means contribution to higher earnings, and in a worse case, protection of earnings earned. Are tech vendors off the hook now? Not yet. Now they need to shake up the other half of the banking community that is still doing a Rip Van Winkle. 4/10/2008 11:22:27 AM |
Offshore Outsourcing of IT Losing PopularityAccording to a Robert Half survey of CIOs, nearly all participants said their companies currently are not outsourcing technology positions outside the U.S. A staggering 94 percent of participating CIOs responded that their companies currently are not outsourcing technology positions to firms outside the U.S. Further, 86 percent said they have no plans to change their level of IT outsourcing in the next two years. The survey was conducted by an independent research firm and was based on more than 1,400 interviews with CIOs from a random sample of U.S. companies with 100 or more employees. But the news isn't all bad for offshore IT outsourcing providers. Of the 111 respondents whose firms currently engage in offshore outsourcing, 43 percent said their companies plan to increase their level of outsourcing within two years. Among respondents whose firms previously had ceased offshore operations (61 respondents), the most common reason cited for doing so was that the operations required too much management and oversight. Additionally, 30 percent of these CIOs believed that they weren't realizing expected cost savings. For firms that are exploring offshore outsourcing options, Robert Half Technology offers the following advice: 1. Look for stability. Choose a vendor that has a track record of retaining employees. 2. Consider set-up time and costs. New jobs or even departments may need to be created to handle vendor selection, manage contracts, train workers and oversee remote teams. 3. Anticipate management challenges. Offer training for managers who will lead overseas teams. Some companies may need a full-time project manager to oversee the offshore vendor. 4. Address security and privacy concerns. Intellectual property risks -- such as the enforcement of patents, copyrights and trade secrets -- may require additional oversight and resources. Courtesy of Wall Street & Technology, a TechWeb property. 4/10/2008 11:20:48 AM |
BofA Awarded Patent on Card TechnologyBank of America’s Active Card Control system increases control over corporate cards. The Active Card Control technology is an extension of BofA's commercial card product suite. Using the technology, the client can reset the available funds on each card as frequently as necessary through a Web-based tool. When initially issued, cards will have $0 in available funds until the client is ready to pay the supplier. At that time, the client submits a purchase request through the Bank of America Works application, which uses the Active Card Control technology to fund individual cards with the exact amount of the invoices to be paid. When those purchases are billed to the card, the available funds go to zero. The bank says that benefits of Active Card Control for the client include improved administrative efficiency and lower costs from not having to raise and lower credit limits or change single transaction limits; increased control over purchasing due to a mandatory approval process; reduced paperwork; and ease of implementation as purchase requests can be used with any card program that uses the Works platform. 4/10/2008 11:19:01 AM |
Banks Adopting More Strategies to Court Underbanked
To bring members of that group into the financial mainstream, the city launched "Bank on San Francisco," a joint effort among Mayor Gavin Newsom, City Treasurer Jose Cisneros and many of the city's financial institutions. "We wanted to enable low-income folks to be more successful in being able to survive and thrive here in San Francisco," Cisneros explains, noting that the Federal Reserve Bank of San Francisco gathered the city's financial institutions and "asked them to offer appropriate starter accounts at relatively low cost" to the underbanked. "When someone doesn't have a bank account, they really have no choice but to go to a check casher," Cisneros continues. As a result, they frequently overpay for a service that most Americans receive for free, he adds. According to Cisneros, many of the area's banks and credit unions -- from the smallest to the largest institutions -- signed on for the program. "We really were excited to see an overwhelming majority of banks in the area agree to participate," he says. By the one-year mark, the Bank on San Francisco program had succeeded in opening more than 11,000 checking accounts for the city's previously unbanked, Cisneros adds. By press time, that number had gone up to 15,000. And other U.S. cities are looking to adopt similar programs. "We've talked to a number of cities and organizations that are looking into this model," Cisneros says. But banks' interest in helping the underbanked isn't entirely altruistic. As many as 40 million U.S. households are considered underbanked, according to the Chicago-based Center for Financial Services Innovation (CFSI), a nonprofit affiliate of ShoreBank Corp. that facilitates financial services industry efforts to serve underbanked consumers across the economic, geographic and cultural spectrum. And while the average account or transactions of an underbanked person may not seem substantial, as a group, the underbanked spend at least $13 billion per year on non-bank financial transactions, according to CFSI estimates. Unfortunately, many of the underbanked have had negative experiences with banks in the past, which contributes to skepticism toward traditional financial institutions. Others, especially immigrants from Latin America living in the United States, have an ingrained mistrust of the establishment in general, according to TowerGroup (Needham, Mass.) senior analyst Jennifer Roth. Roth is an expert on the "cash-preferred" market, which is synonymous with the underbanked market that prefers to not use traditional banking services. "Ca |