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Intensifying regulations and thepush for transparency aredriving 10 trends thatwill reshape theback office andits technologyin 2010. p.26

SEC cracks down oninsider trading p.14

Finding the true valueof trade ideas p.19

IT spending rebounds to $42B in 2010 p.24

Robert DeVault,Director, TransamericaAsset Management

Back-Office Transformation

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Trading 19 Alpha CaptureSystems To boosttheir commissions,sell-side salespeopleincreasingly are communicating tradeideas to clients via so-called alpha capturesystems, which attempt to provide performance metrics around the ideas.But who’s benefiting?

22 UnstructuredData According toresearchers and agrowing number ofWall Street firms, theavalanche of unstruc-tured text-based Webcontent represents thenext frontier in algorithmic trading. Theability to analyze news feeds and socialmedia could provide a very profitablesource of alpha.

IT Spending 24 Tech Budgets Capital marketsfirms will spend almost $42 billionglobally on technology in 2010, recovering the 5 percent in IT spendingthat was lost in the rubble of the financial crisis, according to Aite Group.

14 Close-UpCan InsiderTrading BeStopped? Underpressure to prove it’son the job, the SEC iscracking down oninsider trading withnewfound zeal. TABBGroup’s Larry Tabb andGlobalRMC’s YvonnePytlik discuss some ofthe best practicesfirms can employ toavoid being targets.

The Rise Of the Back OfficeWith greater scrutiny on howfinancial instruments are pricedand cleared, the beleagueredoperations manager is about tosee his world turned upside-down. Here are 10 trends that willtransform Wall Street’s backoffices in the next year. p.26

Wall Street&Technology

Wall Street & Technology’s 2010 Reader Advisory BoardJohn A. Bottega, Chief Data Officer, Federal Reserve Bank of New York

Joseph Ferra, Chief Wireless Officer, Fidelity Investments

John Galante, SVP & CTO, J.P. Morgan Worldwide Securities Services

Joe Gawronski, President, Rosenblatt Securities

Scott Ignall, CTO, Lightspeed Trading

Robert Palatnick, Managing Director/ Technology, DTCC

Steve Rapp, SVP & CIO,AGI Management Partners

Steve Rubinow, EVP & co-CIO,NYSE Euronext

Prashant Sarode, VP, Corporate & Investment Banking Technology, Wachovia

Derek Stein, Chief Technology Officer, Barclays Global Investors

Tim Theriault, President, Corporate &Institutional Services, Northern Trust

Timothy M. Tully Jr., SVP & COO, BNY Mellon Wealth Management

w a l l s t r e e t a n d t e c h . c o m J a n u a r y / F e b r u a r y 2 0 1 0 5

14

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Cover Story Business Lines

Robert DeVault, Director, Financial Reporting/Operations,Transamerica Asset Management

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10 UpfrontIntelligent Enterprise: BNY Mellon Taps BIFor Customer Insight

Betting on Wall Street

SWIFT Restructuring Includes Layoffs

16 Technology EconomicsTechnology budgets may appear flat for2010, but there’s a tsunami of activitygoing on under the surface, says RubinWorldwide’s Howard Rubin.

34 Industry VoiceOutsourcingPortfolioManagementSystems The tech-nology and capabilitiesof outsourced portfoliomanagement systemsrival those of theirinstalled counterparts, says Advent’s Michael Lobosco.

Data Management The middle officeneeds to take the lead in ensuring the quality of enterprise data, according toStuart Grant, Sybase.

38 Perspectives The pay czar, the banker tax, pendinglegislation, shareholder lawsuits and apopular revolt all are vying to restrictWall Street compensation, notes SpecialContributing Editor Larry Tabb. Butshrinking executive pay could haveharmful unintended consequences.

From the Editor 8

All Things to All Investors: Nasdaq Reveals Plans For 2010 In this exclusive video interview, Head of NasdaqTransaction Services Eric Noll discusses theexchange’s drive to make its transparent marketsmore effective for all users by designing marketstructures and order types that appeal to everyone— from large institutions to high-frequency traders to retail investors.wallstreetandtech.com/video/nasdaq-noll

Digital Bonanza In an effort to make the same invaluable technology news, trends,analysis and industry opinions that you’ve come to expect from the Wall Street & Technology brand as accessible as possible, we’ve created a downloadable version of our 2010 Capital MarketsOutlook issue. And throughout 2010 we’ll be rolling out exclusive,digital-only editions offering an enhanced, Web-like experience in a convenient PDF format. Subscribe to WS&T’s digital editions anddownload your free copy today. wallstreetandtech.com/digital-edition

Winning the Low-Latency Arms Race Millions of dollars can be made or lost on the Street in milliseconds. Accelerating Wall Street — the industry’s first fully virtualdata latency trade show — features some of the capital markets’ leading low-latencyexperts discussing the latest technologies and strategies that are driving change in the ultracompetitive algorithmic and high-frequency trading spaces. Find your edge. Check out Accelerating Wall Street today,available on demand at techweb.com/wallstreet-virtual.

Keep Running ...Without Losing a Step Business disruptions can be costly. Is yourfirm prepared? Business continuity planningkeeps your business processes up and running when disaster strikes. WS&T’s onlineFinancial Services Business ContinuityBriefing Center sheds light on how to minimize the uncertainty of potential business disruptions, from risk assessment and business impact analysis to developing and testing BC plans. Sponsored by Eze Castle Integration. businesscontinuity.wallstreetandtech.com

Wall Street & Technology In the Palm of Your HandNow you can get all of Wall Street & Technology’s unmatched coverage of the capital markets technology sector delivered to yourmobile device. Point your mobile browser to wallstreetandtech.comand you’ll automatically receive all of our online content optimized for your handheld device.

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8 J a n u a r y / F e b r u a r y 2 0 1 0 w a l l s t r e e t a n d t e c h . c o m

HE BACK OFFICE. It doesn’t exactly sound like a place wheremost people dream of working, but the back office comprises oneof the largest collective parts of the Wall Street machine.

Maybe our perception of the back office is incorrectly influ-enced by its name — it sounds like a place where shady deals occur(the “back room”). Or maybe it’s just that nothing can measure up

to the glare of the front office, where trades happen and the money is made.Can you imagine Michael Douglas as Gordon Gekko in “Wall Street” presiding

over clearing and settlement operations? “We have 80 percent automated processingtoday. I want 82 percent by the end of the month!” It doesn’t quite have the sexinessof the wheeling and dealing that goes on in other parts of a Wall Street firm. WhenDouglas wasn’t trying to wring more efficiency out of operations, his remaining timeon screen could be spent lobbying for more funding and resources.

But while lobbying for back-office resources maynot be the stuff of box office blockbusters, it is a veryreal activity for back-office managers, who will proud-ly tell you that the clearing, settlement, transactionprocessing, cash management, asset servicing and per-haps a dozen other functions that unceremoniously fallunder the back office’s purview make possible almosteverything that happens on the Street. And, as weexamine in this month’s cover story (“10 Back-OfficeTrends for 2010,” page 26), the back office is undergo-ing a transformation, responding to new regulatoryrequirements and the business’s needs for more trans-parency, faster processing and a host of other demands.

Despite these new demands, one back-officerequirement ironically remains the same: the call todo more with less. The complexity of transactions(think: derivatives) continues to increase, and moreand more of these complex transactions pass through

the back office daily. Fortunately, Wall Street’s back-office organizations have done anoutstanding job meeting business demands, all while utilizing the same — or fewer —resources. Unfortunately, that recipe may be nearing the breaking point.

The only way that the back office can keep up with the changes in the business is toautomate further. Unless firms want to throw bodies at the problem — which is expen-sive and short-sighted — newer technology is needed. And last I checked, technologycost money. While automation may not cost as much as hiring a battalion of clerks,upgrading the back office nonetheless will require a commitment from management.

Time to Pay the Piper

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1 0 J a n u a r y / F e b r u a r y 2 0 1 0 w a l l s t r e e t a n d t e c h . c o m

OBSERVERS HAVE BEEN predicting for yearsthat Wall Street would make more use of busi-ness intelligence (BI) in its customer dealings.But while BI software is widely used in the

capital markets for performance measurement and even forrisk monitoring, it has yet to become commonplace in theareas of serving and selling to customers.

BNY Mellon, however, has been using BI to augment cus-tomer relationships since 2007. It laid a foundation for BI whenit deployed customer relationship management (CRM) soft-ware from Siebel in 2002, when the financial firm was still Bank

of New York. “There was a need at our company to better coor-dinate and understand what our clients were thinking and doingacross our multiple products with multiple sales forces, andinternally there was a need to cross-sell better,” says Erik R.Beck, managing director, global strategic sales, BNY Mellon.

By 2004, Beck reports, every line of business at Bank ofNew York was using the Siebel CRM platform. Then, in2005, business intelligence appeared on the firm’s radar.

“Business intelligence was always used for risk and rev-enue reporting and other systems throughout the company,but it was never used for client insight sitting on top of CRMsystems,” Beck relates. Meanwhile, Siebel was bought byOracle and, after BNY Mellon considered other options, itpurchased the Oracle Siebel BI technology in 2007.

A year later, the firm hired Edward Garry, who is now VP,

global strategic sales, away from Oracle to take the BI projectlive. Beck says there were three goals for the project: to bet-ter understand what clients were doing, to better cross-sellproducts and to grow revenue. “We had this great source ofinformation in ... Siebel, but it was very hard to get that infor-mation out,” he relates.

After meeting with executives and salespeople to find outwhat types of visualized data would help them do their jobsbetter, Beck and Garry’s team built reports and dashboards inthe Oracle BI software for the sales teams. “We were thrilledwith the Oracle product because it integrated with what wealready had, but it didn’t provide the specific metrics we need,so we built everything from scratch,” Beck recalls.

Not All Things to All PeopleBut building one common BI platform for multiple groupsrequires some compromise. “One of the things you accept whenyou pursue a [single-platform] strategy ... is that you’re nevergoing to get everything each person wants perfectly,” Becknotes. “If each line of business went its own way on its own plat-form, they could customize the heck out of it and have exactlywhat they want. But you would miss out on a lot because youwouldn’t be coordinated. ... Our vision was that we’d rather sac-rifice some customization to have everybody on one platform.”This information sharing improves cross-selling and revenue-driving activities, Beck contends.

Analytics available in the BI software, according to Garry,include sales rep performance versus goals, customer activi-ties versus sales, why opportunities were lost or won and theimpact of those results on revenue, and success rates/marketshare (data is derived from salespeople’s input into the CRMsystem). Executives view dashboards on the system to under-stand who the firm is competing against, what’s in thepipeline, why it won or lost particular client sales, and trendsover months, quarters or years, he adds.

For the year ahead, Beck and Garry are focused on improv-ing the system’s ease of use. They also plan to add more chartsand graphs and to make the system more interactive. “Ourfocus in 2010 will continue to be on helping people transformour business, to do something they didn’t do before, to bettercompete against a competitor, to help offer solutions ratherthan products,” Garry says. “With the market as tough as it is,that’s more important than ever.” ✧ —Penny Crosman

Intelligent Enterprise: BNY MellonTaps BI For Customer Insight

Trends & Analysis

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w a l l s t r e e t a n d t e c h . c o m J a n u a r y / F e b r u a r y 2 0 1 0 1 1

PEOPLE OFTEN REFER to Wall Street as a casino.But New York institutional brokerage CantorFitzgerald’s Cantor Gaming subsidiary brings a liter-al truth to that metaphor. Last year the firm brought

the eSpeed trading platform that its brokers use to Las Vegas,where tourists can use it to bet on sporting events via wirelessdevices. This year Cantor Gaming hopes to debut wireless bet-ting on the financial markets themselves at Vegas resorts.

How does a firm make the jump from Wall Street voicebrokerage to Vegas bookmaker? The force behind the moveis Cantor Gaming CEO Lee Amaitis, who also serves as vicechairman of Cantor Fitzgerald’s affiliate, BGC Partners.

Amaitis began working at Aqueduct racetrack at 16,eventually becoming a horse trainer. In the 1980s he movedto Wall Street, working at Fundamental Brokers in NewYork. In 1995 he joined Cantor Fitzgerald. A year later, hemoved to Europe to run the firm’s U.K. division, which gotinvolved in Internet gaming and developing technology forbetting on the financial markets via spread betting. Spreadbetting is similar to day trading in that you’re betting onwhich direction a stock will move in the short term, butthere are two major differences: It’s tax-free, and it doesn’trequire the actual purchase of stock.

In the U.S., spread betting and Internet gambling are ille-gal. Nevada was the first state to pass a law allowing Internetgaming but never enacted it because of federal restrictions. Toovercome those restrictions, Amaitis came up with the idea ofbuilding a wireless network and mobile devices that wouldenable people to place bets only in Nevada. Cantor wrote andsponsored a state bill supporting the scheme that was passed in

2005. Cantor’s mobile gaming system was approvedby state regulators in October 2008, and in March2009 it was deployed at Las Vegas’ M Resort.

“Our philosophy is to use the applicationswe’re so versed with in financial trading and applythem to gaming,” Amaitis says, noting that CantorFitzgerald first rolled out mobile trading in 2005.“We were the first to put U.S. Treasuries on aBlackBerry in real time.” According to Amaitis,components of eSpeed’s matching engines and theBlackBerry trading application were rolled intothe handheld gaming device, known as eDeck.

Cantor is the principal on all wagers, so thereis risk involved in the venture. But the firm mon-

itors its exposure with a risk management system that isattached to its price making system. “It’s impossible to matchevery bet against every bet,” Amaitis explains. “But you canmanage the probabilities of risk.”

In sports wagering, the amounts wagered typically aresmall, and the betting line can be hard to hold, Amaitis says.“The way you do it is, you apply the mathematics of proba-bility,” he relates. “We put 7 million permutations into ourpricing model for the NFL alone.” It’s similar to the pricemodeling performed on Wall Street, Amaitis adds: Just likethe quants who price bonds, the firm performs Monte Carlosimulations to come up with the odds for an event.

A Market GambleThe application that Cantor Gaming hopes to bring toNevada later this year, pending approval from state regula-tors, is called Financial Fixed Odds. Currently operational inthe U.K., it allows people to bet against movements in themarkets. Cantor makes prices for these bets based on algo-rithms developed in eSpeed. The amounts that can bewagered range from $10 to $1,000. “This will allow people inthe state of Nevada to trade the market without having to gothrough a brokerage account,” Amaitis comments.

Regulations require that Cantor Gaming keep its IT infra-structure — wireless devices and the servers that serve data tothem — at a licensed operator within the state. “Ideally,”Amaitis says, “we’d love to have a giant server farm in the mid-dle of the desert to supply all the technology to all the casinos.”

According to Amaitis, slot machine vendors such asBally’s, IGT and WMS view Cantor’s mobile gaming devicesas a threat — “Just like electronic trading was somewhat of acannibalization of the voice brokering business,” he explains.

Yet Amaitis says Cantor is meeting the needs of peoplewho want to enjoy the restaurants, bars and shows in Vegasand gamble in a more comfortable environment than a casi-no. “We’ve been able to convert what most casinos call deadspace into a casino space,” he says. ✧ —P.C.

Betting onWall Street

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S PART OF A GLOBAL initia-tive to reduce costs and improveoperational efficiency, SWIFTbegan last year a restructuring of

its North American Commercial organiza-tion that has resulted in a number of layoffsand other cost-cutting measures. OtherSWIFT groups in North America will followin the restructuring plan.

The moves are part of the Lean@SWIFTinitiative that aims to make the organizationmore efficient and remove 90 million euros(more than US$130 million) in global recur-ring operating expenses by the end of 2010,according to Joanne Healy, head of publicrelations for the Americas at SWIFT. Theprovider of secure global financial messagingservices would not disclose the number ofpeople who have left the organization. TheLean@SWIFT program is designed byMcKinsey & Company.

“This is an 18-month program,” saysHealy. “We have made a commitment to theboard to cut recurring operating expenses [by] 90 million eurosby the end of 2010. Given that manpower costs are a large partof the cost base, there have been some [head count] reductions.Lean@SWIFT is being rolled out in waves across SWIFT, andwe are in the middle of the wave that impacts the AmericasCommercial organization.”

Adds Healy, “It is not just about cutting head count. It isabout making the operations more efficient.” Healy declines tocomment on what percentage of the operating cost reductionscould be attributed to layoffs.

At the SIBOS conference in Hong Kong in September,SWIFT CEO Lazaro Campos outlined Lean@SWIFT to theaudience. “Our target for increased efficiency is 30 percent,”he reported, according to the transcript of his speech. “Yes,you’ve heard correctly: 30 percent. ... The approach shouldalso enable us to improve the service we offer. Twenty percentwill translate into short-term structural cost reductions. Theremaining 10 percent will fund our future.”

Only the Beginning“Of the staff in North America, one-third of the organizationhas gone through the Lean process,” says David Pryce, man-aging director, Americas, SWIFT. “The rest will start later. Weare looking to reduce operating costs so we pass the savings onto our clients. The idea is not to impact services; it is to

increase efficiency and to free up costs to expand to additionalbusinesses in North America.”

According to Pryce, many of the head count reductionscome from a hiring freeze that has been in place since thebeginning of 2009. Many open positions will not be filled asthe organization finds efficiencies through the Lean@SWIFTprocess, he explains. Other staff reductions result from earlyretirement packages that were offered to longtime employees.The remainder will come from layoffs, Pryce acknowledges.

The New York-based Commercial organization isSWIFT’s smallest group in North America, with about 60employees, says Eva Zaeschmar, head of stakeholder relations,Americas, SWIFT. She points out that other groups, includingthe Technical (IT and operations) group, are much larger.

In addition to the Commercial and Technical organiza-tions, SWIFT’s North American groups also include a SupportCenter organization, adds Pryce. The Technical and Supportgroups are located in Virginia, he says. SWIFT’s main office inthe United States is in New York. It also opened an office inSan Francisco in July 2008.

“We are halfway through Lean@SWIFT right now, but itwas announced earlier in [2009],” Pryce comments. “SWIFTis committed to reducing the amount of cost to the organiza-tion without impacting the service levels. The idea is to lowercosts to the industry.” ✧ —Greg MacSweeney

SWIFT Restructuring Includes Layoffs

Trends & Analysis

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WITH THE SEC UNDER PRESSURE to salvage its battered reputation, the regulator has been acting withnewfound zeal to eliminate insider trading. In what has

been termed the biggest insider trading ring in a generation, the regula-tor recently brought cases against the founder of the Galleon Grouphedge fund and former directors at a Bear Stearns hedge fund. In a seriesof interviews, Senior Editor Melanie Rodier spoke with Larry Tabb,founder and CEO of TABB Group, and Yvonne Pytlik, managing part-ner, Global Compliance Risk Management Corp., about what processesand technology financial firms can use to stop insider trading.

Insider Trading:Can It Be Stopped?

WS&T: Can financial firms stop insider trading?

Tabb: It is a very difficult thing to catch. [Perpetrators] arenot using corporate telephones, they’re not using e-mail.They’re working with a surreptitious group of folks to dothings they know they’re not supposed to do.

The issue really is trying to understand who is involved in[corporate] actions, especially on the M&A side and the bank-ing side, and to try to keep them cordoned off [from tradingprofessionals] as much as possible. But the challenge is tryingto understand the trading activities and the names you’refocused on on the corporate side and surveilling them.

As well as ensuring the folks on the banking team are cor-doned off and isolated from trading folks, you have to make sureyou’ve got strong agreements with all of your vendors, thateveryone knows that everything is sensitive information. And it’salso about following traditional compliance policies. The prob-lem with catching some of this stuff is that people know they’redoing something wrong, and they do go pretty far to hide it.

Pytlik: The recent cases of insider trading and other com-pliance violations have had a tremendous impact on theindustry. A serious compliance violation impacts investors andshareholders and is self-destructive to companies themselves.

No one is immune to thosetrends. Banks and hedge fundsand asset managers have totake much more proactiveactions to address those issues.

There are [several] areaswhere they can address thisissue: First, having a singleview across the organization and truly identifying in a sys-tematic and methodological way the highest risk across theorganization. One of these [risks] is insider trading. It shouldbe on the agenda on boards and senior management andexecutive committees. And companies should be looking attheir own environments and understanding how insidertrading can be prevented, how they monitor and identifythose cases, and finally, the escalation process and remedia-tion. From that perspective, [firms need] strong methodolo-gies and standards.

The second area to be evaluated in light of insider tradingis companies’ compliance programs across the organization.What types of policies are in place to address insider trading?What kinds of procedures and infrastructure are in place onthe business side, and what supervision is there to effectivelyidentify insider trading?

>>>Larry Tabb

Tabb Group

Yvonne PytlikGlobal Compliance Risk Management

Corp.

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WS&T: Is the line between information and insider infor-mation different at hedge funds, such as Galleon Group,which are known for their secrecy, and other financial firms?

Tabb: No, there’s no difference. Insider trading is insidertrading. The issue has more to do with compliance. Do theytake it seriously? Does the organization have pressure fromthe top to gather that type of information and take advantageof it? Compliance starts at the top. If there’s significant pres-sure at the top to find and take advantage of inappropriateinformation, no matter how many compliance people are inthe organization, you’re going to have a problem.

WS&T: There’s been a lot of talk in the Galleon case aboutRaj Rajaratnam, founder of Galleon Group, and othersusing expert networks to get inside information. What arethese networks, and how do they work?

Tabb: Expert networks are an issue for a lot of firms. Theyare a group of unlinked individuals who have information oncertain aspects of a company or business, industry, or econo-my. I’m a member of the GLG [Gerson Lehrman Group]expert network. People call me about different things. Thereare all sorts of reminders the firm gives about what [itsexperts] can talk about. I’m not allowed to provide sensitiveinformation. There are all sorts of warnings on the GLG site.

What a hedge fund asks me is up to the hedge fund, andit’s up to me to stay within the guidelines of what I can sayand can’t say. For a hedge fund, it’s an invaluable tool.There’s no mechanism to record a conversation. As an indus-try analyst, I have access to some sensitive information —but not much. But if I’m a programmer at Microsoft andsomeone is asking me about the next Windows release,there’s probably a bunch of stuff I can’t say. Expert networkshave come to strength in the last eight to 10 years. They’rea function of the social media business model, channelingrequests to the right set of people who have information thatfunds are looking for.

WS&T: Has the number of insider trading cases risenrecently because of the economic downturn?

Tabb: Insider trading has always gone on. The ability to spotit and capture it has gotten better with the ability to analyzemore data. The SEC is under tremendous pressure becauseof its failure with [Bernard] Madoff. So it’s very important forthem to get a couple of wings in their hat — to make a high-profile arrest and prove they’re on the case. We’ll be seeingmore fines and more criminal proceedings as the SEC tries toreestablish its reputation.

WS&T: How can technology help stop insider trading?

Pytlik: Technology is very critical, especially right now as reg-ulations and the complexity of the business are increasing. ITis the tool that will help identify a number of violations. Insidertrading is probably one of the most complex areas to identifyand detect. There are bigger companies that offer tools, suchas Actimize and [Oracle] Mantas. And there are also more bou-tique firms [that offer solutions]. But we have to remember thatinformation technology needs to be much more sophisticated.Companies need to do real-time monitoring and really focuson preventive controls as a first measure. They [also need to]monitor on the back end and identify compliance violations.

Tabb: Generally it’s going to be surveillance-type tools [for]monitoring the names you’re working with and [checking] forabnormal activity that’s going on — especially on the optionsside if it’s a specific company — and monitoring e-mail and alltypes of communications. It’s a very hard thing to catch. ✧

View a video of WS&T’s interviews with Tabb and Pytlikat wallstreetandtech.com/video/insider-trading.

Major Insider Trading CasesOctober 2009: Galleon Group founder Raj Rajaratnam isarrested along with five others as part of a $20 millioninsider trading scheme involving IBM, Intel and McKinsey.

September 2009: The SEC accuses Reza Saleh, an employ-ee of H. Ross Perot’s investment firm, of making $8.6 millionin illegal trading profits when Perot Systems Corp. announcedits sale to Dell. Saleh reached a deal with the SEC, agreeing toreturn all the money. But he will not be forced to admit ordeny the allegations.

February 2008: Hong Kong banker David Li and two oth-ers pay $24 million to settle civil insider trading charges inconnection with trading of Dow Jones & Co. stock aroundthe time of News Corp’s takeover offer. Li, chairman of Bankof East Asia, was a former director at Dow Jones.

March 2007: Fourteen people, including former employeesof UBS AG and Morgan Stanley, are accused of a nearly $15million insider trading scheme. Eight Wall Street profession-als, two broker-dealers, a day-trading firm and three hedgefunds participated in the scheme. Former UBS managerMitchel Guttenberg, a member of the bank’s investmentreview committee, is sentenced in 2008 to a six-and-a-half-year prison term.

April 1987: Ivan Boesky pleads guilty to insider trading. Hepays a $100 million fine to the SEC and spends 22 months inprison. The character of Gordon Gekko in the 1987 movie “WallStreet” is based at least in part on Boesky.

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T IS CLEAR from all of the IT analyst statements that2010 has been the most difficult year to forecast ever interms of financial services sector IT spending.

Forecasts from Gartner, Forrester and others predictthat there will be an upturn in spending later in the year whilethe early quarters will be “flat” — along 2009 exit rate levels.All of these predictions indicate that everything currently is influx and can change month by month. But the overarching pattern is that spending will remain at 2009 levels.

Unfortunately, the notion of “flat” is particularly hard tointerpret at this point in time. Traditionally, IT spending infinancial services (as well as other sectors) has been calibratedagainst revenue and operating expense. But the economic tur-

moil of 2008 and 2009, replete with write-downs and creditlosses, has rendered these two reference points unstable. It issort of like removing longitude and latitude from the globe andthen turning on a GPS — there will be a signal, but one would-n’t be able to tell where he was.

An alternative reference point could be absolute spending.An organization can then look at industry trends in terms ofwhether peer spending is going up or down. Surprisingly,however, this “benchmark” gives a false reading as well.

‘Flat’ Is RelativeCurrent December 2009 data from about 80 percent of theworld’s largest financial institutions indicates that, at the high-est level of reporting, absolute IT budgets for 2010 are “flat”

with 2009. However, if application spending(maintenance and devel-opment) and infrastruc-ture spending (process-ing, networks, desktops, help desk, etc.) are assessed separately,it is quickly apparent that the 2010 world of financial servicesIT spending isn’t really flat when viewed “under the covers.”

Following is an example that sheds light on actual 2010 budg-et phenomena apparent from recent data. Let’s go back in timeto 2008 and use an organization with a $5 billion IT budget:

The 2008 budget consists of $2.2 billion in infrastructureexpense and $2.8 billion in applications expense. For 2009 theorganization decreased both applications spending (down 12percent) and infrastructure expense (down 16 percent). Thesenumbers are truly representative of the 2009 IT budget pat-terns. The resulting total spend for 2009 comes to $4.3 billion— applications at $2.5 billion and infrastructure at $1.8 billion.

For the 2010 budget, applications spending is budgeted at an8 percent increase over 2009 (bringing it to $2.6 billion) whileinfrastructure spending continues to be squeezed, facing a 10 per-cent decrease (bringing it to $1.7 billion). The total 2010 budgetis $4.3 billion, which is “flat” with 2009 spending levels, but thestrategic workings of current spending trends are far from flat.

Infrastructure Still SlightedEven in these early stages of the economic recovery, the pres-sure on infrastructure costs continues while discretionaryspending is returning to applications.

On the infrastructure side, the ability to reduce costs is beingenabled by a combination of Moore’s Law, standardization,virtualization and demand management (this is the inverse ofMoore’s Flaw, which states that the lower the unit cost of an infra-structure service, the increased demand increases the total cost).

At the same time, the focus on demand management ismanifesting itself in every aspect of IT infrastructure. Firms aredriving down ratios of desktops to head count from as high as2.1 to 1 to under 1.3 to 1 and rescaling their infrastructures interms of mainframe MIPS and physical servers to be betteraligned for the “next normal” of the financial services business.

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Although 2010 infrastructurebudgets indicate continuedcompression, the applicationsbudget tells a story of business-aligned investment.

For more on 2010 IT spending, see Aite Group’s forecast, page 24.

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Simultaneously, there is a parallel shift from high fixed-coststructures to more variability. Add cloud services to this and thenext “normal” — which should be evident by the end of 2010— begins to take shape.

Although 2010 infrastructure budgets indicate continuedcompression — along with increased staff productivity,greater use of strategic sourcing and effective demand man-agement — the applications budget tells a story of business-aligned discerning investment. This is most evident in theinvestment banking segment, which appears to be rebalancingits IT portfolio. An analysis of absolute spending/budgets for2010 versus 2009 shows development funding moving toward(in rank order) global equities, foreign exchange, commodi-ties and capital markets.

Changing the Competitive LandscapeThere are other phenomena that likely will kick in during 2010that under the “flat” surface will change the competitive land-scape even more. (By contrast 2009 was typified by an almostsectorwide playbook: reduce head count, use more offshorelabor, renegotiate with vendors, consolidate data centers, cutdiscretionary spending, reduce applications and outsourcewhere possible.) For example, 2010 Wall Street IT plans revealmajor thrusts in location strategy — not just adding offshorelabor but rather making long-term decisions on business geog-raphy based on talent availability, risk factors and businessgrowth (e.g., which country will be the “next India”).

In addition, use of private and public clouds is becomingreal. Look at Amazon’s EC2 as a model of price structure —perhaps even as the new benchmark. Its unit costs are nowdown about 12 percent to 15 percent, while at the same time

the services can be procured regionally. In addition, the servic-es have expanded to IBM and Microsoft platforms. Using suchservices externally or internally in late 2010 will help define thenext “normal” as a trade-off of operating expense and capitalexpense, a trade-off of variable costs versus fixed costs, and as anew standard of deployment service levels: servers on-demand.

Next-Generation TransparencyAt the same time that the flat world is becoming increasinglyless flat, a next-generation of IT transparency is likely to emergein 2010. An examination of IT organization plans reveals that anext generation of services catalogs are under development.

The current generation has a primary focus on service defini-tions with their associated costs to drive unit cost efficiency. Thenew generation in the works has clear indicators of the linkage ofcosts and business volumes (how they correlate with each other),makes fixed versus variable costs and the user influence over them

visible, and even shows the time lags of cost changes/shedding.Furthermore, catalogs themselves are moving away from

just infrastructure costs to application-based and transaction-focused transparency. In short, they are migrating to a languageof business versus a language of technology.

Lessons to LearnIf everything stated so far is close to right, there are a few keylessons to be captured:

First and foremost, to attain an understanding of technologyeconomics it is essential that subsurface phenomena be under-stood. Technology is an integral part of products, services, busi-ness operations and customer interactions. It is investments andchanges at these levels that shape the surface. Quite simply: Evenif the surface is flat, there can be a lot going on below it.

Second, even in the absence of traditional reference points(e.g., the loss of meaningful and stable data on revenue andexpense), calibration and navigation is still feasible. An organi-zation can track its movement against itself and ascertain howpeers are similarly moving.

And finally (somewhat), in the context of competitive strat-egy, while there seems to have been a somewhat standard play-book that typified the sectorwide cost reductions of 2009, 2010is shaping up to be a year of diversity and boldness. Perhaps wewill see the ripples in the flat surface in the coming months.Hopefully some tsunamis of success, too. ✧

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Falling Infrastructure CostsPlans in place for major companies in regard to unitcost changes as seen through the eyes of service cat-alogs indicate the following reductions:

Mainframe MIPS 16 percentMainframe Storage 9 percent

Physical Servers:UNIX 8 percentLinux 9 percentWintel 10 percent

Virtual Servers 15 percent per imageNAS and SAN Storage 5 percentE-Mail 7 percentDesktops 3 percentNetworks 5 percent (per port)

Howard Rubin, Founder, Rubin Worldwide

In the context of competitivestrategy, 2010 is shaping up to bea year of diversity and boldness.

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Effective trading systems – for both sell-side and buy-side firms – are critical to achieving high per-formance in the capital markets. Trading systems with features

that allow firms to meet their clients’ needs can be a significant source of new revenue. On the other side of the equation, system defects that make it to the production level can have a hugely disproportionate impact on profitability, with corresponding damage to the firm’s reputation and credibility in the marketplace.

Developing effective and innovative trad-ing systems has never been an easy process. New market opportunities appear quickly and it is difficult – sometimes impossible – to get corresponding revenue-generating fea-tures implemented in time to take advantage of them.

Accenture’s work with trading system development teams — at both buy-side and sell-side firms, from global investment banks to smaller trading shops — has enabled us to identify three key elements that must be aligned for innovative and effi-cient development:

1) Measurement. Many organizations use the wrong metrics – or no metrics at all – when assessing the productivity and effec-tiveness of trading system development. While the number of releases per year is important, the number of high-priority features implemented per year is equally, if not more important.

2) Testing. It should be obvious, given the potentially high cost of defects, that pro-duction is no place to identify and repair problems. Structured, disciplined testing at the unit test, integration test, regression test and user acceptance testing (UAT) levels should reduce defects found in pro-duction to the right percentage – zero.

3) Separation of Powers. At many firms, production support and development are intertwined, which means that the pace of innovative development slows when pro-duction problems crop up. We work with

firms to create separate, properly staffed functions, helping confirm that workflows continue and priority projects maintain their momentum. We encourage separa-tion within development teams, as well, with the creation of smaller, more agile units to address tactical issues while prog-ress continues on high priority, revenue-generating features.

With the right metrics, testing process, and structure in place, trading system develop-ment can become a more reliable, industri-alized activity. A sharper focus and greater efficiency help eliminate development back-logs and increase the frequency of releases. That, in turn, reduces the pressure to add feature after feature to each release, delay-ing the development schedule and creating frustration in the sales force and dissatisfac-tion among clients.

Trading systems are at the heart of the global capital markets. Accenture believes that disciplined systems development with the right team can provide capital mar-kets firms with a significant opportunity to establish and maintain a meaningful com-petitive advantage. By combining our capital markets experience, proprietary assets and knowledge of trading systems applications, we have developed an approach that yields consistently strong results for firms seeking to upgrade this core capability. Our approach provides the structure needed to establish and manage priorities, and to enforce rigor-ous quality standards while also providing the ability for faster innovation required in today’s environment.

Selecting an experienced company with a proven track record can enhance the chances of success for any trading systems initiative. Please contact Accenture if you would like to schedule a discussion or workshop to explore how to achieve high performance in trading systems. To read more about this topic or to contact us, visit www.accenture.com/trading.

About the Author:Lloyd Altman is a senior executive in Accenture Capital Markets, lead-ing its Core trading Services offer-ing in North America. he has been involved in the delivery of solutions for a wide range of buy-side and sell-side products and functions, including credit default swaps, program trading, fixed income trading and risk management.

About ACCeNtureAccenture is a global manage-ment consulting, technology services and outsourcing company. Combining unparalleled experi-ence, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With approximately 177,000 people serving clients in more than 120 countries, the com-pany generated net revenues of uS$21.58 billion for the fiscal year ended Aug. 31, 2009. Visit www.accenture.com for more information.

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To read more about this topic, visit www.accenture.com/trading

DisciplineDrives Success in

Trading Systems Development

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To drum up commissions, sell-side sales professionals increasingly are communicating trade ideas to

buy-side clients via alpha capture systems, which provide performance metrics around the trade ideas.

ITH TRADITIONAL WALLStreet research analysts focusing on

long-term trends, sell-side salesforces are filling the void for short-

term trade ideas — including both buyand sell recommendations. To commu-

nicate these ideas and prove their value to institutional clients,sales desks are sending their trade ideas through so-called“alpha capture systems,” which enable sell-side salespeople toefficiently communicate with buy-side firms in an electronicformat and put performance metrics around their ideas.

“Trade ideas are coming not only from traditional sources,such as research analysts, but now [they] are originating on salesdesks,” comments Paul Rowady, senior analyst at TABB Group.

According to industry experts, salespeople at the invest-ment banks increasingly are leveraging alpha capture systemssuch as youDevise’s Trade Information Monitor (TIM),

Thomson Reuters’ StarMine and First Coverage’sCommunity to share trade ideas with the buy side. An alphacapture system — first used by U.K. quantitative hedge fundMarshall Wace in 2001 to capture profits from short-termtrade ideas — allows buy-side clients to manage and filterinformation while quantifying the value of trade ideas.

Stuart Fraser, head of alpha capture at U.K. institutionalbroker Collins Stewart, conveys trade ideas to institutionalclients through youDevise’s TIM. The Web-based systemdisseminates — in real time — trading ideas on more than13,000 equities and ETFs generated by as many as 350 sell-side companies. Buy-side clients can filter which salespeoplethey wish to follow, as long as they have an existing relation-ship with those sell-side firms.

TIM tracks the performance of the trade ideas based ontheir timeframe and market value, according to youDevise,which is based in London and New York. “It gives the clients

By Ivy Schmerken

The Value of Trade Ideas

WThe Genesis of a Trade IdeaSTUART FRASER, head of alpha capture at U.K. institutional brokerCollins Stewart, leverages the TradeInformation Monitor (TIM) alpha capture system from youDevise topush out trade ideas to his buy-sideclients. According to Fraser, heenters ideas on U.K. and Europeanstocks prior to the opens of theLondon Stock Exchange and the NewYork Stock Exchange. But wheredoes he get his ideas?

Focusing on the top 150European names (out of 350 in hisfirm’s database), Fraser says he culls his trade ideas from varioussources, including Quest, the bro-kerage firm’s proprietary cash flowmodel. “One looks at cash flow at along time horizon, and stock pricesmove materially around that in theshort run,” he explains, adding thathe uses cash flow analysis to gener-ate both long and short trade ideas.

But while the cash flow model isan important part of the firm’s valua-tion process, “It’s not the only impor-tant part of that,” Fraser stresses. Hepersonally visits two or three compa-nies a week and also obtains ideasfrom Collins Stewart analysts andeven clients. In addition, “There’sinformation in the market [and]client meetings with the companies,”Fraser says. “It’s a fairly wide net oneuses to capture ideas.” —I.S.

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a bit more confidence that the salespeople can sift throughideas and reject bad ideas,” says Fraser.

When the salesperson inputs the trade idea, TIM pulls thelatest price for that stock or a volume-weighted price,depending on the fund manager’s request, relates ColinBerthoud, a director with youDevise in London. The systemupdates the market prices from the moment the authordecides to take profits or close the idea. “While the systemmonitors the trade ideas,” Berthoud explains, “it will gener-ate stop/loss alerts if it passes a certain threshold, and the fundmanager can increase or reduce his exposure.”

According to Berthoud, quant funds and asset managers feedthe equity trading ideas, along with research notes, directly intotheir internal systems. But the buy side is not necessarily tradingoff of the information, asserts Collins Stewart’s Fraser.

Most buy-side clients, Fraser says, are “assimilating theinformation” along with other research reports and marketinformation. “The buy side has to have a lot more data pointsto be confident in the information,” he explains.

YouDevise’s Berthoud concedes that rather than tradebased exclusively on the sell-side ideas offered in TIM, it’smore likely that buy-side firms are using the ideas as addi-tional support for current strategies. The buy side, he notes,typically follows a universe of stocks and already has an ideaof whether a stock is undervalued or overvalued. “This ismore to help the buy side time their moves,” Berthoud says.

More Than a Buy or Sell RecommendationTIM also can help buy-side firms gauge the performance ofindividual sales professionals, Berthoud adds. For example, ifeight of the 10 trade ideas entered by a salesperson during a

quarter are profitable, the buy-side client could see that hisshorts outperformed his longs or that he is better at pickinggold stocks in China than oil stocks in North America.

Perhaps more important, TIM can be used for compli-ance purposes, Berthoud points out. The trade-idea informa-tion could be used in a buy-side broker vote system to justifywhy a firm rewarded a broker with trading commissions, hesays. “It’s a really good quantitative way of seeing what valuea broker has added — it’s there in black and white,” Berthoudsays, adding that TIM provides a complete audit trail of whatwas routed to whom. Further, TIM stores all of the informa-tion on the platform forever, so a buy-side firm can provideto regulators the precise broker information on which rout-ing decisions were based.

Though youDevise has not had any direct interactionwith regulators, Berthoud says, the U.K.’s Financial ServicesAuthority (FSA) has paid close attention to alpha capturesystems in general. When the FSA reviewed alpha capturesystems in 2006, it examined the controls necessary to ensurethat ideas disseminated on the platforms do not includeinsider information or other relevant data not generallyavailable. Because these systems have a complete audit trail,however, the FSA acknowledged that the risk of conveyingtrade ideas over alpha capture systems might be lower thantraditional communication methods, though it noted thatsome risk still might exist.

According to Berthoud, youDevise has strong relation-ships with the compliance departments at large brokeragehouses, which monitor the trade ideas submitted by theirsalespeople. “We provide them with real-time access to all ofthe ideas [originating] within their company,” he relates.Since brokerage firms have restricted lists of stocks for whichthey are privy to insider information in some way, the sales-people are prohibited from commenting on certain stocks,Berthoud explains, adding that some brokerage firms havebuilt an authorization loop so that trade ideas are not releaseduntil the compliance department reviews them.

The Evolution of Alpha CaptureAfter Marshall Wace kick-started the evolution of alpha cap-ture systems, a consortium of four major brokers — Citi,Credit Suisse, Dresdner Kleinwort and Merrill Lynch —founded Trade Ideas Limited (TIL) with the idea of creating acentral routing hub to enable sell- and buy-side firms to sendand receive trade ideas regardless of their internal alpha capturesystems. In 2005 the brokers commissioned youDevise to buildthe back-end platform that now serves as an industry utilityknown as the Repository and Distribution Centre (RDC).TABB’s Rowady explains, “You need an intermediary to buildthis once because for a buy-side player to build the same sys-tem, you’d have to convince all your brokers to use your [alpha

“It’s a reallygood quantitativeway of seeingwhat value a broker has added— it’s there inblack and white.”

—Colin Berthoud, youDevise

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capture] systems exclusively.”Approximately 4,300 professionals

at 150 buy-side firms and 350 sell-sidefirms currently utilize the TIM alphacapture system to access the RDC,representing an increase of more than50 percent in the past year, accordingto youDevise. Brokers pay youDevise asubscription fee for the service, butbuy-side firms receive the service forfree if they have an existing relation-ship with the sell-side firm. “The buyside pays commission to the brokers based on performance;the brokers pay a small fraction to us based on a fee we chargeby user,” youDevise’s Berthoud relates.

Over the past few years other alpha capture systems thataggregate and value trade ideas have sprung up. DeniseValentine, senior analyst at Aite Group, wrote a research reportin 2008 categorizing vendor solutions as “aggregators” of inde-pendent or broker research, pointing out that some combinedboth types. Valentine noted that the concept of TIM is similarto other research delivery mechanisms, such as BNYConvergEx’s Jaywalk, which creates performance metricsaround independent research reports. Other top aggregatorsinclude StarMine, which was acquired by Thomson Reutersand ranks the accuracy of analysts’ earnings estimates, and FirstCoverage’s Community Web-based platform, which featuresapproximately 250 sell-side firms that contribute information,including research and sell-side trade ideas, to the buy side. (Formore alpha capture system providers, see sidebar, above.)

But Berthoud insists that youDevise’s TIM has becomethe largest provider of trade ideas transmitted from the sellside to buy-side firms. “Because these are community-basedsystems, the brokers tend to migrate to a single system,” hesays, claiming that 60 percent of the trade ideas that passthrough vendor alpha capture systems are delivered via TIM.

Who Benefits?TABB Group’s Rowady acknowledges that there is a lot ofvalue in the aggregation of sell-side trade ideas for patternrecognition and identifying trends, such as a preponderanceof buy or sell signals or the movement in or out of a particu-

lar sector. For instance, youDevise publishes a weekly senti-ment analysis quantifying the percentage of new trade ideasfrom U.S. and U.K. brokers that are bullish or bearish onstocks or certain sectors.

But Rowady cautions that there may not be room for sev-eral players in the alpha capture space. He doesn’t see the sellside committing to the administrative burden of addingtrade ideas — which, he says, largely is a manual process —to more than one or two of these systems unless the processis automated to some extent.

Aite Group’s Valentine, however, questions altogetherthe value to the buy side of the sell side pushing sales teams’trade ideas via alpha capture systems. She suggests that thesell-side salespeople have an ulterior motive in promotingtrade ideas: to generate commissions. “It may be that thishelps the sell side more than the buy side,” Valentine com-ments, noting that alpha capture systems also provide sell-side firms with feedback on how well their research and rec-ommendations are performing as well as on the market’sperception of them.

Indeed, Collins Stewart’s Fraser confirms the value ofalpha capture systems to the sell-side business. YouDevise’sTIM, Fraser relates, affords him efficient exposure to clientsthat he otherwise might not have access to. “I do send ideasout to groups,” he explains, adding that the audit trail provid-ed by TIM also is valuable.

YouDevise’s Berthoud acknowledges the benefits of alphacapture systems to sell-side firms. “For once it’s the salespeo-ple who are [generating] money for the firm, rather than justthe sales traders who are executing the deals,” he says. But heargues that sell-side sales forces also are a valuable source oftrade ideas for the buy side.

“They’re the sharp point of all the economic briefingsthey’re getting, and they know the client and put togetherideas that are tailored for the client,” Berthoud contends.“They may come out of a morning meeting, hear what theanalysts say and then add their own ideas.”

The question is, do those ideas truly add value to the sellside’s relationship with the buy side? ✧

BNY ConvergExJaywalk212-448-6080www.bnyconvergex.com/companies/BNYJaywalk.aspx

FactSet Research SystemsAlphaMetrics203-810-1000www.factset.com

First CoverageThe Community617-303-0180www.firstcoverage.com

InvestarsExternal Alpha Capture/Internal Alpha Capture212-269-3796www.investars.com

Thomson ReutersStarMine Professional646-223-8593www.thomsonreuters.com

Trade Ideas LimitedTIL44 (0)781-801-2580www.tradeideas.org

youDeviseTrade Ideas Monitor (TIM)44 (0)207-826-4302www.youdevise.com

“It may be thatthis helps the sellside more thanthe buy side.”

—Denise Valentine, Aite Group

Alpha Capture SystemsEver since the U.K.’s Financial Services Authority grantedapproval of their use in 2006, there has been a prolifera-tion of alpha capture systems to objectively track tradeideas from investment banks. Here is a partial list of system providers whose solutions fit in the category:

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Researchers and Wall Street firms are analyzing the avalanche of unstructured Internet content —

including news feeds, blogs and Twitter posts — to help improve trading performance.

INDING AN EDGE on Wall Street can beworth millions of dollars. And lately, convertingtext-based information — such as RSS newsfeeds, blogs and Twitter posts — into machine-readable data is a hot topic in trading circles.

With the exponential increase in Web-based content and electronic SEC filings, there is an avalancheof unstructured textual data to analyze. “The question is, howcan you use it; should you use it?” said Mani Chandy, SimonRamo Professor of Computer Science at the CaliforniaInstitute of Technology (Caltech) in Pasadena, Calif. Chandyspoke on the topic of “Analyzing Unstructured Real-TimeInformation for Algorithmic Trading” as part of a panel discus-sion at the Accelerating Wall Street virtual event in lateNovember hosted by Wall Street & Technology. [Ed. note: Thecomplete event, which focuses on low-latency technology and

managing growing data volumes, can be accessed atwww.techweb.com/wallstreet-virtual.]

“The challenge is being able to produce some alpha fromthe news,” added panelist David Leinweber, a well-knownquant and founding director of the Center for InnovativeFinancial Technology at U.C. Berkeley. “This can be done byfiltering and categorizing news and combining it with otherquantitative analytics.”

It’s not clear to what extent hedge funds’ and quants’ black-

box strategies currently trade off of news feeds. According to a2008 Aite Group report, only 2 percent of firms that employedelectronic trading strategies leveraged unstructured data in amachine-readable format. But there have been advances in thepast five years in services that provide structured data based onnews feeds, blogs and other unstructured text, Caltech’s Chandynoted. For example, news providers Dow Jones and ThomsonReuters offer products that archive the news and providemachine-readable feeds for use in algorithms.

According to the Aite report, depending on the contentrequired, pricing for a structured data news service can rangefrom $4,000 per month to $60,000 per month for low–latencypremium content. Despite the hefty price tag, however, themarket for unstructured real-time information is growing.

Aite estimated that global spending on unstructured data forelectronic trading will jump from $75 million in 2009 to more

than $141 million in 2011. As a sign of the demand for integrat-able unstructured data, in November the Deutsche Borseacquired Need to Know News (Washington, D.C.), a providerof machine-readable news for automated trading engines.

Uncovering AlphaBut gathering the unstructured news sources is just the begin-ning. “The challenge is in designing systems and identifyingnews events by observing patterns that can be traded upon,”

“If you can decide or determine what’s really trustworthy and what’s likely to make an impact,and do that quickly, that is a huge opportunity.”

—Mani Chandy, California Institute of Technology

By Ivy Schmerken

Mining the WebFor Alpha

F

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Chandy told Accelerating Wall Street attendees.In a research project at Caltech, Chandy explained, he is

utilizing OpenCalais, a service from Thomson Reuters thatprovides structured data based on unstructured information,to analyze the entire universe of English language blogs. Thedata is heterogeneous and is acquired from multiple sources,including stock tickers, blogs and news feeds, he noted.

“We observe an event by observing some type of patternover time,” said Chandy. For example, an energy trader wouldlook for the frequency of key words such as “weather” and“electricity.” Traders also can look for an anomaly — if thenumber of blogs about a company is 50 percent higher in thepast day than over the past year, that would deviate from thenorm and qualify as an observable event, Chandy commented.

A system that examines blogs and Twitter posts is part of alarger, smart platform, known as a “sense and response sys-tem,” explained Chandy. At the center of a typical system, herelated, is an enterprise service bus that routes data from mul-tiple sources, such as OpenCalais; a source for acquiring blogs;a Reuters Data Feed (RDF) parser; a server for metadataretrieval; a server for time series analysis of stock tickers; andan event engine that determines what action to take.

For many trading desks, the use of unstructured data couldimprove alpha generation, Chandy asserted. But, “Before youcommit to using a system, ... you ought to spend some timelooking at the costs,” he cautioned. To determine if unstruc-tured data adds value to the trading process, Chandy suggest-ed firms examine five metrics: relevance, effort, accuracy, com-pleteness and timeliness, or REACT. “If traders get a lot ofirrelevant data, they will stop paying attention,” he said.

U.C. Berkeley’s Leinweber stressed, “The science of findingalpha in news is to define a series of news analytics.” Pointing tocurrent research he conducted against the broad S&P 1,500universe of stocks using Thomson Reuters’ NewsScope archive— which provides sentiment analysis to identify if a story abouta company is positive, neutral or negative — he added, “Newsselection skills allow managers to profit, but you have to movebeyond ‘buy on the green’ and ‘sell on the red.’ ”

Leinweber explained to attendees that he spent a great dealof time refining event filters and leveraged Spotfire, a visuali-zation tool from Tibco, a Thomson Reuters company, to cre-ate an interactive, event study explorer. Simple filters, he relat-ed, could look at the intensity of news events by counting thenumber of unique stories and alerts on a company. Moresophisticated measures, he said, would take relevance intoaccount, such as whether the company was mentioned in theheadline only, in the first sentence or later in the article body.

According to Leinweber, higher thresholds for newsintensity and sentiment around a given company — requiringtwo or three stories per day rather than one, for example —produced higher returns over the index for the selected stock.

“The higher returns are what we see when we use more strin-gent filters, a good indicator of signal quality,” Leinwebertold WS&T in a follow-up e-mail.

Garbage In, Garbage OutBut both Leinweber and Caltech’s Chandy warned the audi-ence to weigh the value of sources, indicating that blogs are notalways written by reputable sources and often are lagging indi-cators of stock price movements (though they can be effectivefor spotting volatility). “Ninety-nine percent of blogs are irrel-evant for trading,” Chandy asserted. “It may make sense toidentify which sites are relevant for a given need.”

News stories also can be inaccurate, the speakers cautioned.Chandy cited the case of a story about United Airlines’ 2002bankruptcy filing resurfacing on Google in 2008; the story thenfound its way onto Bloomberg. News-driven algorithms swunginto action, driving United Airlines’ stock price down to $3 pershare, from its open of $12.50, before the market realized it wasold news. Social media also introduce some possibility ofmanipulation, Leinweber pointed out, though he noted thatthe SEC is working to weed out this type of activity.

Despite the challenges of analyzing unstructured informa-tion, however, both Chandy and Leinweber insisted thatthere is an opportunity to generate alpha from mining thisinformation. “This is a really exciting opportunity partlybecause of the volume of unstructured data and the range ofpeople producing unstructured data, from the trusted ones tothe manipulators,” said Chandy. “If you can decide or deter-mine what’s really trustworthy and what’s likely to make animpact, and do that quickly, that is a huge opportunity.”

Added Leinweber, “Alpha comes from information andinnovation. Clearly the great tide of new information isunstructured textual information, and that’s a very profitableplace to look for the future.” ✧

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An on-demand version of WS&T’s AcceleratingWall Street virtual event can be accessed atwww.techweb.com/wallstreet-virtual.

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Capital markets firms will spend almost $42 billion on technology globally in 2010, up from

an expected $39.7 billion in 2009 and $41.8 billion in 2008, according to an Aite Group study.

IT Spending MakesA Comeback

S THE DUST SETTLES on the most severe glob-al recession in decades, technologists are cautiously

optimistic for 2010, as capital markets IT spend-ing is expected to inch back up by 6 percent,

making up for the 5 percent in spending lost inthe financial rubble last year, according to Aite

Group. Based on a Q4 2009 survey of financial services tech-nology executives, Aite expects capital markets firms globallyto spend almost $42 billion on technology in 2010 — up froman expected $39.7 billion in 2009 and $41.8 billion in 2008.[Ed note: Wall Street & Technology helped Aite gather respons-es from financial services technology executives.]

But it is not simply a case of budgets returning to 2008 levels,as very few companies actually fall within the 6 percent averagespending increase, cautions Adam Honore, research director atAite Group and author of the report. Instead, some companiesmay see their tech budget coffers increase more extensively, whileothers will still tighten their belts in 2010, he tells WS&T.

Overall, 28 percent of the 30 CIO-level capital markets exec-utives who participated in the survey indicated that they wouldreceive no budget increase in 2010, while 24 percent said theywould see a 10 percent rise. The remaining responses varied

widely. Some firms indicated a 10 percent drop, while othersexpect technology budgets to rise by more than 20 percent.Those reporting the highest budget increases typically are elec-tronic trading firms (proprietary, hedge fund or sell-side firms)pushing to maintain their positions in the low-latency arms race.

“My budget is flat to modestly up. But it’s a belt-tighteningair in the room, not one of free spending,” says Steve Rapp,managing director and CTO, AGI Management Partners. “In2010 I wouldn’t still use the term ‘cost-cutting’; I would usethe term ‘prudent business practices’ and the gain of econom-ic efficiencies that we would have pursued whether or not theeconomic conditions of 2008-2009 had occurred.”

Rapp reports that his IT priorities this year include theimplementations of a new trading platform and a new account-ing system as part of an ongoing project to consolidate theapplications and infrastructure of three affiliate companies on asingle platform. The project is expected to deliver cost savingsranging in the millions of dollars over several years, he relates.

Glenmede also is focused on strategic initiatives and prudent cost control. Chieftechnology officer NicholasVoutsakis says one of thefirm’s priorities this year iscontinued investment in itswealth management platform,which encompasses clientreporting, trade order man-

agement and post-trade compliance, and integrates fixedincome, analytics and reporting on a single platform.

“In the long term, while creating integrated platformsrequires an investment, it does enhance efficiency,” explainsVoutsakis. “We are being prudent with IT spending and are try-

By Melanie Rodier

A

“My budget is flat to modestly up. But it’s a belt-tightening air in the room, not one of free spending.”

—Steve Rapp, AGI Management Partners

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ing to spend on more-strategic initiatives. Itgoes back to the strategy we’ve laid out — toreally evolve many independent systems thattalk to each other into larger platforms withmore inherent integration.”

What a Difference a Year MakesUltimately, the past year has led to a huge dif-ference in IT strategy for most firms, Aite notes.Last year cost reduction dominated the agendaat most capital markets technology organiza-tions, followed by risk management. Today theoverall top business objective as related to ITspending has become business agility (whichranked last in the 2009 survey), followed closely by operationalefficiency, according to the Aite survey (see chart, at right). Costreduction slid from first place to sixth — although several firmsstill listed it as their top objective, Honore points out.

Most CIOs indicated that execution management systemsare their top IT priority, followed by risk management sys-tems, global trading settlement back-office systems, clientreporting, and pre- and post-trade analytics, according toHonore. Most also plan to upgrade infrastructure, takingadvantage of emerging technologies and maturing technolo-gies around multicore processing and virtualization, he says.More than 40 percent of CIOs plan to upgrade single-coreservers to multicore machines in 2010, the report found.

“In the past companies have focused on specific pieces oftechnology. This year it’s more about taking care of the middlelayer — the core underlying infrastructure, servers and the net-working layer that everything sits on top of,” Honore explains.

Chief technologists also plan to virtualize nearly one-quarter of their servers on average, Aite found. And with allof the physical, virtual and operating system upgradesplanned, Microsoft stands to be a major benefactor of mod-ernization efforts, as it owns roughly 60 percent of the capi-tal markets server footprint, the Boston-based firm noted.

Cloud computing, according to Aite, still remains a relative-ly low priority for many CIOs, despite its budgetary benefits.The consultancy reports that 50 percent of respondents current-ly have no plans to leverage a cloud in 2010, with security citedas the main concern. Thirty-three percent, however, currentlyare exploring the concept. Glenmede’s Voutsakis notes that hisfirm is looking at cloud technology, including cloud-based voiceover IP, as a way of improving services and containing costs.

Trimming the FatMeanwhile, for the second year in row, Aite asked technol-ogists in which areas they hoped to trim their budgets. In2009 business intelligence solutions were at the top of thatlist. In 2010 market data processing takes the top spot —

representing a nine-spot jump over 2009.According to Aite, the primary focus in this area relates to

terminal usage. Honore explains that firms are looking to cuttheir use of high-cost Bloomberg and Thomson Reuters termi-nals for professionals who don’t need the full functionality orwho have duplicate functionality. Firms also are moving to directexchange feeds and/or reducing through colocation efforts thenetwork footprint required to move market data around.

In order to keep budgets in check, CIOs also expect tosqueeze their vendors in 2010, the Aite survey revealed.Renegotiating with existing vendors is the top spending reduc-tion strategy, with new vendor negotiations ranking No. 3.

In addition, while internal development has been on a slowdecline in recent years, CIOs believe it will make a comeback in2010. As a result, they will rely more heavily on core infrastruc-ture technologies to help them embrace modern architecture— which ranked No. 2 on companies’ cost-reduction radar.

Overall Aite expects 2010 to usher in a host of new IT oppor-tunities, as new markets open to electronic trading; firms opentheir doors to new asset classes; and retail firms change their salesand service offerings and, in some cases, rebrand their efforts.Not surprisingly, the fastest-growing influencers for future tech-nology are risk and compliance personnel, Aite found.

Aite offers several recommendations for technology exec-utives who are faced with the challenge of controlling costs ina technology arms race around electronic trading whileensuring their firms stay competitive:

First, CIOs should do their homework on developmentoptions — making sure they know the open source opportu-nities, vendor landscape and hybrid development options,Honore wrote in the report. Tech executives also shouldmeasure the value of internal development against commodi-tized processes. Should a firm really support a function thatprovides zero competitive differentiation and can be foundoff the shelf from 10 vendors? Further, Aite suggests thattechnologists should work with industry groups to standard-ize common problems and create commoditized solutions. ✧

Rank the following business objectives in orderof priority as related to IT spending:

Source: Aite Group

Percent of Respondents

Organizational Integration

Reducing Cost

Compliance

Risk Management

Growth

Operational Efficiency

Business Agility

1st Priority

14% 14%

14% 11%4%

10% 17% 7%

31% 17% 14%

30% 20% 17%

7% 14% 17%

10% 17% 23%

2nd Priority 3rd Priority

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10Back-OfficeTrends for

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HY DO YOU have so manypeople?” the operations

manager at a small New Yorkmetals trading firm gets asked

a few times a week by line managers who consider his department nothing but overhead.“What are they all doing? Aren’t there some efficiencies or best practices you can put in placeto do more with fewer people?”

The weary ops manager — who works 13-plus-hour days, six or seven days a week, toensure that all of the firm’s metal orders getshipped to the right places and that the financialtransactions are completed properly — can’tthink of a good answer. His shoulders hunch, his hairline recedes and his attitude deterioratesfurther. None of his staff are goofing off; rather,some work even longer hours than he does. >>Ph

oto

by M

ike

Wei

mar

“W2010

With new regulations on the way and calls for greater transparencyinto how financial instruments are pricedand cleared, the importance of a strongback office is destined to receive a lift this year.Here are 10 developmentsthat are transformingWall Street’s operationsdepartments and thetechnology they use.By Penny Crosman

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Back-Office Transformation

“We don’t want tohave a bunch ofnumber crunchersand data entryoperators workingfor us, because thatdoesn’t make senseto the shareholder orto the risks we’d betaking due to errors.”—Robert DeVault, Director, Financial Reporting/Operations,Transamerica Asset Management

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The fact is, his paper-bound firm is reluctant to spendmoney on software. And if it did deploy software to auto-mate some of the data-entry tasks that his operations staffperform, he most likely would be forced to lay off many ofhis loyal workers.

This is not the glamorous world of the high-stakes traderor investment banker. It’s the often time-capsuled world ofthe back office, sometimes referred to as “Australia” becauseof the parallels to a penal colony to which people in otherdepartments who misbehave are sent.

“The reason we haven’t made more progress in opera-tions is because we’re coming off of 20 years of excessive per-formance of 10 percent or more a year,” says Tim Lind,managing director, strategic planning, at Omgeo and a for-mer TowerGroup analyst. “When a firm is profitable, no onecares what’s going on in the back office — they can be bet-ting it all in Saratoga. When the firm is losing money, nowthey’ve got to be efficient.”

But with new regulations on the way, along with calls forgreater scrutiny and transparency into how financial instru-ments are priced and cleared, the importance of getting tradetransactions right — the purview of the back office — willbecome a little clearer, more-sophisticated software will be

implemented and the operations manager might (maybe)finally get some respect.

“For the career operations professional, there’s so muchwork involved in knowing how this stuff is run,” says Lind. “It’snot as celebrated a position as it should be, but these peoplereally do know the moving parts of the organization, how theinformation flows and what it means. They’re the ones whocan aggregate it and present it to regulators in a lucid way.”

Here are 10 trends that will reshape Wall Street’s backoffices over the next year (drumroll, please):

1. The never-ending requirement to domore with less.“The biggest trend we see is enormous pressure to providemore for less at a quick pace,” says Jami Wysota, VP of par-ticipant solutions at Diversified Investment Advisors, aPurchase, N.Y.-based adviser specializing in retirementplans. “Everybody is under that same pressure: How do youhandle more clients and communicate with customers morewithout hiring. Everybody needs to look at the back officeand say, ‘Where can we be as efficient as possible?’ The onlyway to do that is to look at technology. People are workingas fast as they can, but there’s an enormous amount of work;technology helps you turn out that work much quicker at amore palatable cost.”

Wysota says Diversified Investment Advisors is consider-ing technologies such as mass e-mail systems that could beused to replace print communications. “Where legislationallows us,” she notes, “we’re trying to embrace things liketext messaging.”

One popular way to cut operations costs on Wall Street,according to Ben Keeler, director at consultancy Citisoft, is torethink data acquisition strategies. “Clients are making a sig-nificant move to rationalize where they’re acquiring pricingand reference data,” he relates. “It’s not your standard, ‘Canwe get rid of this interface, can we get rid of this vendor?’They’re looking at their policies and general data trends. Isthere a general trend toward disintermediation of data? Can Iget data directly from an exchange versus a provider? How doI change my policy to adapt to the changing data landscape?”

Another cost-cutting measure that is picking up steam in theback office, according to Lou Maiuri, global head of outsourc-ing at BNY Mellon Asset Servicing, is outsourcing (see Trend 4).

2. The escalating use of software as aservice (SaaS). “We like to build and own technology where it matters, inareas of core competency such as front-office services,” saysJoseph Noviello, EVP of BGC Partners and technologyarchitect at ELX Futures, an electronic futures exchangeformed in December 2007 by a group of financial services

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1. The never-ending requirement to domore with less.

2. The escalating use of software as a service.

3. The adoption of new software and services for new asset classes.

4. More outsourcing to custodians.

5. Preparations for cost basis accounting rules.

6. The automation of collateral management tasks.

7. More rigorous cleansing and verifying of operations data, and faster delivery of that data downstream.

8. The development of precise error- andfraud-detection software.

9. The need to prepare to die gracefully.

10. The introduction of a host of new regulations.

10Developments That Are ReshapingThe Back Office

Back-Office Transformation

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firms, including BGC. But for applications that are notamong the firm’s or the exchange’s primary business, he adds,“It doesn’t make sense for us to invest a lot of time buildingthese sorts of solutions.”

Eagle Investment Systems, which began offering soft-ware as a service six years ago, has seen rapid adoption ofthe SaaS model recently. In the past three years, SaaS solu-tions have comprised 80 percent of the vendor’s sales, andthe SaaS business has grown on average 25 percent peryear, the firm reports.

The fact that providers handle maintenance and upgrades

of SaaS solutions also is a tremendous benefit, particularly inthe current uncertain regulatory environment. The providerscan be expected to take care of the modifications needed tocomply with new regulations.

3. The adoption of new back-office soft-ware and services for new asset classes. Abysmal stock market performance has driven many firms,especially smaller buy-side firms, to add more exotic productsto their arsenals. Where their existing software and outsourc-ing providers can’t accommodate the back-end processing of

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RANSAMERICA AssetManagement has foundhappiness going it alone.The St. Petersburg, Fla.-

based asset management firmrecently pulled out of an outsourc-ing agreement with a custodianbank for financial fund administra-tion and found efficiencies by bring-ing the function back in-house.

“When we originallyoutsourced, we thoughtthat maybe by giving itto the service providerwe’d get a better level ofproduct and could add alevel of control on top ofthat,” explains Robert A.DeVault, director, finan-cial reporting/operations,Transamerica. “But wefound that by outsourcing, we had aloss of control. The determination toinsource was to make sure we couldfully understand where all the riskswere within a process and then surround those with controls as necessary to ensure that we couldverify the accuracy of the data wewere producing.”

When the firm discovered errorsthat needed to be corrected, theoutsourcer truly seemed to be athousand miles away and oftenhard to reach, according toDeVault, who declines to name thecustodian bank. In the process ofbringing the function back in-

house, “For as many things as wepossibly could, we tried to usetechnology to make straight-through technology sweeps, whereno one touches any data,” he says.

For instance, Transamerica builta reporting engine around fundadministration automation soft-ware from Confluence. Holdings,general ledger and other primary

data that Transamericareceives from its custodian bank are fedautomatically into aConfluence database in a straight-throughprocess, DeVaultreports, adding thatTransamerica’s tech-nology team built aprocess to add data

from sources other than the custo-dian bank and scrub that data. Thereports generated by the softwareare compliant with accountingrules, such as FAS 157, the mark-to-market rule for fair valuationreporting, according to DeVault.

The software has resulted inbudget savings by reducing printtypesetting costs. “Before, we’dprepare spreadsheets and Worddocuments and send those out to aprinter that would turn them intofinancial reports for us,” DeVaultrelates. Today, the software gener-ates a printer-ready PDF documentthat goes directly to the financial

printer, bypassing the typesetter.More important, according to

DeVault, the software uses a mutual fund’s net asset value (NAV)to automatically calculate perform-ance data (such as total returnNAV), taking into account distribu-tions, sales loads, taxes and otherfactors. “We’re still responsible formaking sure the data is accurate,but we don’t have to worry aboutsomeone going in and typing overa formula,” DeVault comments. “Webuilt the controls to make sure thedata transfer from the custodianbank is all automated.”

Automation Adds ValueDeVault won’t divulge specific tech-nology plans for next year. But hesays he will keep automating basicfunctions. “We want our people tobe doing the types of things a computer or database system can’tdo,” he says. “We don’t want themto be doing the types of things thatit can, because they add morevalue in an analytic position.

“The quicker we can get data intothat almost-done state where some-one can look at it critically and say,‘Does this make sense?’ the better.We don’t want to have a bunch ofnumber crunchers and data entryoperators working for us, becausethat doesn’t make sense to theshareholder or to the risks we’d betaking due to errors.” —P.C.

Robert DeVault,Transamerica

TTransamerica Finds Back-OfficeEfficiency, Accuracy Through Insourcing

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these new products, firms are adding providers and softwaresolutions (including SaaS) to get up to speed quickly.

“Wall Street has struggled to build a single front-to-back,multiclass, globally aware software platform,” explainsOmgeo’s Lind. “Like the unicorn, it’s a mythical creature. Backoffices were fundamentally built around stocks and bonds; theyweren’t constructed to manage some of the more complexaspects of over-the-counter and exchange-traded derivatives.Often it’s impractical to extend a system created for stocks andbonds to workflows associated with products like derivatives.”

Not only are firms dealing with more asset classes, butwithin existing asset classes the complexity of products isincreasing, points out Michael Pinedo, chair of theDepartment of Information, Operations and ManagementSciences at the Stern School of Business at New YorkUniversity. “More-sophisticated products often require

additional software to price and track them based on themarket prices of underlying stocks or bonds,” he comments.“That software development is always one or two yearsbehind new product development.”

For example, Pinedo says, about 200 different types of for-eign exchange trades now exist. A large FX trading depart-ment might handle 10,000 trades a day, 80 percent of whichmight be automated. But that other 20 percent, he notes, areproducts that have been developed only in the past year ortwo, and the software has yet to catch up with them. “It’simportant that there’s continuous investment in the opera-tions software to keep it up to date,” Pinedo asserts.

The flip side to this trend is a move toward platform con-solidation among those firms that have merged or have beenoffering products on different platforms that they are justnow bringing together. “Within BGC over the years we’ve

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IVERSIFIED InvestmentAdvisors, a Purchase,N.Y.-based investmentadvisory firm that

specializes in retirement plans,services more than 2,000 plansfor 1.2 million participants. Tokeep up with growing volumes ofthe heavily customized plans —wherein each client gets its ownplan provisions, branding andmessaging — this past August thefirm streamlined its documenta-tion process, which is the opera-tions group’s primary function,according to Jami Wysota,Diversified Investment Advisors’VP of participant solutions.

In the past, enrollment books,confirmations and other plan documents that are sent to clientswere handled in what was calledthe “pick-and-pack” method,Wysota says. Operations staffwould go to the shelves and pickthe 60-page enrollment book, privacy notice, account accessbrochure and other materials, put

them in an envelope and mailthem off, she explains. “It was alabor-intensive, high-cost process,”Wysota recalls. “There was no ability to customize the documen-tation because everything was sitting on a shelf somewhere.”

To cut labor requirements andimprove service, DiversifiedInvestment Advisors automatedthe document-generation processseveral years ago using softwarefrom HP Exstream. Now staffleverage templates to create andprint customized documentationon demand, according to Wysota,who explains that text, photosand other graphics can be easilyswapped in and out and plan documents updated withoutrequiring a design department or technical assistance.

As a result of the automation,the firm was able to decrease itsoperations budget by $1.3 millionthis year, Wysota reports. The newsoftware saves 50 cents on eachwelcome kit sent to new plan

participants; the firm sends outapproximately 350,000 welcomekits a year, generating an addition-al savings of about $175,000 peryear, she adds.

The software also acceleratesthe process. “DiversifiedInvestment Advisors in the fourthquarter of 2009 added 91 clientson the books, which is a tremen-dous amount of volume for us,”Wysota relates. “If every clientneeded to change our standardmaterials just slightly, therewould be no way to keep up withthat manually.”

Wysota sees this type of docu-ment automation and customiza-tion as a growing requirement inthe retirement services industry.“The big thing we see in the retire-ment industry is major demand byclients to customize core materials— just taking things off the shelfdoesn’t cut it any more,” she says.“We’re seeing our competitorsbeginning to offer the same typeof thing.” —P.C.

DInvestment Adviser Saves MillionsThrough Document Automation

Back-Office Transformation

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operated our equity and fixed-income operations on dif-ferent products, and just recently we’ve convergedeverything globally onto a single product,” relatesBGC’s Noviello. “It introduces lots of efficiencies forour organization, but it was no small task.”

Adds Adam Schneider, principal at DeloitteConsulting, “We’re seeing a lot of deferred mergerintegration. Now firms have to do this in a hurry togain efficiency.”

4. More outsourcing to custodians.In the interest of cutting costs and allowing a third partyto worry about complying with impending regulations,more and more firms are outsourcing back-office func-tions to custodians such as State Street, BNY Mellonand Northern Trust.

BNY Mellon Asset Servicing formed an outsourc-ing unit in December to accommodate growingdemand from clients, putting Maiuri in charge. Thegroup has 54 clients comprising mainly asset managers,mutual funds, institutional accounts, insurance compa-nies and pension plans. “The [sales] pipeline isextremely active,” Maiuri relates.

According to Maiuri, one change in operations outsourc-ing that he has observed among his customers is a desire forglobal services to cover operations in several countries consis-tently — with disaster recovery. “We really needed to have aglobal view of the business,” he says.

Calamos Investments, a global investment managementfirm with $30.5 billion in assets under management, recentlyagreed to use Citi’s investment administration services. Citiwill handle trade processing, portfolio accounting and recon-ciliation, performance measurement, collateral management,and voluntary corporate action services for Calamos’ institu-tional portfolios, funds and separately managed accounts,according to a release. Calamos executives said in the state-ment that they liked Citi’s technology and its ability to sup-port retail and institutional lines of business on one platform.

Transamerica Asset Management, on the other hand,recently reverted back from outsourcing to insourcing to getmore control over data quality and to make processes moreefficient (see related sidebar, “Transamerica Finds Back-OfficeEfficiency, Accuracy Through Insourcing,” page 29).

BGC and ELX Futures’ Noviello points out a trendtoward outsourced and remotely managed IT operations.“The trend is for less and less emphasis on managing yourown desktops, deploying people to service someone’s phoneor installing software on someone’s desktop,” he says. “If youcan remotely manage and provide all those services, thatsaves an awful lot of people time and costs. More people arelooking to commoditize the back office around that.”

5. Preparations for cost basis account-ing requirements.“The [accounting] rules that take effect in February are veryspecific and different from what anybody’s technology does,and prior calculations will have to be redone,” says Deloitte’sSchneider. (This, of course, is good news for accounting firmssuch as Deloitte). “It’s a big deal, and it’s mandatory, and I’mnot seeing a lot of energy and action in this space.”

Robert DeVault, director, financial reporting/operations,at Transamerica Asset Management, says he is only modestlyconcerned about cost basis accounting rules since the report-ing legislation is more applicable to transfer agencies thanbuy-side firms. In addition, mutual funds already use costbasis accounting for the securities held within their funds, hesays. “The mutual fund industry is already one of the mostregulated areas that exist,” DeVault comments.

Still, there are a few requirements that he hopes will getdropped because they would require a lot of work for compli-ance. Nonetheless, DeVault believes Transamerica will beable to use the reporting tools it already has in place to meetthe new requirements rather than have people spend timedealing with them.

6. The automation of collateral man-agement tasks, such as margin calls. Experiences with Lehman Brothers and AIG over the pasttwo years have proven to many firms that their casual, ad hocapproach to collateral management is insufficient and even

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“We reallyneeded tohave a globalview of thebusiness.”

—Lou Maiuri, BNY MellonAsset Servicing

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dangerous in times of crisis. “Both buy-side and sell-sidefirms need to have an integrated view of collateral,” Deloitte’sSchneider says. “Buy-side firms ignored this for many years.”

Although some people claim that a central clearing partycould solve the problems of collateral management — such asgetting no response to a collateral call or the bankruptcy of acounterparty — the executives interviewed for this article donot buy this argument. “Firms are going to need a way tovalue contracts, communicate collateral needs to counterpar-ties and resolve any dispute,” says Omgeo’s Lind. “The use ofe-mail in financial services is easy and convenient, but thedark side is that we don’t know what people are saying.”

Twelve large buy- and sell-side firms have been workingwith AcadiaSoft to create a messaging hub that all firms coulduse to send margin calls to one another. This represents a bigstep up from the current method of sending e-mails to coun-terparties that can be ignored or overlooked. Two firms wereexpected to go live on the system by the end of 2009.

“What firms learned last fall was that they had no ideawhat the to-the-minute status of their margin calls were,”says Craig Welch, president of AcadiaSoft. “They’d sendmargin calls out over e-mail, and they wouldn’t know at anygiven time what the responses were. Say they sent out 1,000margin calls — if they were lucky, they’d get 1,000 e-mailsback from their counterparties.

“As you can imagine, some counterparties respondquickly, some respond late, some try to game the system andrespond late at night after the collateral can actually bemoved. What they’re trying to do is provide transparency to

both sides of a transaction so they can clean up a hugeamount of disputes.”

Another company, Algorithmics, also is working onmargin call automation.

7. More rigorous cleansing and verify-ing of operations data and faster deliv-ery of that data downstream for riskmanagement and regulatory purposes. “Five or 10 years ago we would have had a conversationabout straight-through processing,” says Deloitte’sSchneider. “But after you achieve straight-through process-ing, bad data causes stuff to fall out on the floor. We’re see-ing a rise in focus on data management that starts with gov-ernance, operations and procedures.” This trend should begood news for Wall Street data management vendors such asGoldenSource and Asset Control.

While many firms rely on centralized data that’s distrib-uted to different groups, “In the current environment peoplehave different demands for data and the degree to which it’scleansed, its timeliness, and the ability to audit and back-testdata,” says Citisoft’s Keeler. “There’s a trend toward gettingdata closer to internal customers in a timely manner, in amore customized way.” While Keeler concedes that there’strepidation toward “ivory tower data management strategyprojects,” he insists that firms are taking more-tacticalapproaches to enterprise data management.

The ability to confirm trades quickly and detect excep-tions early in the process will be important to the back office

of the future, contends Omgeo’s Lind.“Customers’ tolerance for an aged exception iszero,” he says. “People want to know where theirpositions are immediately [and] get them con-firmed. They want to know who the counterpartywas to the trade. They want binding evidence ofthe trade. Traders, portfolio managers and riskmanagers don’t want to assume anything is in untilthey get confirmation.”

About 70 percent of equity trades executed inthe U.S. haven’t confirmed the details of the tradeby the end of the day, according to Lind. But everyanalysis of performance or risk that’s conductedwith missing trade information is flawed, he notes.

8. The development of sophisti-cated, precise error- and fraud-detection software.“You want to be sure that on whatever open tradesor open positions you have, there’s no fraud, or atleast no human error,” New York University’sPinedo says. “People are going to work more on

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“Everybody isunder that samepressure: Howdo you handlemore clients andcommunicatewith customersmore withouthiring. ... Theonly way to dothat is to look attechnology.”

—Jami Wysota, DiversifiedInvestment Advisors

Back-Office Transformation

0110_26-33.qxd 1/14/10 3:35 PM Page 32

that in the future.” Software that match-es data gathered in different divisionsagainst each other as well as against majorcounterparties’ positions will be a focusof internal operations software develop-ment projects, Pinedo suggests. “If youdo a lot of trades with counterparties, thedaily checking of aggregate numbers ishealthy for both parties.”

Software that checks a firm’s tradedata against more generic outside sourcesand industry data also will be in demand,according to Pinedo, who notes thatthese solutions can be purchased fromvendors or built in-house.

9. The need to prepare todie gracefully.In the wake of the slow and expensiveshutdowns of Lehman and AIG FinancialProducts, some institutions have beenasked by U.S. regulators to put in place“living wills,” or resolution plans forshutting down in an orderly way. (Youcould say it’s the opposite of a businesscontinuity plan.) This is much easier saidthan done, most observers agree.

“These firms’ operations departmentshave to be able to do a graceful shutdownof the institution, and for a large organi-zation that’s an extraordinarily hard task,”Deloitte’s Schneider observes. “Theissues are complicated. Most systemsaren’t designed to self-fail.”

What happens to deposits and cus-tomers in one jurisdiction? What do youdo with inter-company activity? How doyou settle trading? “Those are all thingsthat matter greatly to technology andoperations types,” who will bear thebrunt of unwinding the business,Schneider says. “We’re seeing significantenergy and focus in this area.”

10. The introduction of a host of newregulations and requirements.“There is a series of regulatory actions already under way andbeing contemplated that are big deals,” Schneider relates.“We’re seeing the emergence of a new regulatory structure inthe U.S. We’re seeing a change in the tenor of the regulatorsfrom ‘Too big to fail’ to ‘What do we do if they fail?’ ”

For changes that are reporting-oriented, firms canrespond with data management improvements, Schneidernotes (see Trend 7). Wall Street firms’ ability to prove to reg-ulators that they are getting the right reference, pricing andrisk data, and using it properly, is bound to come up in thenew financial reform rules. Firms surely will be required tocalculate their exposure to a particular asset or counterpartyon a dime, observers agree. ✧

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LX FUTURES, a U.S.Treasuries futuresexchange in New York,had a technology head

start when it launched last July.For its main technology platformthe exchange relies on eSpeed, the U.S. Treasury trading platformthat brokerage firm BGC Partners— one of ELX’s investors — devel-oped for itself.

But, “Although we have lots oftechnology that was leveraged forthe trading platform, there are cer-tain nuances about the way invoic-es and fees are handled in thefutures community that weren’tamong our existing technologies,”relates Joseph Noviello, EVP ofBGC Partners and technologyarchitect at ELX Futures. “I thoughtit made sense to look for existingsolutions for the necessary feemodules. It wasn’t necessary forus to worry about all aspects ofthe back-office components whenwe had an entire exchange to puttogether. We had enough on ourplate already.”

One software-as-a-service solution that Noviello harnessedfor the new exchange is a billingplatform from Firm58. Another isa notification facility from SendWord Now. “This allows us to sendbroad communications out to ouruser base and groups of targetedusers,” Noviello says. “This wasnot expensive to leverage, and it

would have taken us a lot of timeto build something that wouldwork all the time with all the functionality we need.”

Many exchanges and exchangeparticipants, especially in thefutures space, are using hostedclearing software and services,according to Noviello. “Newentrants don’t always need thelargest machine, but they also donot want to build something on asmall environment that doesn’tscale,” he explains. “In hosted environments those things becomevery easy. You shift the manage-ment of those capacity issues tosomebody else. It’s easy to sit backand have a provider keep up withthe latest patches, the latest virusprotection components, the planning for capacity growth.”

But rivacy and security concerns around SaaS still lingeron Wall Street, Noviello acknowl-edges. “Anyone who’s dealing with sensitive information will be concerned about having theirinformation hosted and managedby someone else in some otherlocation,” he notes. “That’s alwaysa hurdle to get over. But as firmsget more comfortable with thecontrols in place to satisfy themthat their information is not sub-ject to manipulation, and as regu-lators approve these initiatives,people will become less sensitive[to security concerns].” —P.C.

Futures Exchange ELXBlends Hosted andHomegrown Ops Platforms

E

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EvaluatingOutsourcing Options

N TODAY’S complex and competitive businessenvironment investment advisers have more to bal-ance than ever before. One of the tools that canhelp them find the balance between downwardpressure on fees and ever-growing client expecta-tions is outsourcing portfolio management systems

and associated operational functions. Outsourced technologysolutions have advanced to the point that they are capturingrenewed attention from investment firms, particularly asfirms seek to control risks and costs.

Outsourcing, particularly of portfolio management sys-tems, has come of age in the investment world. Until fairlyrecently, outsourced portfolio management systems wereconsidered lacking in robustness, flexibility and accuracy,suited only to small firms with lean operations and modestrequirements. Today, however, the underlying technologyand capabilities of outsourced portfolio management systemshave caught up with the original promise. The most advancedoutsourced portfolio management solutions offer functional-

ity that is comparable to their installed counterparts.That is one reason why many firms are taking a new and

serious look at outsourcing their core systems and back-office processes. For firms that are more focused on “hightouch” than “high tech,” delegating these duties to third-party experts enables investment managers to devote moreattention to serving clients and managing assets. And itdelivers the advantages of current technology while mini-mizing the investment in hardware, implementation, main-tenance and IT expertise.

Not All Solutions Are Created EqualBut not all outsourced solutions are created equal. There aresome important questions to consider when evaluating out-sourcing providers and their solutions.

1. What should a firm expect to gain by outsourcing?Through outsourcing, firms should expect to reduce theiroverall operating risks and costs as well as increase their abil-ity to focus on managing investments and servicing cus-tomers. These objectives can only be fully realized if the out-sourcing solution meets three key criteria: It must produce areal reduction in the amount of time the firm spends onmanaging systems and data; it must reduce a firm’s systems,data and staffing risks; and it must be able to perform thedelegated functions more accurately and cost-effectivelythan the firm could itself.

2. What exactly is the provider providing? Firms needto understand the details of the services being delivered bythe outsourcing provider to be sure they will meet the key cri-teria outlined above. Many firms see just the tip of the icebergwhen they evaluate a provider’s service. In fact, what takesplace below the surface — not just what is delivered, but thetechnical and operational details of how it is delivered — isthe real determinant of the provider’s value and ability tomeet a firm’s needs and expectations.

3. Does the provider have critical mass and a proventrack record? A key measure of the value of a solution is thestrength of the company behind it. Although there are manyfactors that influence a firm’s decision to outsource, oneconstant is the goal of reducing financial, staffing and oper-ating risks. In order to truly reduce risk and add value, aprovider needs to be able to demonstrate strength in theform of a long tenure in the industry, proven and consistentsuccess, deep financial and staffing resources, and strategicindustry relationships.

4. Is the provider’s solution specialized or compre-hensive? Within the vast arena of outsourcing, mostproviders are likely to be specialists in particular areas, suchas IT services, application software, custodial or market dataaggregation, or operational best practices. Only a few com-prehensive solution providers can demonstrate proven com-

I

Michael Lobosco currently is director of Advent OnDemand at Advent Software. He hasheld numerous roles at Advent within the firm’sprofessional services, sales, marketing andbusiness development teams. Prior to joining Advent, Lobosco held director-levelroles at several venture-backed portfolio management outsourcing companies.

Michael Lobosco, Director of Advent OnDemand, Advent Software

About the Author

0110_34-35.qxd 1/13/10 2:53 PM Page 34

petency across the board. For firms that are serious aboutshifting the focus back to clients and investment decisions,anything less than a comprehensive solution may actuallywork against your goals, requiring more attention andincreasing your risk.

5. What is “best practices” expertise, and does theprovider deliver it? Managing investment operations is acomplex responsibility with many detailed nuances.Developing best practices expertise around managing thosecomplexities and details only comes through years of experi-ence. For a provider to deliver the highest level of value to itscustomers it must not only perform the delegated functionsbut know how to manage through those complexities andevents that you haven’t even thought of.

6. Are the necessary quality controls in place?Portfolio management systems and the data they provide arethe backbone of most investment advisory firms. Advisersneed to have a high degree of confidence in the services anoutsourcing provider performs on their behalf and the portfolio information they make available. If they do not, theprovider becomes a distraction and another layer of riskrather than a means of allowing the firm to focus on growing assets under management and serving clients. The provider should be able to demonstrate best practicequality controls coveringevery aspect of the solu-tion, including applications,account aggregation, dailyreconciliation, performancemeasurement, data migra-tions and customer service.

7. Does the providercontrol the resources, or isit just another middleman?In today’s world of virtualresources it can sometimes be difficult to know exactly whois performing the functions being outsourced and wherethose resources are located. In order for a provider to deliv-er reliable and high-quality services, it must control theresources supporting the outsourced functions. It is impor-tant to know that a provider is not adding risk by further out-sourcing part or all of the delegated functions to anotherthird party. This concept applies not only to people but alsoto technology and data.

8. Does the solution offer you flexibility for thefuture? As we have seen in recent years, the markets, theindustry and the practices of advisory firms are highlydynamic. As a result, business and technical requirementsare constantly evolving. Choosing a portfolio managementsystem and outsourcing provider is a big decision and a

long-term commitment. To make sure it works in yourfavor, it is important to know that the provider can ensuresufficient implementation and service-level flexibility tokeep pace with your evolving needs.

9. Does the provider have the resources (and thecommitment) to invest in continual product and serviceenhancements? Does the solution have the flexibility to

adjust to changing servicerequirements and industrytrends? Is there a clearimplementation migrationpath to increasinglyadvanced versions of thesystem — or even to a fullyinstalled, onsite system,should that become appro-priate? Be wary of compa-nies that talk only about

their outsourcing solutions and avoid the subject of futuremigration. The right solution will meet your needs nowwithout boxing you in as your needs change.

There will always be firms for which installing a portfo-lio management system in-house makes the most sense basedon their business requirements. For a growing number offirms, however, outsourcing is an increasingly viable alterna-tive, regardless of the economic climate.

Today’s best outsourced systems are capable of meetinghighly customized requirements and are backed by deepexpertise in investment operations and processes. Still, thereremains a wide gulf of differences in capabilities among out-sourcing providers. It’s important to know precisely whatyou’re getting — and the company from which you’re gettingit — before signing on the dotted line. ✧

Outsourcing Portfolio Management Systems

Outsourcing back-office functions to third-party expertsenables investment managers todevote more attention to servingclients and managing assets.

w a l l s t r e e t a n d t e c h . c o m J a n u a r y / F e b r u a r y 2 0 1 0 3 5

Questions to Ask WhenEvaluating Outsourcing Partners

1. What should the firm expect to gain by outsourcing?2. What exactly is the provider providing?3. Does the provider have critical mass and a proven

track record?4. Is the provider’s solution specialized or comprehensive?5. What is “best practices” expertise, and does the

provider deliver it?6. Are the necessary quality controls in place?7. Does the provider control the resources, or is it just

another middleman?8. Does the solution offer you flexibility for the future?9. Does the provider have the resources to invest in

product and service enhancements?

9

0110_34-35.qxd 1/14/10 10:10 AM Page 35

For additional information, please contact Anthony Carraturo at 914.368.1083 or simply email acarraturo@meritdirect.com. For other UBM mailing lists please visit www.ubm.meritdirect.com.

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Project1 6/11/2009 11:18 AM Page 1

The Middle Office &Data Management

HE RECOVERY IS under way. Banks arestrengthening their balance sheets andreturning to profit. With this encouragingnews, firms have a prime opportunity torestructure technology and strengtheninternal data management capabilities.

These improvements will provide banks with the agilityrequired to meet future business strategies and ongoing rapidchanges in market conditions. But without the ability to man-age quality of data with a consistent approach, how can theseimprovements be achieved?

During 2008 and 2009 firms and banks witnessed how alack of transparency and timely data flow throughout anorganization contributed to the economic downturn. Theevents of Sept. 15, 2008 (when Lehman filed for bankruptcy),among others, show that firms need to be able to monitor,assess and react across business lines within the day — andthey need the correct data to do this.

Maintaining data in silos and duplicating that data acrossfront-, middle- and back-office systems independently haslimited firms’ ability to maintain an accurate view on theirpositions. They are without the real-time data required tomake tough decisions on when to increase or pull funding toa business line. But where does this problem start?

Currently, the middle office accepts data sent from thefront-office system and external data feeds as being accurateand complete. But this isn’t always true. To perform intradayanalytics, the middle office builds a new aggregation platform

with data that is not always completely reliable. Using thatincorrect or incomplete data is never going to result in analy-sis that is accurate enough for solid business decisions. Forexample, a global organization might have data from Asia-Pacific (APAC) but not from Europe or North Americabecause of the time of day; that data will need to be updatedwhen available and the correct data moved throughout theworkflow. That change could impact the analysis.

An Accurate WorkflowDecisions made throughout the day often are based on inac-curate data. Firms must put in place a process that enablesdata accuracy throughout the workflow. As data is created,it should be validated and moved with any corrections madein near real time.

A real-time data flow minimizes the amount of correctionsneeded over an extended period of time with a more consis-tent view of data over the front, middle and back office. Themiddle office must be responsible for this process, as often it’sthe source of records for auditing or regulatory reporting.

The middle office has a unique position within the firmto provide an environment of record that oversees dataquality, metadata and standard analytics across businessesand geographies. The net result would be a simplified dataprocessing environment with a clear and defined view ofdata, which provides much stronger capabilities to the busi-ness for analysis, faster time to market, and improved andconsistent understanding of a firm’s position, from the desklevel to the C level.

Firms have a unique opportunity to take a step back andlook again at how important data management is to supporttheir business agility, but also to ensure we never end up in aneconomic situation similar to 2008/2009. Firms must useaccurate data to stay protected. ✧

T

Stuart Grant has more than 10 years of experience providing market data and datafeed solutions to buy-side and sell-side organizations. Having recently joined Sybasefrom Thomson Reuters, he is focused on business development within financial services,with a key focus on enabling firms to create a holistic data management platform.

Stuart Grant, Financial ServicesBusiness Development

Manager, Sybase

About the Author

w a l l s t r e e t a n d t e c h . c o m J a n u a r y / F e b r u a r y 2 0 1 0 3 7

A lack of transparency andtimely data contributed to the economic downturn.

Data Management

0110_37.qxd 1/13/10 4:29 PM Page 37

Larry Tabb, Special Contributing Editor

HETHER APPROPRIATE or not, moneyis how we keep score. The bigger house, the

cooler car, the more luxurious jet, the most zeroson your paycheck — all of these things have been

critical to attracting the best and the brightest to our industry. Is this right? Is it fair? Are capital markets professionals real-

ly the best and the brightest? Who knows ... Nonetheless, industry professionals have commanded high

salaries, and firms have been able to afford them. Compensationin this age of the credit crisis, bailouts, takeovers, take-undersand general mayhem, however, has become our industry’s thirdrail. Goldman CEO Lloyd Blankfein was likened to DeNiro in“Goodfellas,” asking his employees to keep a low profile.Employees at AIG were asked to give back their bonuses aftersigning retention agreements. And in general the citizenry hasnot understood why industry compensation levels have been sohigh given the level of taxpayer support.

Post-credit crisis, Wall Street compensation models are influx as five forces vie to catalyze change: the pay czar, thebanker tax, pending legislation, shareholder lawsuits and a popular revolt. Each has the potential for varying impact.

While Kenneth Feinberg has the most prestigious moniker(pay czar), now that the major banks have repaid their TARPliabilities, he has the least power. The 50 percent tax onU.K./French banker bonuses over 25,000 pounds (approxi-mately US$40,000) has the most immediate bite, as firmsalready have announced that they will fund personnel moves toavoid this tax. If the banker tax truly is a one-time tax, howev-er, the long-term impact will be minimal. But taxes don’t tendto be transient, and if the banker tax is kept on the books, theimpact would be serious on an already devastated U.K. andEuropean economy. Not only would the bankers move to avoidthe tax, so would the banks — and their payrolls, which fund acascading set of other businesses, such as real estate, the auto-motive industry, restaurants and bars, luxury goods and so on.

While popular revolt may have the least teeth, populism andpolitical votes go hand in hand. The U.S. House of

Representatives recentlypassed its version offinancial reform, inwhich compensationwas a critical pillar. TheHouse bill would require financial institution compensationschemes to be approved by a nonbinding shareholder vote(today it is approved by a vote of the board) and would requireincentive-based pay structures to be reported to financial insti-tutions’ regulators, which would be responsible for ensuringthat these structures are aligned with sound risk managementstrategies and that they do not create incentives to take unduerisk that could threaten the safety and soundness of both finan-cial institutions and the economy.

Chilling DevelopmentWhile these requirements sound legitimate, just the thoughtthat regulators — and by proxy, legislators — might have a sayon pay will send shivers down the backs of financial servicesexecutives everywhere. Will the bill ultimately be passed intact?Who knows? But given the optics of this year’s bonus projec-tions, it may well become law.

While shareholders should have the most impact on pay,many times shareholders vote with their pocketbooks and sellwhen things get rough. Unfortunately, the people with thegreatest vested interest (the owners) sometimes have the leastpower. Conversely, many times it’s the squeaky wheel that getsthe oil. In this case, the squeaky wheel will be the litigious.

We’ve already seen at least one lawsuit in which a pensionfund is suing a major broker because the fund believes the bro-ker’s pay program was “unconscionable.” While this suit maynot win, if a similar one does pass muster, there could be a cas-cade of suits that force the industry to change — think asbestosor tobacco. The impact could be huge.

What happens in Congress, London, Brussels and thecourts on compensation will have a major impact not just onour industry but on the global economy. At the core of thecontroversy is optics — if our industry’s management cannotget the optics right, legislators very easily could shift the bal-ance of financial power (intentionally or unintentionally)among firms, nations and geographies. As the saying goes,sheep get sheared, pigs get fat and hogs get slaughtered. Let’shope we aren’t the hogs. ✧

Sheep get sheared, pigs get fatand hogs get slaughtered.

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0110_38.qxd 1/15/10 1:46 PM Page 38

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