Wednesday, June 07, 2006

T+0 and Real Time Everything by 2015?

By the year 2015, the widespread implementation of straight-through processing is expected to happen, including T+0 settlement, according to a new worldwide research study issued today by BearingPoint, Inc., a McLean, VA-based management and technology consulting firm. 

I’m not sure it will take that long. 

According to the study, the stock exchange consolidation happening today – as demonstrated by groundbreaking developments such as the NYSE-Euronext merger proposal – is a precursor to the migration by exchanges into the traditional world of investment banking, driven by the exchanges’ need as public companies to identify avenues for continued growth.  The study is entitled, “Shifting From Defense to Offense: A Model for the 21st Century Capital Markets Firm,” and it was based on surveys of top executives from leading capital market companies to find out how these firms are already transitioning their operations in preparation for the challenges of the next decade.

The study also found that capital markets firms will need to establish an organizational structure that maps to their clients’ “investment DNA? with a centralized view of client data across all business lines and products. This will allow banks to provide a consolidated risk and finance profile of each client, as well as the information needed to design custom products for each client’s portfolio.  This “investment DNA” idea is an outgrowth of the ongoing customization and personalization we’ve been seeing in the online brokerage and banking industries over the last five years. 

E*Trade takes the idea of an investor’s “DNA” to the max, but they use it primarily to cross-sell other products that they offer.  It’s hard to move from one part of the E*Trade site to another without being offered mortgages, credit cards, and shopping opportunities.  I’ve gotten complaints from investors who were recently Borged into the E*Trade system due to the BrownCo takeover about this incessant cross-selling.  “Can I turn it off somehow?” asks one new E*Trader. 

The BearingPoint study, which you can read by clicking here, also cites the key technology issues that should be considered as the capital markets industry looks to the future, including:

· The role of emerging markets:  Emerging markets will represent an important growth engine for the global capital markets industry, as their upper and middle class grows.

· 21st Century data infrastructure:  By 2015, all forms of data, including unstructured data like email and messages, will need to be stored for internal and external audiences.

· Strategic risk management: Impending market restructuring legislation is causing the leading capital markets firms to take a different approach to managing risk.

· Enterprise client management:  Middle- and back-office functions will be reconfigured into massive processing utilities, leaving capital markets firms focused on the front end.

“We have seen the list of the top ten investment banks and brokerages change every ten years, with new players breaking in and others fading away through consolidation and competition,? said Peter Horowitz, managing director of BearingPoint Financial Services and global markets lead.  “We can expect to see an even more dynamic shift over the next ten years as exchanges, which are searching for profits and growth more aggressively than ever before, muscle their way onto the playing field.  As a result, sell-side firms must begin preparing immediately to use technology to both capitalize on alternative revenue opportunities and identify new ones.? 

I believe that the biggest drag on this push to real-time everything are the legacy systems still in use by many of the larger banks and brokerages.  If you know where to look, you can see the transition from one system to another as you move around a website. 

Some brokerage executives have told me that upgrading their hardware is difficult with the constant regulatory changes.  They fear switching to a new system only to have to deal with another set of regulations that would render it unusable, or immediately obsolete. 

I think that waiting until the regulatory landscape levels out is not a wise business decision. 

Posted by twcarey on 06/07 at 10:07 AM
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