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Focus Sharpens as Spending Slows
European brokers buy order-routing technology, U.S. shopping for pricing, risk systems
June 9, 2008
Brokerage firms face a delicate balancing act over the next year. At a time when precarious financial markets are pushing Wall Street to cut operating expenses, there is a crying need for increased resources in areas such as risk management and compliance.
Firms are eager to remedy the portfolio valuation problems, post-trade processing errors and lapses in oversight of business procedures that have contributed to multimillion-dollar write-downs, major reputational damage and heightened regulatory scrutiny.
Liquidity management and low-latency projects are also generating hefty expenditures, particularly at bulge-bracket firms whose trading desks place a premium on rapid data collection, fast algorithmic run-times and nearly instantaneous execution. Even traders servicing mutual funds, pension funds and insurance companies are using some of those technologies to improve their performance in light of Regulation National Market System (NMS). European firms are also upgrading their systems as the Markets in Financial Instruments Directive, which went into effect late last year, drives the proliferation of alternative trading venues on the continent.
"The U.S. has already been through this process and many firms now have to watch over two-dozen potential sources of liquidity," said Chermaine Lee, analyst with Boston-based Celent and co-author of a recent report on brokers' IT spending. "The goal is to spot where the liquidity is and respond quickly without being aligned with one venue. This means that firms need incredibly fast and smart order-routing systems."
Lee estimates that European brokerages' compound annual growth rate for IT spending from 2007 to 2011 will come to 5.8 percent, compared to 1.3 percent for their North American peers. In the U.S., said Lee, most of the top-heavy spending took place in 2005 and 2006, when Reg NMS took effect.
"Most of the pickup in our business has come from Europe, where the need to access multiple liquidity pools is becoming important," acknowledged Harrell Smith, director of product strategy for New York-based trading systems provider Portware.
Cheuvreux, the European agency brokerage subsidiary of Credit Agricole, is investing "a sizable chunk" of its 2008 IT budget on meeting best-execution requirements on both sides of the Atlantic, according to Ian Peacock, CEO of Cheuvreux North America. "Whether for new liquidity pools or post-trade analysis, there is a far larger emphasis on connectivity in the post-Reg NMS and -MiFID environment," said Peacock. "That means FIX engines, market gateways, and expanding our algorithmic and program trading capabilities." Cheuvreux last month added connectivity to BNY ConvergEx Group's VortEx dark pool via its CrossFire algorithm--its 14th link to alternative liquidity pools.
The firm's North American operations will be more focused on low-latency solutions, said Peacock. Cheuvreux, which provides collocation services through an affiliate for equities trading on the New York Stock Exchange, has applied to the Nasdaq Stock Market and NYSE Arca for rack space.
Event Processing Emphasis
Market fragmentation and electronic trading are also driving concerns about data capacity and prompting firms to look into other low-latency alternatives. "Complex event processing [CEP] engines will become critical for quicker data analysis," opined Daniel Chait, managing director of Lab49, a London- and New York-based technology consultancy. "With message volumes soaring, latency is creeping in and trading infrastructures will need to consume data on a real-time basis."
Aite Group expects firms to spend $303 million this year on CEP software, $65 million on hardware to support the technology, and an additional $498 million on integration. Tier-one brokerages are ahead of the implementation curve, but smaller firms are also discovering applications for the technology beyond trade analysis.
