The post-credit crisis freeze has begun to thaw across Wall Street but experts predict buy side firms will still be a bit gun shy when the time comes to invest aggressively in their information technology infrastructures in 2011.
Even though IT spending budgets are expected to see a modest rise next year with portfolio management and trading volumes projected to pick up, they will still be a fairly long way from pre-crisis levels. And though revenues are continuing their steady climb, market participants argue that regulatory uncertainty, weak 2010 trading volumes, and a crisis-fueled desire for affordable solutions are pushing the buy-side to continue to keep costs in check.
“We do expect it to increase a bit, but I don’t know if I would say it’ll go back to a pre-crisis level,” Aite Group analyst Sang Lee says. “At the firms we’ve been speaking with, the budgets still seem fairly tight. If you just look at the trade volume, that probably tells the story.”
For firms that do manage to cobble together funds to invest in IT, a good number will look to beef up their data management systems, with a rising number opting for cloud-based storage services that are generally cheaper than traditional IT platforms, such as in-house databases. Cloud computing is a term used to describe Internet-based computing, in which technology providers supply data storage and software online.
“If there’s an investment, it’s going to be to the cloud or web-enabled systems that allow traders to internally power their spreadsheets with more current data,” says Steve Hotovec, who oversees proprietary investing at Alchemy Ventures. “If you’re Web-based and you can rent it, you’re definitely going to see a pickup in IT spending there. Because I can try it, but I don’t have to buy the hardware and I can train one person to use it. That’s gaining traction.”
Traders say that cloud computing has become more necessary in the wake of exploding message traffic and the sheer amount of data that’s now required to evaluate best execution. So firms are increasingly looking for places to store, manage, validate and mine that data, which if done correctly, can boost execution quality, according to Jason Lenzo, the head of trading for equity and fixed income at Russell Investments, a dually-registered broker-dealer and investment adviser. It has an estimated of $149 billion in assets under management.
“Done properly, it makes your ability to measure execution and evaluate transaction cost analysis in a real-time post-trade environment much more effective,” Lenzo explains. “Cloud computing will continue to garner more and more focus as it provides a very scalable and relatively inexpensive solution for many of the challenges financial firms are faced with today.”
Effective data storage will also go a long way towards repairing the trust between firms and their clients which was damaged following the 2008 crash, notes Stephen Davenport, the director of equity risk management at Wilmington Trust.
“There’s going to be a need for more backup, so part of it is making the client experience a little better,” Davenport explains. “We’re trying to get more detail. So if you received an order at 10:04, what were the actual bids at that time? And over the period of when you traded, how did you perform relative to the alternatives that were available?”
Meanwhile as Wall Street awaits word from regulators on how the Dodd-Frank Wall Street Reform and Consumer Protection Act will function, buy-side firms are likely to remain in research mode regarding compliance software next year. On the other hand, risk management platforms are still likely to enjoy strong demand experts say.
Hotovec contends that the buy side will look for its risk management software to focus more on controlling risk in 2011, rather than solely using risk analytics to conduct and tally what-if scenarios.
“Post-2008, the focus and expenditure is on risk control. What systems do I have in place to actually affect my control,” Hotovec says. “That goes hand in hand with how often I’m getting my data. The next thing is; is the data actually clean?”
The growing need for accurate and accessible data for risk management is another reason why cloud computing figures to grow in popularity at buy side firms in the near future, Hotovec adds.
“The people who are doing Web-based stand to benefit," says Hovotec. "Prime brokers, custodians and administrators.”