SIFMA 2009 Special Report: When Tech and Crunch Collide

Naj Alavi, Managing Director of Xenomorph Inc, talks to Inside Market Data about the impact of the financial crisis on technology trends.

Today's financial markets depend more than ever on technology, which has moved from being an enabling factor to a major competitive differentiator and key driver of change. However, the economic crisis has thrown many firms' spending plans into turmoil, delaying upgrades and slashing non-essential projects. Against this backdrop, Inside Market Data asked some of those at the sharp end to describe how the trends of the past year have affected business, and what we can expect to see in future.

IMD: How has the economic crisis affected firms' spending decisions, both in terms of their evaluation and purchasing processes, and in terms of the types of technologies they are looking for?

Domenic Iannaccone, director of business development, financial services industry, Sybase: Since the general downturn in the economy was precipitated by events in the financial sector, there is a two part answer to this question. The first relates to spending decisions on systems and technology that would provide organizations with an enterprise risk management view. This is occurring as organizations, small and large, look to focus on governance, risk and compliance-whether it be to improve their internal processes or to prepare for future regulation. The second relates to spending decisions during times of extremely tight budgets. In this regard, organizations are looking at making investments, but they need to provide some interim ROI over the next six, if not three months. In today's climate, large multi-year project plans with payouts in the distant future are not going to get funded.

Mike Dunne, chief technology officer, Activ Financial: In the market data sector, there is interest in adopting appropriate technology for enhanced services and lower cost. In particular, supporting infrastructure for specialized applications, including low-latency market data and co-location, are prime candidates for managed services approaches for the great support and cost demands associated with these approaches. With fewer staff, the increasing cost of bandwidth and extreme message-rate growth, the days of financial service firms managing their own ticker plants are numbered.

Peter Lankford, founder and director, Securities Technology Analysis Center (STAC): Most firms continue to invest in capacity and low latency, but tight budgets mean they need to maximize "bang for the buck." This is why so many firms are interested in ways to make the technology selection process more efficient, such as through standards like STAC Benchmarks. Third-party standards will also inform internal selection processes, as mergers and restructurings spur technology consolidation.

Naj Alavi, managing director, the Americas, Xenomorph: The economic crisis has not so much affected firms' spending decisions; rather, it has fine-tuned the decision-making process by ensuring everyone involved is acutely aware of the impact of their actions. This has led to decisions taking longer-and perhaps quite rightly so. With respect to the types of technologies firms are looking for, I do not feel this has changed, except that a great deal more emphasis is now placed on the prioritization of what is needed and what could possibly be re-engineered or applied from existing systems.

Rob Ciampa, vice president of product management, Tervela: We've seen mixed reactions. Some firms are spending while others have pushed their decisions back a bit. One thing is for sure, though, messaging projects are not going away. In fact, the current economic climate is driving trading patterns that actually exacerbate problems with legacy messaging and middleware-creating huge opportunities for Tervela.

IMD: What impact has this had on providers of data and supporting technologies-especially start-up ventures and vendors developing bleeding-edge technology?

Lankford: Few vendors, large or small, are having an easy time right now. On the plus side, demand still exists. Prop desks and smaller firms continue to invest aggressively in whatever can give them an edge. Even large firms that have been hit hard by the crisis are investing to handle volume increases, market structure changes, and mergers. The task before vendors is to develop specific solutions with quick ROI and find targeted ways to get those solutions in front of the key decision makers. Just like the customer's technology selection process, vendor marketing needs to be more efficient than ever.

Ciampa: The start-up ventures with revenue, customers and products that solve real problems will continue to grow while those in search of a value proposition will die out. The period of time it takes to vet out the business impact has become shorter. In the messaging arena, we're already on to our third-generation architecture, so we got past this a couple of years ago. That doesn't mean we lay back during this time period. It's just the opposite: pursue the market aggressively and continue to give customers what they want.

Alavi: Data is crucial to the survival of firms trading on information-so even in an economic downturn, data providers tend to find themselves protected from the full onslaught of any inbound crisis. Firms developing bleeding-edge technology may not feel the full brunt of the economic crisis due to the future-tech they are developing. For such firms, in times of an economic downtown, it comes down to how well oiled their marketing and PR machines are, as well as how deep their pockets are, and whether they have already built a healthy potential client list.

Iannaccone: The economic crisis didn't change the underlying forces on the business that were here before; it only made it more difficult. The constant pressure to lower latency, treat all data as real-time, and incorporate event processing are still there. The crisis does make it more challenging for new companies coming on the scene. Buyers are evaluating technology and data services more closely and sales cycles have lengthened. The stretching of this timeline can prove disastrous for a startup as funding sources dry up and financial backers pull out. In today's climate, buyers need to not only look at technology and cost, they need to also evaluate the financial strength of the vendor and make an assessment of their survivability in today's climate.

Dunne: Because of the stress from the current credit crisis, firms are willing to challenge the status quo more than in the previous two decades. A responsible manager can no longer hide behind big-name vendor offerings. Now, value is king. New vendor offerings must be seriously considered for one of two benefits: improving performance or reducing total cost of ownership. There's always room for innovation especially in the fast-moving market data solutions space which makes R&D investment quite critical in this market.

IMD: Has the crisis shifted firms' focus from exploring new technologies to consolidating their position with quality, reliable data-or do new technologies also have a role to play in the process of capturing and assessing that data?

Dunne: We're seeing firms exploring new technologies more cautiously than before. Investors no longer have the patience to sustain marginal business propositions. These firms want to see a clear ROI for the solutions and ensure the vendor is viable before investing resources.

Alavi: New technologies will always have a role to play-if for no other reason than to create cost and/or performance efficiencies and to deliver competitive advantage. Competitive advantage in any market condition is valuable, but in a market suffering from a crisis, it could be invaluable.

Iannaccone: In some respects, the market is more competitive than before the crisis. Returns were higher on exotic instruments and structured products. What we are seeing is that they probably were not priced correctly given their risk. The market has pulled back from riskier investments. This has increased the pressure on firms investing in more traditional asset classes to find a competitive edge. How do you distinguish yourself in a crowded field if it isn't by effectively using new data sources, with new technology to deliver better performance or reveal patterns that are not easily seen? Additionally in an increasingly cost-conscious environment, automating to reduce exceptions and eliminate redundancy in processing data is critical.

Ciampa: If the seawall is six feet high and the water is rising past seven feet, all you can do is run-or bring new tools to the job site. Consolidating remains a poor option because of complexity, costs and diminishing returns. It's the legacy stuff that's broken; consolidation only exacerbates the problem.

IMD: Even throughout the last year, market volatility has seen data volumes continue to rise. How have firms balanced budget constraints with the need for low latency and increasing capacity requirements?

Lankford: Simple: they have an exception process. For example, many firms have moritoriums on hardware purchases at the moment, but capacity upgrades to handle market data get special treatment. No one wants to be the bureaucrat who brought down the trading floor.

Ciampa: They're actually taking a much more holistic look at TCO and quantifying operational costs with more realistic assumptions. For example, it's not just software versus hardware; it's the additional hardware that is necessary to support the software. The equation now includes network upgrades, rack space, cooling, integration, personnel, maintenance, etc. Some companies are even quantifying the cost of latency and down time. The gist is they are now addressing budgets with much more concrete assumptions.

Iannaccone: Competing on lower latency and dealing with increasing data volumes are mandatory. If you can't deal with these demands you cannot effectively compete. It's not just about being efficient at what you have always done. The leaders in any economy are the ones who can reduce the cost of doing business the old way in order to free up money to make investments in the new way. To be competitive, the answer is "yes, both." Firms need to constantly trim operating costs and invest in technologies that will provide a sustainable advantage. You don't have the luxury to wait until good economic times to make investments.

Dunne: Capital markets firms will continue to see increasing message rate volumes that cannot be sustained by legacy solutions. Low-latency solutions and capacity are still critical issues, but now firms have realized that they don't have to sacrifice either for market data solutions. There's no question that even large firms are seeking managed service solutions. The challenging marketplace has only served to expedite the move to re-evaluating the total cost of ownership across all market data solutions.

IMD: What will be the new hot technologies over the next year, and will takeup of these depend on how quickly the economy recovers, or will they find a way to benefit from the downturn?

Ciampa: We see three: Messaging systems, rapid integration tools and more accurate latency measurement tools. Messaging is important because we're now entering the lifecycle of smaller, more powerful, open, eco-friendly, hardware-based messaging systems. It's essentially messaging for the masses, all the right tools to get you integrated in a day, and the measurement systems to confirm the results.

Alavi: There will always be firms who are ready to embrace new technologies with a view to creating a state of competitive advantage. Forward thinking firms such as these will likely be focusing their efforts on CEP, risk management, data management and technologies that streamline their businesses.

Iannaccone: It is always difficult to balance all the factors that go into trying to predict the "hot new technology." However, while I don't have any clairvoyant skills, I don't think I'm going out on a limb when I say there are two technologies on the rise: mobility and computing as a utility.

Mobility, because of the ever-increasing uses in business for handheld devices, iPhones, PDAs and BlackBerrys. Incorporating these devices fully into the enterprise and providing full access to all data and systems is the challenge.

Computing as a utility covers the spectrum from cloud computing where you are just renting computing cycles to the other extreme where you buy Software as a Service.

I think the march to mobility is happening outside the current economic crisis, while computing as a utility may be helped by the crisis as organizations are forced to look at cost savings-cloud and SaaS vendors may be in a position to make it attractive in the front years of a multi-year service contract.

Dunne: Whether or not the economy recovers quickly, capital markets will continue to see increasing message rate volumes that cannot be sustained by legacy solutions. Hardware-accelerated solutions offer great performance enhancements especially with latency and throughput, while lowering the hardware footprint. Optimizing bandwidth and connectivity will also continue to drive new technologies. Any technology that can be applied to simultaneously improve performance and reduce cost will triumph in the downturn.

Lankford: Latency reduction will continue to fuel investment from the highest-frequency traders. Elsewhere, the need to consume less power and space will drive adoption of new architectures for compute-intensive workloads, based on the latest multi-core CPUs, GPUs, or FPGAs. And capacity concerns will drive adoption of high-bandwidth networking like 10-Gigabit Ethernet. These upgrades will also reduce latency for the firms adopting them, which will increase competitive pressures on everyone else. Those firms delaying latency-related investments today will have to catch up quickly when their budgets recover-and perhaps even earlier.

View the article on the Inside Market Data website.