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Software as a Service in Finance

Date: 15 May 2007

Produced by: Chris Swan

The materials may not be used or relied upon in any way.

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Agenda

What is a service anyway?

Services that banks use

Services that banks sell

Bank 2.0?

The hard part – SLAs

Questions

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What is a service anyway?

http://en.wikipedia.org/wiki/Service

–In economics and marketing, a service is the non-material equivalent of a good. Service provision has been defined as an economic activity that does not result in ownership, and this is what differentiates it from providing physical goods. It is claimed to be a process that creates benefits by facilitating either a change in customers, a change in their physical possessions, or a change in their intangible assets.

http://en.wikipedia.org/wiki/Software_as_a_Service

–The key characteristics of SaaS software, according to IDC, include

network-based access to, and management of, commercially available (i.e., not custom) software

activities that are managed from central locations rather than at each customer's site, enabling customers to access applications remotely via the Web

application delivery that typically is closer to a one-to-many model (single instance, multi-tenant architecture) than to a one-to-one model, including architecture, pricing, partnering, and management characteristics.

http://en.wikipedia.org/wiki/Service_(Systems_Architecture)

–OASIS (organization) defines service as "a mechanism to enable access to one or more capabilities, where the access is provided using a prescribed interface and is exercised consistent with constraints and policies as specified by the service description."

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Services that banks use – Market Data

Exchange

Exchange

Exchange

Market

Data

Provider

Customer

Customer

Customer

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Services that banks use – Exchanges

Exchange

Customer

Customer

Customer

Customer

Customer

Customer

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Services that banks sell – Prime services

http://en.wikipedia.org/wiki/Prime_brokerage

–Prime Brokerage is the generic name for a bundled package of services offered by investment banks to hedge funds. The business advantage to a hedge fund of using a Prime Broker is that the Prime Broker provides a centralized securities clearing facility for the hedge fund, and the hedge fund's collateral requirements are netted across all deals handled by the Prime Broker. The Prime Broker benefits by earning fees ("spreads") on financing the client's long and short cash and security positions, and by charging, in some cases, fees for clearing and/or other services.

–The following "core services" are typically bundled into the Prime Brokerage package:

Global custody (including clearing, custody, and asset servicing)

Securities lending

Financing (to facilitate leverage of client assets)

Customized Technology (provide hedge fund managers with portfolio reporting needed to effectively manage money)

Operational Support (prime brokers act as a hedge fund's primary operations contact with all other broker dealers)

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Services that banks sell – Prime services

Hedge Fund

Hedge Fund

Hedge Fund

Exchange Clearing Settlement

Bank

Trading

Position

keeping

Clearing

And

Settlement

Prime

Services

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Services that banks sell – Algorithmic trading

http://en.wikipedia.org/wiki/Algorithmic_trading

–In electronic financial markets, algorithmic trading, also known as algo, automated, black box, or robo trading, is the use of computer programs for entering trading orders with the computer algorithm deciding on certain aspects of the order such as the timing, price, or type (market vs. limit, or buy vs. sell) of the order. It is widely used by pension funds, mutual funds, and other institutional traders to divide up a large trade into several smaller trades in order to avoid market impact costs or otherwise reduce transaction costs. It is also used by hedge funds and similar traders to make the decision to initiate orders based on information that is received electronically, before human traders are even aware of the information.

–Algorithmic trading may be used in any market strategy, including market making, intermarket spreading, arbitrage, or pure speculation (including trend following) to make the complete decision on entering trades and electronically executing the trade with no human intervention, other than in writing the computer program.

–In 2006 at the London Stock Exchange, over 40% of all orders were entered by algo traders, with 60% predicted for 2007. American markets and equity markets generally have a higher proportion of algo trades than other markets, and estimates for 2008 range as high as an 80% proportion in some markets. Foreign exchange markets also have active algo trading (about 25% of orders in 2006). Futures and options markets are considered to be fairly easily integrated into algorithmic trading, and bond markets are moving toward more access to algorithmic traders.

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Services that banks sell – Algorithmic trading

Hedge Fund

Mutual Fund

Hedge Fund

Exchange Exchange Exchange

Bank

Algorithmic

Trading

System

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The Bank as a service bundle

Client

Client

Client

Exchanges Clearing Settlement

Bank

Equities

Derivatives

Fixed

IncomeReference

Data

Validation

and

Enrichment

Risk

Management

Financial

Control

Clearing

and

Settlement

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Bank

Service cloud

Bank 2.0?

Client

Client

Client

Exchanges Clearing Settlement

Equities

Derivatives

Fixed

IncomeReference

Data

Validation

and

Enrichment

Risk

Management

Financial

Control

Clearing

and

Settlement

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The SLA challenge – is it for the person or the machine?

+ Ambiguity

- Detail, process

- Ambiguity

+ Detail, process

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SLAs work just like any other piece of softwareFrom the classic waterfall process (or

SDLC+):

Initiation (Concept)If we are going to have a system then we will need an SLA

Requirements definitionIdentify at a coarse level what the parameters covered by the SLAwill be

System and software designDetermine high level metrics (key performance indicators) then refine to get specific metrics

Implementation and unit testingThis creates and verifies the functional parts of the SLA

Integration and system testingAt this stage it should be possible to validate that the non functional aspects are achievable

Deployment / maintenanceEnsure that the system performs within the SLA and respond to exceptions

EvaluationDoes the SLA actually represent the service to fit the business need that drove the original concept?

}These stages are where efforts are typically focused with existing performance management tools.

Many systems are integrated and tested for ‘ultimate’ performance because no SLA has been defined, designed or developed earlier in the cycle.

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Tools and technology

XML has become increasingly popular for modelling derivatives, with FPML emerging to cover most of the common ground

We need standard XSDs for SLAs

Composition is crucial – we don’t code from scratch, so we won’t build SLAs from scratch

Common models (canonical forms) can be reused

These may well have repeatable behaviour as well as shape

Components and frameworks have yet to emerge

SLAng (UCL) shows the way, WS-CDL may help with behaviour

Eclipse/VS.Net plugin for SLAs – coming soon?

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Questions?

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