embracing emerging technologies for quantum growth nov 2008
TRANSCRIPT
Embracing Emerging Technologies for Quantum GrowthNov 2008
Agenda
1. Importance of innovation in business
2. Role of technology in the financial services
3. Emerging technologies: Future of financial markets
4. Success stories
5. Q & A
What is innovation?
Qualitative change (not any change) The creation of something new (not just the adoption of somebody
else’s novelties) The innovation process includes invention, and successful
implementation or market launch (commercialization) A focused approach to enhance user value or productivity
TYPES OF INNOVATION Radical innovation: Developing a completely new product/ service
which did not exist (Securitization) Incremental innovation: Improving upon a previous innovation
(Straight Through Processing)
Product and Process Innovation
Product Innovation is characterized by Creation of a differentiator through a superior product/service Has a longer time to market Success of the product/service is determined within a short time period
post launch
Process Innovation is characterized by Creation of a differentiator that captures value through efficiencies Has a shorter time to market Success of the process innovation is determined over a longer period of
time
Product and process innovation complement each other and one alone is seldom good enough to drive quantum growth
Role of technology in financial services
As strong as the Weakest Link
A financial system is as strong as its weakest link.– Alan Greenspan, former chairman of the US federal reserve bank.
IT remains the key to differentiation, competitive advantage and institutional survival.
Capital markets transformation has
been influenced by multiple agents
Globalization
Technologicalrevolution
Regulatory change
Economicenvironment
Industry adoption of
STP
Multiplication of execution
venues
Increasingtransaction
volumes
Client demandsfor improvedservices andlower costs
Consolidation
Firm-wide risk focus
Security
New competitors
Profitability pressure / cost
containmentCapital
Markets
Players
Internalization Systemic risk management
Market Infrastructure organizations
Market participants
Service providers
Industry associations
E-trading has led to skyrocketing of trade volumes with average trade size plummeting
Electronic trading
Changing Face of Capital Markets and role of IT
Shift from open outcry to electronic trading systems
Birth of online retail brokerage as separate from a brick-and-mortar brokerage
Growing disintermediation Direct Market Access Reduced turnaround time for IPO Advanced derivative products Improved pricing analytics and
modeling Competitive landscape with free
markets Reduction in transaction costs Globalization of markets
Algorithmic trading Electronic communication networks Risk management frameworks Order entry and order management
systems Client Relationship Management Derivative trading tools Asset management and
administration Portfolio management tools Clearing and settlement Real time position monitoring and
collateral management Risk reporting Historical trend analysis and data
mining
Significant changes in last decade Key IT enabled functions
Changing Face of Banking and role of IT
Variety of new products and services
Emergence of new delivery channels
Convergence of core banking business and information technology
Mergers & acquisitions New services (Tele-banking, E
banking, door step banking) New approaches to banking
(automated self banking centers)
Core Banking Internet/ electronic banking Mobile banking Payment system gateways Smart cards Risk management AML/ KYC Kiosks/ new delivery channels CRM/ Call Centers/ Help Desks Wireless technologies Resource management
Significant changes in last decade Key IT enabled functions
A rider on IT spend and technology adoption: Spending more on IT doesn’t necessarily translate into higher profitability Spending more on IT
doesn’t necessarily mean higher profits.
Institutions with above-average IT expenditures have higher cost-to-income ratios and below-average increase in revenues.
Many institutions spend too much on running their daily operations and too little on innovations
Institutions face difficulty in translating IT investments into real business value
Scale does not guarantee cost benefits. Many big institutions have yet to see sustainable cost advantages from their vast IT operations
What matters is the way IT is adopted strategically and implemented tactically to drive growth in business
Top-performing banks form their IT strategies in close cooperation with the business
High-performing banks see IT as more strategic, and they drive more of their IT agenda directly; that is, they outsource less
Source: McKinsey
Embracing technology solutions – choosing the right fit
Architecture Characteristics Pros Cons
FO FOFO
MO MOMO
BO BOBO
Single integrated solution usually provided by an external party
Common hardware platform
Single vendor relationship
Overall functional coverage tends to be weak
Dependent on supplier to ride the technology wave
FO FOFO
MO MOMO
BO BOBO
Mix of solutions from multiple vendors that have interfaces / protocols for integration
Advanced functionality coverage
Ability to replace and enhance depending upon technology evolution in a space
Integration challenges
Higher overall cost including maintaining multiple vendor relationships
Mix of hardware, software platforms
Inte
gra
ted
Hyb
rid
Bes
t o
f B
reed FO FOFO
MO MOMO
BO BOBO
Multiple solutions provided by external parties and developed internally
Advanced functionality coverage
Lower cost to replace parts of the system architecture with new technology components
Integration challenges
Higher overall cost including maintaining multiple vendor relationships
Impact of Electronic Trading Technology on the Securities Markets
• Cost-efficiency: Electronic trading greatly lowers continuing operation costs by bringing significant efficiencies to the trading process. This leads to a dramatic increase in trading volumes.
• Removing physical constraints on markets: It removes physical constraints such as geography and the number of market participants.
• Disintermediation: By providing a means for natural buyers and sellers to meet without a market intermediary, electronic trading has a great potential to dis-intermediate markets.
• Blurring Regulatory Distinctions: It poses regulatory challenges for market participants and regulators alike
Recent evolution of domestic equity market capitalization in USD
Source: World Federation of Exchanges
Exponential growth in trading volumes in Indian markets
Growth in Indian Stock Market (USD billions)
Source: Dun & Bradstreet
Exponential growth in trading volumes Exchanges had to scale up their
IT systems
Impact of technology in a front to back environment
Better campaign management using CRM tools
Targeted distribution of research in quick time using internet and mobile technologies
Real-time market data use with improved data warehousing
Program trading efficiency Improved beta with trading
in dark liquidity pools Faster analytics using grid
computing
Front Office
Automated accurate fee calculation
Swift quotation of commission structures
Better order management Real-time post trade risk
management and portfolio evaluation
Improved collateral management
Tools for accurate performance measurement
Fast and accurate margin calculation
Electronic client reporting
Middle Office
• Reduced failure in settlements due to automation of manual processes
• Faster and accurate corporate actions processing
• Accuracy in accounting and reconciliation
• Quick cash transfer with electronic payment gateways
• Better risk reporting to management and regulatory bodies
Back Office
Operational Risk Management
Reliable disaster recovery
Robust infrastructure for performance & uptime
Improved STP
Robust securityAutomated exception
management
Emerging technologies: Future of financial markets
Expectations in the current market
Improvement in service levels
A single window for multiple services
Increase in convenience for customers – including being able to transact on the go
Transparency – ability to compare products/services feature for feature against other competitors in the market
Security of transactions and confidentiality of data
Understanding and adapting to the client’s needs,
Convergence in markets will increase
through a broader distribution network,
supported by a wider array of service/product offerings and capable talent,
and ‘state-of-the-art’ technology systems
Convergence of financial institutions is the blurring of conventional boundaries separating the traditional providers of once-discrete financial services (i.e. life assurance, short-term insurance, banking, health, general retail)
Emergence of a financial supermarket is leading to Client Centricity
PersonalCover
Education provision Savings
& Investment
Home loan
Car & household
cover
Banking / Trans-
actionalMedium
term credit
Financial Education
Wills & trusts
Medical
Risk cover
Retirement
Client
Wealth Management
FinancialEducation
Lifestyle
Where Are We In The Technology Hype Cycle? - Gartner
Emerging technologies in capital markets
Next 2 years
2 to 5 years
5 years and more
Real time market-data distributionAlgorithmic trading
toolsDMA trading toolsCredit and market risk
calculation engines
Complex event processing for trading applications
Consumer on-boarding tools
Mobile solutions for developing and emerging markets
Operational risk enginePrivate virtual worlds
Enterprise reference data management solutions
Financial social networks
Component based buy and sell side securities processing
Q & A
Use of some more emerging technologies..
Social Networking In order to conduct an on-line transaction in which both parties have
confidence, identity is a key. Facebook is one platform providing identity. Based on this
identification, third parties can make use of this base for deriving software applications for transaction services.
Cloud computing Promises reliable services delivered through next-generation data
centers that are built on compute and storage virtualization technologies.
Consumers will be able to access applications and data from a “Cloud” anywhere in the world on demand.
The Cloud will appear to be a single point of access for all the computing needs of consumers.
Success Stories
NSE and BSE had to scale up their IT systems to accommodate increasing number of brokers across various instruments
Technological innovations at NASDAQ
NASDAQ tries to keep its systems scaled to two times the level of the previous peak in IT demand.
Has 3 sets of websites: Trade Station, private and public websites
Has Web 2.0 features: Mobile site for nasdaq.com,
boardrecruiting.com: social networking for recruiting candidates for corporate directorships.
Blogs are used for internal use;
site shareholder.com offers interactive webcasting.
It recently consolidated all fundamental and real-time data into a single, internally developed ticker 30 plant. A custom made content management system was developed
Closer at home - National Stock Exchange uses technology effectively
NSE's IT set-up is the largest by any company in India. NSE can handle up
to 6 million trades per day in Capital Market segment
NSE introduced a nation-wide on-line fully-automated screen based trading
system (SBTS)
NEAT is a state-of-the-art client server based application which helps
achieve minimum response time and maximum system availability
Technology has carried the trading platform to the premises of brokers and
to the PCs of investors
More than 9000 users trade on the real time-online NSE application
Trading cycle reduced from 14-30 days earlier to T+2 now