Securities Industry to Increase Reliance On Technology in '04

By Allen Bernard

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New research from TowerGroup released today found the securities industry will remerge from dramatic cost cutting, layoffs, retrenchment and scandal, as an entirely different business -- one more reliant than ever on technology and automation.

"Those of us still in the securities business 10 or 15 years from now will look back on this period as a defining moment in the evolution of the capital markets," said Robert Hegarty, vice president of Securities & Investments at TowerGroup and author of the research. "The wholesale restructuring of the markets, with technology playing a central role, has redefined how securities are traded and has proven that electronic trading is preferred over the 'human touch.'"

Major IT trends identified in the "2004 Perspectives: The Securities & Investments Industry Emerges from the Rubble -- With Technology at Its Core" report include:

  • an increasing reliance on external IT providers: since 1996, the portion of securities and investment firms' IT budgets allocated to external IT provision has risen from 43% to 55%. As the industry strives to support expanding technology platforms while still innovating for growth, financial institutions will look increasingly to vendors to solve their technology needs;
  • a focus on regulatory compliance and risk management: regulators will continue to inundate securities and investment firms with a flood of new requirements through 2004 and beyond. In the face of this deluge, IT managers will find themselves forced to prioritize regulatory initiatives, while chief compliance officers (CCOs) will take on increasing responsibility;
  • alternative sourcing (offshore, outsourcing, etc.) will take center stage: 2003 saw the rapid ascension of outsourcing as a core competency in the securities sector. This aggressive trend will continue. For example, TowerGroup expects the securities industry to increase outsourced overseas staff more than 52% per year through 2005;
  • a rapid electronification of the markets: 2004 will see the completion of the "electronification cycle," when brokers will abandon what's left of the human side of trading in favor of fast, reliable and secure electronic crossing, matching, routing and trading systems; and
  • the use of ASPs will finally take hold: after years of false hopes, the application service provider (ASP) model will gain enormous traction in the securities and investments industry. This will allow many technology providers to break into previously unserved markets while providing new technologies and scale to smaller firms.
  • Hegarty noted that simultaneously, institutions have become more adept at managing and deploying technology. "Institutions are now favoring budgets over open wallets, while also embracing more business line involvement in IT decisions. As the industry prepares to move forward, CIOs, CTOs and senior executives need to refocus on bringing innovation back into the IT game," he said.

    The TowerGroup is a research and consulting firm focused on the global financial services industry.