This year has seen a significant increase in IT budget in the trading / brokerage, fund management, hedge funds and the investments and securities services sectors, according to Datamonitor research. As a result, financial services organizations are increasingly turning to technology to cope with pain points and to maintain competitive par.
The new research is based a study surveying 100 leading financial markets institutions in the US, UK, Germany, France, Benelux and Switzerland. Conducted in Q4 2006, it determines strategies, plans and priorities for technology strategy and investment for 2007, in addition to providing an insight into issues currently facing the sector.
Investments and securities service firms are looking to better manage, hedge and mitigate their risk by investing heavily in risk management systems, whereas fund managers are increasing IT spend in their payment systems.
In a climate of increased competition, IT vendors have recognized the importance of offering superior technology and connectivity options to customers. Investment in technology has been identified as a priority for the execution of long-term sustainability and to maintain competitive par, which in turn, will present continued opportunities in 2007 for technology vendors.
At present only a handful of firms are fully utilizing the capabilities of electronic trading. However, with upcoming regulations such as Reg NMS and MiFID, which advocate the need for best execution, Datamonitor anticipates that there will be a strong uptake of electronic trading throughout 2007.
According to the study, two of the key drivers for increased investment in algorithmic trading stems from the need to keep up with competitors and the growing demand from customers. Hedge funds are also using the need for increased revenue and tracking liquidity, which is critical to their business models, as catalysts as well.
In addition, phishing and anti-money laundering initiatives have emerged as key focus areas to satisfy regulatory requirements. Regulators have become less tolerant and expect firms operating within their respective jurisdictions to have appropriate and adequate risk measures and controls in place. As such, 38% of all respondents in the study cite security measures as a paramount importance. This is likely to continue into 2007.
The study also reveals that a large number of institutions would not consider outsourcing all of the IT infrastructure areas, however, some firms continue to outsource many elements of their IT infrastructure. This trend is set to continue in 2007, but more specifically, it is especially true within the hedge fund sector as many hedge funds do not have the resources or capabilities to maintain an IT department or function in-house. Furthermore, this opens up a lucrative market for technology vendors to offer ASP risk management solutions targeted at hedge funds.
Key drivers to outsource back office services remain the same as in 2006, namely, the need for cost reduction as well as improving efficiency of current operations. However, many UK firms in particular have become increasingly cautious about outsourcing to India. Key reasons for recent customer backlash in the UK centers involve issues attached to data security and confidentiality as well as communication problems between customers and call centre staff.