Derek Stein Of Barclays Global Investors

The former consultant and hedge fund manager is making sure that BGI’s legions of quants get the technology they need — securely.

Running technology for an investment management firm full of computer-savvy math Ph.D.s is no easy task. When the firm is also the world’s biggest money manager, the job becomes even more difficult. For the past year Derek Stein has been thrust into that role as chief technology officer at Barclays Global Investors, which oversees $1.6 trillion in client assets.

Stein came to Wall Street in 1987, after running a small hedge fund in his native South Africa, where he earned an undergraduate degree in computer science and a graduate finance degree from the University of the Witwatersrand. He worked on information technology projects for financial clients as a consultant with Ernst & Young, then oversaw global middle-office operations and e-commerce at Merrill Lynch & Co. before switching to market maker Knight Capital Group as chief administrative officer and head of technology. That combination of operating and tech experience is serving Stein well at BGI, where many investment professionals have not only the know-how but also the inclination to build their own computerized portfolio management tools. Stein’s challenge is to develop such technology while ensuring that BGI doesn’t waste time and money on duplicative systems.

The CTO also must make certain that BGI’s technology infrastructure can keep up with the San Francisco–based firm’s rapid growth. Assets have doubled since 2000, driven by the popularity of exchange-traded and actively managed funds; last year alone assets in the two areas soared by 48 percent and 21 percent, respectively. Active fixed-income funds are becoming especially popular, creating a need for new trading systems that can handle risk-reducing derivatives strategies.

Since joining BGI last December, the 44-year-old Stein has been working full tilt. He has expanded the technology staff by more than one third, to 650, and reorganized it to encourage more cooperation between those supporting firmwide technology and those working in BGI’s business units. He also has created a single network — known as a service-oriented architecture, or SOA — on which applications can be developed and accessed by professionals throughout the firm and has begun outsourcing commoditized technology offerings to vendors and offshore providers. He recently discussed these and other issues with Institutional Investor Contributor Julie Segal.

Institutional Investor: BGI relies on quantitative models that constantly need to be tweaked and updated. How big a challenge is that technologically?

Stein: We have more than 100 Ph.D.s developing proprietary models. They straddle the line between technology and research. Historically, BGI operated its technology infrastructure almost as two loosely coupled teams — a more centralized group to support the backbone of the company and a separate group of IT staffers embedded in each of the business units. But the two groups didn’t converge into a cohesive IT strategy. As we have grown, we have needed an integrated infrastructure.

How have you reorganized things?

Individuals in the business units can tap into applications in the service-oriented architecture that we’ve created. You build that once, and people can access it throughout the firm. The SOA encourages sharing and greater productivity. We want to avoid redundancies and ensure that if we have a great application, it gets out to all our researchers.

How can a centralized network help research professionals?

We provide the technical underpinnings and secure, private network to support our researchers and make them more productive. Our development cycle is very interactive and iterative, involving strong collaboration between the business and technology teams. A lot of our intellectual capital is in algorithms, for example. We need those developed right in the business units. But because the investment process is very similar across our various business units, we can use IT to share innovations throughout the firm.

What kinds of technology are you sharing?

Some are tools for acquiring and transforming research data into strategies, optimizing portfolios and creating cash flow models. Other technology includes global networks, desktop support, data center management and storage to facilitate development at the application level. We want to provide tools centrally so our developers don’t have to build commodity services, such as messaging, that can be purchased from a vendor.

How much money have you saved by moving to an SOA infrastructure?

We haven’t quantified any savings yet. There are many examples of other firms using SOAs that have experienced innovation gains and created business services that are reusable and easily tailored for varying applications.

What has been the biggest challenge for you?

No one wants to take a breath from what they’re doing and subscribe to an application from a central location. But we’ve been very structured in the reorganization. Everyone knows who his or her IT partner is. We’ve also had the challenge of managing significant growth in technology. In 2006 we hired close to 175 people, including full-timers and contractors. To put that in perspective: We have 650 technology staff out of a total workforce of about 3,000 throughout BGI. These people are spread out between San Francisco, Tokyo, Sydney and London. There has been a lot of emphasis on integrating these new people and telling the story of our reorganization. We need people to understand why we want to all be playing from the same song sheet under an SOA. It has also helped that we’re finalizing our three-year technology plan and are able to talk about how the IT strategy is being driven by the business growth. It has been very transparent.

Tell me more about the three-year plan.

We’re thinking about what some of the key drivers are for our business and what we’ll need from our technology when it comes to dealing with the increased scale and volume that go with growth. We need to develop technology to deal with derivatives products, for example. We’ve also focused on business continuity and on the technology required by compliance staff and regulators.

You’ve had good growth in fixed income, particularly active strategies. What technology do you need to support those areas?

Over the past two to three years, we’ve been building out fixed income, active strategies and hedge funds that use active fixed-income, active equity and market-neutral strategies. As a result, we need to develop capabilities to support active portfolio management and the associated use of OTC derivatives. For OTC derivatives we’ll be building out a hedge fund service platform for the middle and back office for all hedge fund portfolios. We’ll be partnering with a vendor that specializes in that. Fixed income is also driving the development of a next-generation portfolio management system and a global trading system, which we’ll use for equities as well when it’s finished.

What’s the plan for your growing ETF business?

It’s about the Web. We’ve been almost exclusively oriented toward a large institutional client base. But the advent of ETFs has changed all that. Electronic services for what we call the iProducts group is much more important given the retail nature of ETFs and the increasing number of competing offerings out there. We’re building Web services that will allow advisers and investors to do more research and analysis on ETFs.

How do you manage costs?

You have to be conscious of running IT with a commercial focus. We’ve introduced some centralized governance processes that will make sourcing suppliers more efficient, giving us maximum leverage and buying power. We’re also coordinating efforts on a BGI group basis when it comes to procurement.

What tasks does BGI outsource to offshore vendors?

We’re in the process of building out our first application offshore by using a third-party vendor in India. It’s a billing application, and we feel it is a low-risk project with which to start. We want to get comfortable with the process before moving forward. But in 2007 it will be a priority to offshore more development. It’s not necessarily for economic reasons: We want to use our core team to grow the business and hire people offshore to build more of the commodity services, like billing. We didn’t have the scale before to take full advantage of offshoring. Growth came quickly, and we’ve just been dealing with the growth. Now we’re trying to be strategic.