MANAGING A COMPLEX ARRAY of transactions, customer relationships and associated documentation, financial institutions have always been, in a sense, data processing businesses. Now marketplace and regulatory developments, combined with the billions of dollars being spent in this area, have pushed data management issues to the top of financial technology executives’ priority lists and seized the attention of CEOs and COOs as never before.
Market data volumes are just about doubling annually, which will drive total spending on the necessary infrastructure by buy- and sell-side firms to $2.4 billion in 2009 from $2.1 billion in 2007, estimates U.K. research firm Datamonitor. And that’s mostly for front-office, trading-related needs. A separate set of enterprise data management projects, in which firms are streamlining and standardizing their repositories of client and counterparty reference information, will generate global expenditures of $1.8 billion in 2007, $2.7 billion in 2008 and $3.1 billion in 2009, predicts Boston-based Aite Group.
The past summer’s record stock market volumes were just the tip of the data management iceberg. The proliferation of alternative trading venues and the algorithmic programs that probe those liquidity pools at millisecond intervals generate quote volumes that dwarf the number of actual order executions -- and at an accelerating rate.
Needham, Massachusettsbased research firm TowerGroup projects that from 2000 to 2012, annual quote volumes will soar 21,000 percent, to 400 billion on the New York Stock Exchange, which it considers a proxy for all global market data. By comparison, trades still number in the single-digit billions. “There is no end in sight for growth,” says J. Barry Thompson, CEO of Tervela, a New York developer of high-speed messaging technology and former head of North American information technology architecture at UBS.
A further data-growth indicator is the rapidly expanding peak-capacity mandates issued by the Options Price Reporting Authority in Chicago. Each new stock quote requires adjustments in multiple options classes; these, in turn, are mushrooming as one-cent price increments are phased in. OPRA is telling market data recipients that they must be able to handle peak one-minute message rates of 907,000 per second by next July, up from 701,000 as of January 2008 and 573,000 in July 2007.
Meanwhile, the sweeping market-structure reforms on both sides of the Atlantic -- the Securities and Exchange Commission’s Regulation National Market System and the European Union’s Markets in Financial Instruments Directive -- require that firms maintain ever-larger tick-and-quote databases for best-execution compliance purposes. TowerGroup senior securities and capital markets analyst Tom Price estimates that market data volume will grow 900 percent by 2012.
Price believes more competition among markets will lead to cheaper and better execution in the long run. In the meantime, NMS and MiFID only compound the effects of the market data explosion. “I can cope with it,” says Thomas Chippas, head of the North American equity business of Deutsche Bank’s Autobahn electronic trading platform. “But it’s a never-ending task.”
Major banks are wrestling the data monster into submission, but only after assessing the extent of the problem and deploying the necessary task forces. “It has been a scramble, but a structured scramble,” observes longtime financial technology consultant Larry Tabb, founder of Westborough, Massachusetts, research firm TABB Group.
Jeremy Lehman, head of equity technology architecture, strategy and principal investments at Citigroup Global Markets, says one big hurdle was to recognize that “this is no longer just a technology issue. It’s a business issue as well.”
Microsoft Corp. and Sun Microsystems, among others, have organized “thought leadership” initiatives that are as much educational as sales-oriented. Some institutions have been “like deer in the headlights” trying to make sense of MiFID, says Ian Warford, Microsoft’s head of capital markets for Africa, Europe and the Middle East.
Tervela’s Thompson, however, is skeptical that traditional vendors and assumptions -- such as that higher volumes can be handled by simply adding servers to a network -- will suffice. He believes that today’s securities messaging infrastructure is inadequate and increasingly unstable, suffering from years of budgetary constraints. His company, launched in 2004, unveiled its first product last month: a hardware appliance that, Thompson says, outperforms existing message-middleware installations by up to 100 times.
