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June 30, 1999

The Scalable Solution

By Peter Caswell

Can the right technology prepare financial professionals for changes in the evolving trading environment?

Yes, if the right technology is scalable systems that can be integrated across multiple environments. Scalable systems are designed to handle increased capacity as a firm's business grows.

As you know, the changes taking place have resulted in the automation of manual tasks. Indeed, it has been the main impetus in the past decade for more technology at Wall Street firms.

Many buy-side firms, for instance, are using systems to automate functions such as portfolio accounting and trade order management. Now there is a push for more seamless electronic communications. The sellside's business, meanwhile, has become more complex. The adoption of online trading, and the plans for extended trading hours, will mean more order flow.

As we examine the implications of these changes, it's beneficial to consider how technology will help the trading environment. Systems integration and scalability stand out.

The future of technology belongs to systems that work together seamlessly within a firm, and to systems that are based on open standards. These allow communication between a firm and its outside partners. Scalable systems help firms keep pace with business growth. The benefit is that a firm does not have to completely overhaul its technology each time it needs more capacity.

A Major Trend

A major trend in the industry, and possibly the next big thing, is the increasing popularity of individually-managed portfolios. The growth of online investing has fueled individual investors' appetites for managing their own assets. An example in the institutional world is money managers offering pooled funds. The buyside's use of the right technology will allow them to manage a broader number of individual portfolios.

As this trend continues, the institutional world will need scalable systems to handle the large volume of allocations on an electronic real-time basis. In this environment, scalable and highly-integrated systems can be viewed as one big network, connecting investors to money mangers, to traders, and to custodians.

The need for systems integration leads back to the larger question for the institutional world: Where will the money be?

If it's in the hands of individuals who are managing portions of their accounts, a firm's ability to handle a plethora of little trades will determine whether it will get to the money. And their ability to get to the money will depend on whether they're "on the network." The processing of this type of trading is not something that will be handled manually.

In addition to changes in investor habits, the market itself will change. Market productivity will increase and market risk will decline. Five years from now, one can envision traders facing a 20-hour trading day and markets that demand real-time settlement. Nearly all of the financial information exchanged between sell-side and buy-side firms would be electronically communicated.

The sellside must make changes in its workflow to handle the increased market pressures, much as its buy-side clients will need to respond to the pressures they will face. In the aforementioned market scenario, the buyside will be dealing with multiple sell-side institutions.

New Focus

Today's technology changes have shifted the focus from merely automating a firm's internal workflow. We're quickly moving toward integrated solutions at buy-side firms - integrated solutions that communicate seamlessly with integrated solutions on the sellside.

For this to happen, standards will help streamline the process. Not a lot of technology should remain proprietary. Moving in this direction will create an environment of open standards, while the burden of maintaining multiple workstations will be left behind.

On the buyside, connectivity is the trend. Money managers are getting more electronically connected to their customers. Now they are looking at the sellside to move in the same direction. The buyside wants to move the sellside closer to straight-through processing.

Customers will also be looking for more of an integrated choice, with buy-side and sell-side systems looking like extensions of each other. Sell-side firms that use technology to connect to these systems will have a clear advantage.

Peter Caswell is president and chief operating officer of San Francisco-based Advent Software, which sells software to trading firms.