Embracing Emerging Technologies for Quantum Growth. Nov 2008. Agenda. Importance of innovation in business Role of technology in the financial services Emerging technologies: Future of financial markets Success stories Q & A. What is innovation?. Qualitative change (not any change)
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Agenda • Importance of innovation in business • Role of technology in the financial services • Emerging technologies: Future of financial markets • Success stories • Q & A
What is innovation? • Qualitative change (not any change) • The creation of something new (not just the adoption of somebody else’s novelties) • The innovation process includes invention, and successful implementation or market launch (commercialization) • A focused approach to enhance user value or productivity TYPES OF INNOVATION • Radical innovation: Developing a completely new product/ service which did not exist (Securitization) • Incremental innovation: Improving upon a previous innovation (Straight Through Processing)
Product and Process Innovation Product Innovation is characterized by • Creation of a differentiator through a superior product/service • Has a longer time to market • Success of the product/service is determined within a short time period post launch Process Innovation is characterized by • Creation of a differentiator that captures value through efficiencies • Has a shorter time to market • Success of the process innovation is determined over a longer period of time Product and process innovation complement each other and one alone is seldom good enough to drive quantum growth
As strong as the Weakest Link • A financial system is as strong as its weakest link. – Alan Greenspan, former chairman of the US federal reserve bank. • IT remains the key to differentiation, competitive advantage and institutional survival.
Capital markets transformation has been influenced by multiple agents E-trading has led to skyrocketing of trade volumes with average trade size plummeting Technological Economic Increasing revolution environment transaction volumes Multiplication of execution venues New competitors Electronic trading Profitability pressure / cost containment Industry associations Service providers Market participants Capital Industry adoption of STP Market Infrastructure organizations Markets Security Players Firm-wide risk focus Consolidation Systemic risk management Internalization Client demands for improved Globalization Regulatory services and change lower costs
Changing Face of Capital Markets and role of IT Significant changes in last decade Key IT enabled functions • Shift from open outcry to electronic trading systems • Birth of online retail brokerage as separate from a brick-and-mortar brokerage • Growing disintermediation • Direct Market Access • Reduced turnaround time for IPO • Advanced derivative products • Improved pricing analytics and modeling • Competitive landscape with free markets • Reduction in transaction costs • Globalization of markets • Algorithmic trading • Electronic communication networks • Risk management frameworks • Order entry and order management systems • Client Relationship Management • Derivative trading tools • Asset management and administration • Portfolio management tools • Clearing and settlement • Real time position monitoring and collateral management • Risk reporting • Historical trend analysis and data mining
Changing Face of Banking and role of IT Significant changes in last decade Key IT enabled functions • Variety of new products and services • Emergence of new delivery channels • Convergence of core banking business and information technology • Mergers & acquisitions • New services (Tele-banking, E banking, door step banking) • New approaches to banking (automated self banking centers) • Core Banking • Internet/ electronic banking • Mobile banking • Payment system gateways • Smart cards • Risk management • AML/ KYC • Kiosks/ new delivery channels • CRM/ Call Centers/ Help Desks • Wireless technologies • Resource management
A rider on IT spend and technology adoption: Spending more on IT doesn’t necessarily translate into higher profitability • Spending more on IT doesn’t necessarily mean higher profits. • Institutions with above-average IT expenditures have higher cost-to-income ratios and below-average increase in revenues. • Many institutions spend too much on running their daily operations and too little on innovations • Institutions face difficulty in translating IT investments into real business value • Scale does not guarantee cost benefits. Many big institutions have yet to see sustainable cost advantages from their vast IT operations
What matters is the way IT is adopted strategically and implemented tactically to drive growth in business Source: McKinsey • Top-performing banks form their IT strategies in close cooperation with the business • High-performing banks see IT as more strategic, and they drive more of their IT agenda directly; that is, they outsource less
Embracing technology solutions – choosing the right fit Architecture Characteristics Cons Pros Integrated • Common hardware platform • Single vendor relationship • Overall functional coverage tends to be weak • Dependent on supplier to ride the technology wave Single integrated solution usually provided by an external party FO FO FO MO MO MO BO BO BO • Advanced functionality coverage • Ability to replace and enhance depending upon technology evolution in a space • Integration challenges • Higher overall cost including maintaining multiple vendor relationships • Mix of hardware, software platforms Hybrid Mix of solutions from multiple vendors that have interfaces / protocols for integration FO FO FO MO MO MO BO BO BO • Advanced functionality coverage • Lower cost to replace parts of the system architecture with new technology components Best of Breed • Integration challenges • Higher overall cost including maintaining multiple vendor relationships Multiple solutions provided by external parties and developed internally FO FO FO MO MO MO BO BO BO
Impact of Electronic Trading Technology on the Securities Markets • Cost-efficiency: Electronic trading greatly lowers continuing operation costs by bringing significant efficiencies to the trading process. This leads to a dramatic increase in trading volumes. • Removing physical constraints on markets: It removes physical constraints such as geography and the number of market participants. • Disintermediation: By providing a means for natural buyers and sellers to meet without a market intermediary, electronic trading has a great potential to dis-intermediate markets. • Blurring Regulatory Distinctions: Itposes regulatory challenges for market participants and regulators alike
Recent evolution of domestic equity market capitalization in USD Source: World Federation of Exchanges
Exponential growth in trading volumes in Indian markets Exponential growth in trading volumes Exchanges had to scale up their IT systems Growth in Indian Stock Market (USD billions) Source: Dun & Bradstreet
Impact of technology in a front to back environment Front Office Middle Office Back Office • Better campaign management using CRM tools • Targeted distribution of research in quick time using internet and mobile technologies • Real-time market data use with improved data warehousing • Program trading efficiency • Improved beta with trading in dark liquidity pools • Faster analytics using grid computing • Automated accurate fee calculation • Swift quotation of commission structures • Better order management • Real-time post trade risk management and portfolio evaluation • Improved collateral management • Tools for accurate performance measurement • Fast and accurate margin calculation • Electronic client reporting • Reduced failure in settlements due to automation of manual processes • Faster and accurate corporate actions processing • Accuracy in accounting and reconciliation • Quick cash transfer with electronic payment gateways • Better risk reporting to management and regulatory bodies Reliable disaster recovery Robust infrastructure for performance & uptime Improved STP Robust security Automated exception management Operational Risk Management
Expectations in the current market • Improvement in service levels • A single window for multiple services • Increase in convenience for customers – including being able to transact on the go • Transparency – ability to compare products/services feature for feature against other competitors in the market • Security of transactions and confidentiality of data
Convergence in markets will increase Understanding and adapting to the client’s needs, through a broader distribution network, supported by a wider array of service/product offerings and capable talent, and ‘state-of-the-art’ technology systems Convergence of financial institutions is the blurring of conventional boundaries separating the traditional providers of once-discrete financial services (i.e. life assurance, short-term insurance, banking, health, general retail)
Emergence of a financial supermarket is leading to Client Centricity Personal Cover
Emerging technologies in capital markets Next 2 years 2 to 5 years • Real time market-data distribution • Algorithmic trading tools • DMA trading tools • Credit and market risk calculation engines • Complex event processing for trading applications • Consumer on-boarding tools • Mobile solutions for developing and emerging markets • Operational risk engine • Private virtual worlds 5 years and more • Enterprise reference data management solutions • Financial social networks • Component based buy and sell side securities processing
Use of some more emerging technologies.. Social Networking • In order to conduct an on-line transaction in which both parties have confidence, identity is a key. • Facebook is one platform providing identity. Based on this identification, third parties can make use of this base for deriving software applications for transaction services. Cloud computing • Promises reliable services delivered through next-generation data centers that are built on compute and storage virtualization technologies. • Consumers will be able to access applications and data from a “Cloud” anywhere in the world on demand. • The Cloud will appear to be a single point of access for all the computing needs of consumers.
NSE and BSE had to scale up their IT systems to accommodate increasing number of brokers across various instruments Success Stories
Technological innovations at NASDAQ • NASDAQ tries to keep its systems scaled to two times the level of the previous peak in IT demand. • Has 3 sets of websites: Trade Station, private and public websites • Has Web 2.0 features: • Mobile site for nasdaq.com, • boardrecruiting.com: social networking for recruiting candidates for corporate directorships. • Blogs are used for internal use; • site shareholder.com offers interactive webcasting. • It recently consolidated all fundamental and real-time data into a single, internally developed ticker 30 plant. A custom made content management system was developed
Closer at home - National Stock Exchange uses technology effectively • NSE's IT set-up is the largest by any company in India. NSE can handle up to 6 million trades per day in Capital Market segment • NSE introduced a nation-wide on-line fully-automated screen based trading system (SBTS) • NEAT is a state-of-the-art client server based application which helps achieve minimum response time and maximum system availability • Technology has carried the trading platform to the premises of brokers and to the PCs of investors • More than 9000 users trade on the real time-online NSE application • Trading cycle reduced from 14-30 days earlier to T+2 now