Information technology: global trends

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Technology in financial markets is entering uncharted territory - and not in a good, groundbreaking sort of way. For the first time since various consultancies and think-tanks started tracking it (around the turn of the century), spending on IT within financial firms has gone negative.

Even when the last tech bubble burst (2002-2003), spending kept increasing as banks looked to shave milliseconds of trading times, deal with ever-expanding data requirements or use the latest technology to get one over their competitors.

But now, it seems, they'd rather keep things ticking over than roll out exciting new projects. Figures from research firm Financial Insights suggests that banks will spend 3.2% less on technology this year than last, and the securities industry as a whole will be cutting back by nearly 10%.

And research by its contemporary TowerGroup predicts that US financial institutions' IT spend will contract by 3.7% throughout this year.

"In 2009, IT strategies will be challenged by industry volatility, forcing financial services institutions to retract or postpone previously planned IT projects," says Virginia Garcia, senior research director, cross-industry practice, TowerGroup.

It doesn't help that some big spenders have either been cutting back, or disappeared from the market entirely.

Merrill Lynch, for instance, was estimated to spend $4bn annually on technology, and since its merger with Bank of America, has since stated that it aims to save $7bn over three years across the combined platforms.

Lehman, meanwhile, was expected to spend around $2.5bn on technology last year, suggests research from Tabb Group. It leaves a legacy of 6,000 IT staff worldwide and some 26,666 servers, according to an SEC filing by restructuring experts Alverez & Marshal.

Given all this doom, where are the areas of emphasis in IT now? In 2008 banks invested in IT platforms surrounding both commodities and foreign exchange trading. They are also building systems around algorithmic trading, which automatically places trades based on parameters set by mathematicians. This was traditionally confined to the equities space. However, now it's being applied to other asset classes such as derivatives, fixed income and foreign exchange.

Banks are spending more on IT operational risk solutions, too. Investment in this area has been given a boost by the activities of Jérôme Kerviel, the Société Générale rogue trader who allegedly cost the firm €4.9bn. Kerviel was supposedly able to manipulate the bank's internal risk management controls to undertake his illicit activities. 80% of 145 firms surveyed by Ernst & Young in the first quarter of 2008 said they intend to increase their spending on operational risk over the next 12-18 months.

Of course, IT investment isn't limited to investment banks. Insurance firms, for instance, have been struggling against the twin forces of clunky legacy systems and inefficient back office processes and are shelling out on IT in order to bring them up to date.

This article was last updated on 2 February 2009

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