IT Spending Update: Navigating the New Volatility

As capital markets firms recede, reorganize, and seek safe harbors, IT spending and priorities come into focus. Firms are considering their competitive position, capital base, and growth prospects.

The weakening economy will have a significant impact on IT spending in 2009 and 2010, according to a new report, Securities & Investments IT Spending Update: Navigating the New Volatility by David Easthope and Cubillas Ding, both senior analysts with Celent's Securities & Investments group.

The report assesses the impact of the financial crisis and the resulting reorganization of capital markets, securities IT priorities and IT vendor market positioning.

Although the predictions for 2009 are down, the report does cite that the gloom should begin to lift and technology allocations for 2010 should see positive growth.

Some key findings from the report include:

As a whole, total S&I technology spending is projected to contract by 7.1% next year from $74.7 billion to $69.4 billion, due predominantly to the severe 14% cuts anticipated in North American sell side spending. In line with end 2009 economic recovery expectations, an upturn in global capital markets and wealth management IT spending should be observed in 2010 with a moderate expansion of 4.2% and an even healthier 7.8% clip in 2011.

The steep drop-off in Celent’s estimates for total Securities & Investments (S&I) technology spending in 2009 is a result of drastic cuts in new investments. Despite difficult market conditions, Celent believes that exchanges, custodians, and clearing organizations will increase IT spending in 2009, while brokerages and hedge funds will both trim spending. IT vendors may see reductions in the new investment spending component of capital markets by 30-40% for North America. Most IT vendors looking for continued robust spending by new clients will be disappointed in 2009.

Buy side IT spending slowdown from the financial turmoil should be more muted. Projections for 2009 are -4.0% for North America, -2.0% for Europe and 4.0% for Asia. Assuming capital flows and profitability starts to return in 2010, Celent expects buy side spending growth to rebound at 8.0% for the US market, 7.0% for Europe and 10.0% for the burgeoning Asian region, where the hedge fund industry is maturing and growing assets.

Sell side Securities and Investments (S&I) companies, particularly institutional brokerages, have had significant losses due to direct subprime exposure. North American broker-dealer spending is expected to be significantly cut to $26.1 billion in 2009 from $30.4 billion, while European spending should fall to $18.6 billion. Celent anticipates growth for sell side firms in North America to be negative at -14.0% and a fall of 6.0% for European sell side spending. Asia’s spending should still be in the positive region at 4.0% but this is barely a quarter of the growth observed between 2006 and 2008.

In 2008-2009, North America’s total securities and investments IT spending growth is expected to be deep in the red at -12.4% while Europe’s contraction is less dire at -5.0%. This discrepancy between the transatlantic markets can be mainly attributed to the severe downsizing of US brokerage IT expenditures as a result of the series of bank failures and consolidations. North American hedge funds and asset managers are also comparatively worst hit by the financial crisis, with a projected -4% decline in spending versus Europe’s estimated 2% contraction for next year.

Asia is the only region expected to survive the severe economic downturn with a positive 2009 growth rate intact (4.0%) for S&I IT spending. But this rate is still far below the aggressive 13.6% expansion in spending that was anticipated before the subprime problems and broader crisis. In addition, the 2010 to 2012 timeframe should see the return of strong double digit IT spending growth in Asia. With lower relative levels of advanced trading tools and systems like DMA, algorithms, OMS/EMS, Asia still needs to focus on playing the IT catch-up game in order to stay competitive in the global marketplace.