Outsourcing: The Wave of the Future in Trading Floor Disaster Recovery?

Searching for back-up trading floor solutions, financial-services firms are now more actively considering outsourcing disaster recovery to third-party vendors that specialize in redundant trading facilities. Post 9/11, all types of firms -- including investment banks, brokerages and money managers -- have had to spend time figuring out how they were going to back up their primary floor in the event of another disaster. A handful of larger firms have already announced their intention to build redundant-trading facilities on their own, but, increasingly, small-to-mid-size firms are turning to third-party vendors to accommodate their backup trading-floor needs.

SchlumbergerSema, a global IT services company that specializes in trading floor recovery, has seen a significant increase in its business over the last 11 months. Prior to 9/11, the firm had built a fully equipped backup-trading facility in Jersey City, N.J. that could accommodate 650 trading positions. However, after supporting nine of its financial-services clients, post 9/11, at the Jersey City site, SchlumbergerSema decided to build another large disaster-recovery floor -- in Iselin, N.J. -- to meet increased client demand for trading-floor space.

Joe Riscica, general manager of SchlumbergerSema's Global Recovery Services business for North America, says that, increasingly, clients of SchlumbergerSema are signing up for "dedicated positions" that will provide their traders with access to a fully functional back-up facility on a "24 by 7" basis. Just after 9/11, he says, the Jersey City site mainly supported clients on a "shared basis." A shared contract, Riscica explains, only guarantees a firm a minimum of 20 percent of the trading seats it signed up for, in the event of an emergency.

"We're beginning to see request-for-proposals from companies that previously did all of their (disaster recovery) work themselves ... (and) what we're finding is that the clients we're talking to today are looking at more of a dedicated solution than they were in the past. They want to know that if they're (sending their traders) to a back-up site, all of the seats they contracted for are there 100 percent of the time. So the shared model is eroding," he says. Since more and more firms want dedicated positions, Riscica says, SchlumbergerSema has built a second back-up trading facility in Iselin, and is considering building additional sites in other New Jersey locations.

Riscica declines to specify the average amount SchlumbergerSema charges clients per position, noting that each client has a special set of needs that can impact the final cost of a contract. As part of its base package, he say, SchlumbergerSema provides a "desk, chair, turret and PC" for each trading position, but can also customize a position to accommodate a client's specific needs in areas such as voice recording, time stamping and market data.

Damon Kovelsky, an analyst in the risk and trading group at Meridien Research, says that outsourcing back-up space from a third-party vendor is an adequate solution for firms with "smaller-trading desks." But he cautions that larger firms should seriously consider internal development of disaster-recovery floors, because third-party vendors will not provide the "quality" they desire in a back-up site. "Whether you build a (disaster-recovery floor) on your own or outsource this depends on how much of your revenue is (derived from) trading. The more firms are dependent on trading revenue, the more they should (build) it themselves," Kovelsky advises.

One large firm that is building a disaster recovery floor on its own is Morgan Stanley. Morgan already had back-up facilities in Brooklyn and Harborside, N.J. prior to 9/11, and recently announced that it was going to build a multi-million-dollar site in Harrison, New York. Whether the Harrison site will serve as Morgan's back-up trading facility remains unclear, but Greg Ferris -- Morgan's executive director of global business continuity planning -- emphasizes that the firm has no intention of outsourcing its disaster-recovery floor.

Ferris says that Morgan is wary of the third-party model, because, in the event of a disaster, an entire "geographical area" could potentially all have to relocate to a single disaster-recovery facility. Indeed, without specifying names, he says that many Wall Street firms "had difficulty with the third-party model" after 9/11. Therefore, he says, Morgan has decided to build a back-up floor on its own. Ferris, however, declines to provide details on the location, size and technological capabilities of the firm's disaster recovery floor.