Tear Down This Wall!

Yielding to economic pressures that have made product-centric business models costly to maintain, capital-markets firms are contemplating big organizational changes. Many are betting their futures on developing common-technology platforms to collapse silos and wring out costs.

Such changes could eventually lead to the merger of equity and fixed-income departments - a radical move by historical standards.

"Economics have driven many brokers to re-examine what is our value proposition, and what is our business model and realign themselves accordingly," says Miranda Mizen, senior analyst at Needham, Mass.-based TowerGroup, a financial-technology research and consulting firm.

While brokers are not necessarily merging departments, Mizen says, "You may find they're looking at risk differently across equities, derivatives and proprietary fixed income all at once."

Today, many firms are prevented from sharing sales leads and taking advantage of cross-selling opportunities because each product area has a separate technology platform, a separate profit and loss (P&L) statement and employees are compensated by allegiance to a certain business-unit head.

In the go-go 1990s, sell-side firms could afford to run these technology fiefdoms. But with the collapse of the Internet bubble in 2000, and the reduction in headcounts and slashing of IT budgets that has occurred over the past three years, firms can no longer justify this fragmentary approach.

"I'm seeing debate at a broad level in the way that firms are organized," says Bill Cline, global managing partner at Accenture. "Maintaining two sales forces (for equities and fixed income), is that economically sustainable?" he asks. "If that higher cost is not translated into some tangible value proposition, it's not."

While the jury is still out on whether firms will tackle the broader organizational issues, a very small number of firms have achieved some success in breaking down silos that exist across asset classes, says Cline.

"The trend is to use technology to create more common-delivery capabilities," he says. Putting in a common CRM (customer-relationship-management) front end that spans the asset classes is certainly a foundation, says Cline.

A few major players, including Morgan Stanley and CSFB, have already begun implementing technology to merge their equity and fixed-income trading floors. Deutsche Bank has started implementing a customer-centric view of multinational corporations that issue and originate debt.

In September, Merrill Lynch announced a reorganization of its global-markets and investment-banking division so that capital markets falls within investment banking.

Two factors are driving the change, says Rahul Merchant, chief technology officer of Merrill's global markets and investment-banking division (GMI).

First, there's the desire to service the client more effectively. Merrill must be able to tell a client "what he or she has done with (the firm) on the equity as well as on the debt side," explains Merchant. Second, as margin and revenue pressures have hit brokerage firms, Merrill and others have looked to consolidate by taking out middle layers and legacy systems.

"Over the past 18 to 24 months, we've been able to focus on the pure meat-and-potatoes issues," says Merchant, asking, "How do we have effective use of our precious dollars and make life better?"

Merrill Consolidates: Cutting out the Middle

Though Merrill has made use of messaging middleware so systems can communicate across silos, product silos still exist.

"Everyone continues to trade those products all the time and (yet) the idiosyncrasies of these products will not allow us to consolidate the front and back," says Merchant. For example, "In equities, you have listed-cash, derivatives and then you've got convertibles and so on and so forth," says Merchant. "How would you price a convertible bond using a cash-equity platform?"

Though it can't collapse the front-office silos, Merrill has had success using the same messaging infrastructure in the front and back office.

After the trade is executed and it passes through different systems - back-office systems, risk-management systems, credit systems, the margining system - it uses common infrastructure, says Merchant. "So now what you're doing is you're taking away the front-end independent piece and making it more generic," he says.

At the corporate level, Merrill has consolidated the credit, margining and the risk-management processes along all products.

However, this is not day-to-day risk management, which takes place in the middle office. "This always stays with the individual P&L owner," Merchant emphasizes. "We can't take that away from them, that is their job. I'm talking about all the corporate functions which had silos of systems. They have been consolidated quite a bit."

Client-information systems have been consolidated too. Here, the goal is to put together a report by an institutional client who has done business with the firm in stocks, bonds, derivatives and convertibles.

In the past, "You would have a client-information system for every five or 10 different products, then you would have a system for another five or 10 different products, and then you would have a system that consolidates all of those things," says Merchant.

Now, the client system is a thin-layer that can extract information from several different product systems and consolidate this information using a good middleware technology, says Merchant.

"The same thing has to be done behind the scenes to have a global and comprehensive view of the customer," says Accenture's Cline. Firms need to normalize data feeds and create a common repository. Firms can either build a new common infrastructure, or they can do it virtually using messaging technologies and connectivity. But this spans a lot of different data - "how you identify the customer, all kinds of positions (and) contacts. It's a very challenging exercise," says Cline. But he believes the "pay off" is there. "When we run the numbers we usually find that those kinds of products improve cross selling," adds Cline.

But one Wall Street watcher says there is a limit to what firms can achieve with technology alone. "I think organizations also have to change their structure," says Sang Lee, manager of the securities and investment practice at Boston-based Celent Communications. "I think technology can't resolve problems like that. Each silo is ultimately responsible for their own P&L. If I'm heading the equity desk, I couldn't care less that fixed-income isn't doing well because (their) technology isn't working."

Technology will be an enabler in busting silos insists Mizen, who points to the impact of the Financial Information Exchange (FIX) protocol "with its huge adoption in equities, take-up in fixed income and recently signed agreement with the Futures Industry Association to expand into listed futures and options.

By fostering standardization in brokerage, "Technology allows a much better communications layer of what's going on in all areas in the trading level," she says.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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