On Shaky Ground

The underlying theme at SWIFT's SIBOS conference in Sydney in October was the need for financial industry participants to enhance their infrastructures.

The underlying theme at SWIFT's SIBOS conference in Sydney in October was the need for financial industry participants to enhance their infrastructures.

With a number of game-changing events on the agenda for the next 12 months -- most notably Reg NMS in the U.S. and MiFID in Europe -- many are asking if the industry is prepared to absorb these changes in such a short period of time. The well-meaning alterations of Reg NMS and MiFID certainly will bring unintended consequences.

The new regulations mostly are designed to increase the efficiency of the markets and provide better protection for investors. But one of the biggest changes that will result from the new structure of the markets is the exponential increase in the volume of messaging traffic, trades and market data. While most agree that there will be an increase, the guesstimates vary widely. Some estimate a doubling of trade volume; others predict that trade volumes will quintuple and market data volume will explode.

Therein lies the problem. Everyone is guessing when it comes to how firms' architectures need to be enhanced. If you build only for X traffic and the reality turns out to be X-plus-500,000, you're out of a job. If you build for X and the reality turns out to be X-minus-500,000, you've built a lot of capacity your firm doesn't need -- you've wasted a lot of IT dollars, also something you don't want to highlight on your resume. As a result, some firms may be opting to enhance their capacity slightly while adopting a wait-and-see approach.

But as the now well-circulated Corrigan Report details, financial firms have a dismal track record of anticipating market disturbances (that is, small stresses to the market structure) and an even worse record at trying to anticipate market "shocks," large geopolitical or financial events that seriously test the market's resiliency. And, as any market participant or casual observer knows, in times of stress, message traffic and trade volumes skyrocket.

If a market shock were to occur shortly after Reg NMS goes into full swing, would the market infrastructure hold? If the infrastructure crumbled, it could be disastrous, exacerbating the severity of the shock and prolonging any recovery as investors would lose confidence in the ability to safely move their capital in and out of investments. The market needs the tools and the infrastructure to weather financial storms. Waiting to see the intensity of those storms could be more costly than investing now to enhance and improve existing infrastructures.

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio