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U.S. Trading Technology Spending Slowed in 2008 by Credit Crisis

U.S. spending will slow in the coming year, but growth is on the horizon abroad.

The fallout from this summer's credit crisis likely will have a ripple effect on trading technology spending in the coming year, according to Stephen Kimsey, principal at Kimsey Consulting. But Kimsey says that any spending downturn will depend on the outcome of the credit crisis and the speed with which it is potentially resolved. "Our expectation is for any pain in trading spend to be felt for a period of months as opposed to years," he relates.

"Trading technology spend does not follow the latest fads," Kimsey explains. "The majority of spend will continue to be on systems development -- the majority of trading technologists that we speak to have a comparatively large backlog of projects."

But the current market climate has had a definite impact on planned spending for the coming year. "We are seeing some hesitation among buyers to commit to IT spending that perhaps 12 months ago would have gone ahead without question," says Kimsey. "It is, however, a mixed picture, and one that we do not expect to become any clearer until the middle of next year."

According to the firm's most recent U.S. Tri-State Trading Technology Study, spending on trading technology for 2007 was about $5.9 billion for the region, up 5 percent over the previous year. Though Kimsey estimates that about 20 percent of trading operations will be entering a technology refit cycle through the end of 2008, he expects technology spending in 2008 to be curtailed a bit following the summer's market volatility. "We would expect a proportion of the planned refits to be delayed, probably until 2009, and also a proportion to be scaled down in scope as trading firms look for ways of curtailing their immediate cost," he says.

Looking overseas, Kimsey says trading technology spending in the U.K. and Western Europe will remain comparatively flat with some opportunity for growth in the hedge fund sector. "In the U.K. we expect to see a short-term reduction in the growth of trading positions," he explains.

"We would expect to see the overall number of trading operations [floors] decline in the most mature markets as institutions merge, realign their business, etc," says Kimsey. "There are clear economies of scale in the trading sector -- applicable to both buyers and vendors -- and these become more evident in the mature and IT-sophisticated developed markets."

Growth Markets

In Eastern Europe, however, while technology spending currently is relatively small, it has been rising at about 10 percent per year, and Kimsey expects that trend to continue as markets in the region develop further. Kimsey also expects a continued rise in spending on trading technology in the Middle East/Africa region, particularly in the oil states (mainly Dubai) and South Africa.

According to Kimsey, spending on trading technology in the Asia/Pacific region will continue its upward trend as well, with China and India leading the demand, he says. "This region has proven to be a valuable fall-back for many of the trading technology vendors, and we would expect the region's importance to be even greater next year," Kimsey notes.

Though Kimsey points out that the majority of spending on trading technology has come from the sell side, he says the spending gap is closing. "Historically, the buy side has spent considerably less on trading [investment] technologies, primarily a reflection of the longer-term nature of their involvement in the wholesale markets," he explains.

But, Kimsey continues, the distinction between buy- and sell-side firms continues to blur, and buy-side firms are taking a more proactive role in the markets and are using more-sophisticated investment instruments. "Hence this requires more-sophisticated trading systems than it did in general 10 or even five years ago," he says.

The Shopping List

According to Kimsey, in broad terms, technology spending in 2008 will be directed fairly evenly among market data technologies (25 percent), applications (25 percent) and trading telecom solutions (22 percent), followed by hardware (15 percent) and other trading information technology (see chart, page 15).

But what are the hot technology spend areas for 2008 and beyond? Kimsey sees regulatory and compliance-related tech, as well as improved risk, market and operational management systems topping the list.

Of course, the standards also will continue to get a large chunk of the IT spend. "Clearly, trading platforms [order management and execution amangement systems] will be on many trading technology buyers' lists, and we expect the next few years to be an active time for vendors of this technology," explains Kimsey.

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