Embracing Emerging
Technologies for Quantum
Growth
Nov 2008

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Qualitative change (not any change)
The creation of something new (not just the adoption of somebody else’s novelties)
The innovation process includes invention, and successful implementation or market launch (commercialization)
A focused approach to enhance user value or productivity
TYPES OF INNOVATION
 Radical innovation: Developing a completely new product/ service which did not exist (Securitization)
 Incremental innovation: Improving upon a previous innovation
(Straight Through Processing)

 Creation of a differentiator through a superior product/service
 Has a longer time to market
 Success of the product/service is determined within a short time period post launch
 Creation of a differentiator that captures value through efficiencies
 Has a shorter time to market
 Success of the process innovation is determined over a longer period of time
Product and process innovation complement each other and one alone is seldom good enough to drive quantum growth

 A financial system is as strong as its weakest link.
– Alan Greenspan, former chairman of the US federal reserve bank.
 IT remains the key to differentiation, competitive advantage and institutional survival.

E-trading has led to skyrocketing of trade volumes with average trade size plummeting
Technological revolution
Multiplication of execution venues
Increasing transaction volumes
Industry associations Electronic trading
Industry adoption of
STP
Service providers
Market participants
Capital
Market
Markets
Players
Consolidation
New competitors
Profitability pressure / cost containment
Security
Firm-wide risk focus
Economic environment
Internalization
Systemic risk management
Globalization
Client demands for improved services and lower costs
Regulatory change

Significant changes in last decade
 Shift from open outcry to electronic trading systems
 Birth of online retail brokerage as separate from a brick-and-mortar brokerage
 Growing disintermediation
 Direct Market Access
 Reduced turnaround time for IPO
 Advanced derivative products
 Improved pricing analytics and modeling
 Competitive landscape with free markets
 Reduction in transaction costs
 Globalization of markets
Key IT enabled functions
 Algorithmic trading
 Electronic communication networks
 Risk management frameworks
 Order entry and order management systems
 Client Relationship Management
 Derivative trading tools
 Asset management and administration
 Portfolio management tools
 Clearing and settlement
 Real time position monitoring and collateral management
 Risk reporting
 Historical trend analysis and data mining

Significant changes in last decade
 Variety of new products and services
 Emergence of new delivery channels
 Convergence of core banking business and information technology
 Mergers & acquisitions
 New services (Tele-banking, E banking, door step banking)
 New approaches to banking
(automated self banking centers)
Key IT enabled functions
 Core Banking
 Internet/ electronic banking
 Mobile banking

Payment system gateways
 Smart cards
 Risk management

AML/ KYC
 Kiosks/ new delivery channels
 CRM/ Call Centers/ Help Desks
 Wireless technologies
 Resource management

A rider on IT spend and technology adoption:
Spending more on IT doesn’t necessarily translate into higher profitability
 Spending more on IT doesn’t necessarily mean higher profits.
 Institutions with above-average
IT expenditures have higher costto-income ratios and belowaverage increase in revenues.
 Many institutions spend too much on running their daily operations and too little on innovations
 Institutions face difficulty in translating IT investments into real business value
 Scale does not guarantee cost benefits. Many big institutions have yet to see sustainable cost advantages from their vast IT operations

What matters is the way IT is adopted strategically and implemented tactically to drive growth in business
Source: McKinsey
 Top-performing banks form their IT strategies in close cooperation with the business
 High-performing banks see IT as more strategic, and they drive more of their IT agenda directly; that is, they outsource less

Architecture
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Characteristics
Single integrated solution usually provided by an external party
Pros
 Common hardware platform
 Single vendor relationship
Cons
 Overall functional coverage tends to be weak
 Dependent on supplier to ride the technology wave
Mix of solutions from multiple vendors that have interfaces / protocols for integration
Multiple solutions provided by external parties and developed internally
 Advanced functionality coverage
 Ability to replace and enhance depending upon technology evolution in a space
 Advanced functionality coverage
 Lower cost to replace parts of the system architecture with new technology components
 Integration challenges
 Higher overall cost including maintaining multiple vendor relationships
 Mix of hardware, software platforms
 Integration challenges
 Higher overall cost including maintaining multiple vendor relationships

• Cost-efficiency : Electronic trading greatly lowers continuing operation costs by bringing significant efficiencies to the trading process. This leads to a dramatic increase in trading volumes.
• Removing physical constraints on markets : It removes physical constraints such as geography and the number of market participants.
•
Disintermediation: By providing a means for natural buyers and sellers to meet without a market intermediary, electronic trading has a great potential to dis-intermediate markets.
• Blurring Regulatory Distinctions: It poses regulatory challenges for market participants and regulators alike

Recent evolution of domestic equity market capitalization in USD
Source: World Federation of Exchanges

Exponential growth in trading volumes
Exchanges had to scale up their
IT systems
Growth in Indian Stock Market (USD billions)
Source: Dun & Bradstreet

Front Office
 Better campaign management using CRM tools
 Targeted distribution of research in quick time using internet and mobile technologies
 Real-time market data use with improved data warehousing
 Program trading efficiency
 Improved beta with trading in dark liquidity pools
 Faster analytics using grid computing
Reliable disaster recovery
Middle Office
 Automated accurate fee calculation
 Swift quotation of commission structures
 Better order management
 Real-time post trade risk management and portfolio evaluation
 Improved collateral management
 Tools for accurate performance measurement
 Fast and accurate margin calculation
 Electronic client reporting
Robust infrastructure for performance & uptime
Improved
STP
Robust security
Operational Risk Management
Back Office
• Reduced failure in settlements due to automation of manual processes
• Faster and accurate corporate actions processing
• Accuracy in accounting and reconciliation
• Quick cash transfer with electronic payment gateways
• Better risk reporting to management and regulatory bodies
Automated exception management

 Improvement in service levels
 A single window for multiple services
 Increase in convenience for customers – including being able to transact on the go
 Transparency – ability to compare products/services feature for feature against other competitors in the market
 Security of transactions and confidentiality of data

Understanding and adapting to the client’s needs, through a broader distribution network, supported by a wider array of service/product offerings and capable talent, and ‘state-of-the-art’ technology systems
Convergence of financial institutions is the blurring of conventional boundaries separating the traditional providers of once-discrete financial services (i.e. life assurance, short-term insurance, banking, health, general retail)

Emergence of a financial supermarket is leading to Client Centricity
Risk cover
Wealth Management
Education provision
Retirement
Savings
&
Investment
Home loan
Medical
Personal
Cover
Wills
& trusts
Financial
Education
Financial
Education
Client
Medium term credit
Car & household cover
Banking /
Transactional
Lifestyle

Next 2 years
 Real time market-data distribution

Algorithmic trading tools
 DMA trading tools
 Credit and market risk calculation engines
2 to 5 years
 Complex event processing for trading applications

Consumer on-boarding tools
 Mobile solutions for developing and emerging markets

Operational risk engine

Private virtual worlds
5 years and more

Enterprise reference data management solutions
 Financial social networks

Component based buy and sell side securities processing

Social Networking
 In order to conduct an on-line transaction in which both parties have confidence, identity is a key.

Facebook is one platform providing identity. Based on this identification, third parties can make use of this base for deriving software applications for transaction services.
Cloud computing
 Promises reliable services delivered through next-generation data centers that are built on compute and storage virtualization technologies.
 Consumers will be able to access applications and data from a
“Cloud” anywhere in the world on demand.

The Cloud will appear to be a single point of access for all the computing needs of consumers.

NSE and BSE had to scale up their IT systems to accommodate increasing number of brokers across various instruments

 NASDAQ tries to keep its systems scaled to two times the level of the previous peak in IT demand.
 Has 3 sets of websites: Trade Station, private and public websites
 Has Web 2.0 features:
 Mobile site for nasdaq.com,
 boardrecruiting.com
: social networking for recruiting candidates for corporate directorships.
 Blogs are used for internal use;
 site shareholder.com offers interactive webcasting.
 It recently consolidated all fundamental and real-time data into a single, internally developed ticker 30 plant. A custom made content management system was developed

Closer at home - National Stock Exchange uses technology effectively
 NSE's IT set-up is the largest by any company in India. NSE can handle up to 6 million trades per day in Capital Market segment
 NSE introduced a nation-wide on-line fully-automated screen based trading system (SBTS)
 NEAT is a state-of-the-art client server based application which helps achieve minimum response time and maximum system availability
 Technology has carried the trading platform to the premises of brokers and to the PCs of investors
 More than 9000 users trade on the real time-online NSE application
 Trading cycle reduced from 14-30 days earlier to T+2 now