Source: Tim Jennings, City Practitioners
Traditionally, lines of business within investment banks have built their own application suites, tailored to the particular business process and asset classes handled. However, this "silo-based" approach is an obstacle to cross-asset trading and maintaining a large number of applications is very costly.
Banks are keen to consolidate financial products onto a smaller set of software assets. As part of this trend towards consolidation, investment banks are beginning to look more closely at using enterprise trading software.
How does enterprise trading software work?
Rather than using a host of different applications - as is currently the case - a bank would employ an enterprise trading software package, typically from an external vendor, which would then support business processes across front, middle and back offices, as well as across multiple lines of business and regions.
This solution potentially has a number of advantages – better integration of financial information, fewer control points to manage, reduced cost and complexity. Cross-selling could also be facilitated, while back office processing and time-to-market for new products could also be improved across the business. From a technical perspective, enterprise software would enable the development of centres of expertise on the chosen platform, while expertise itself would be easier to find in the skills market. The hardware footprint would be reduced, and development analysts become potentially freer to focus more on value-added areas. Using shared services support models would also become considerably easier, further reducing cost.
Is this ERP (Enterprise Resource Planning) for banking?
ERP solutions were implemented across traditional businesses from the late 90’s to manage the supply chain on a single platform. Is banking following this trend? A comparison of enterprise trading software and traditional ERP solutions reveals many similarities. However, differences also exist. For example, while traditional ERP systems manage data (e.g. inventory, orders) and process, enterprise trading systems must also manage complex financial risk.
Traditional ERP implementations provide a number of pointers for banks looking to install enterprise trading software. For example, ERP projects teach the importance of synchronising the business operating model across lines of business. Thus, when carrying out this type of consolidation project, banks should ensure pricing and risk analytics are standardised across all business units, create a common view of shared data (e.g. counterparties, market data, instrument data) as well as a standard approach to end of day schedules, calendars etc.
And there are other lessons to be learnt from ERP. First and foremost, firms should not underestimate how much time and effort is required to test and integrate this type of system. It is equally vital that firms restrict customisation of vendor solutions to a minimum. Early ERP projects overran notoriously due to over-ambitious scope and customisation - firms must realise that not "keeping things simple" can be both high risk and lead to considerable delay. Excessive customisation also opens the door to exactly the same ongoing maintenance problem they were trying to escape from in the heritage systems.
Is investment banking ready for enterprise trading systems?
When deciding whether to go ahead with this type of consolidation project, banks must consider a number of factors including possible disruption to business. New technology deployment can leave organisations considerably less efficient initially whilst the workforce learns new systems and processes. The introduction of enterprise trading systems may also impact on flexibility, and any gain in business integration must be weighed against the loss in line of business nimbleness, However, the prize is still significant: cost savings in IT support and development; benefits from common business processes and models; benefits from a single interface onto the front-to-back trading process. Loss of flexibility can be avoided with careful, up front planning, and may be offset with increased opportunity for cross-selling.
At present, lines of business still remain independent fiefdoms. The widespread take-up of enterprise trading software is likely to remain some way off as the introduction of single solutions across multiple lines of business would require considerable buy-in from traders, particularly those at a senior level. At present, for many in the trading community, such degrees of consolidation might well be perceived as a step too far.
Nevertheless, banks are keen to see progress made in this area. In the end, however, progress is likely to be evolutionary, with symbiotic expansion both of vendor capability and end-user confidence. And vendors are already expanding their capacities, well aware of potential selling opportunities to both buy- and sell-side institutions. As to the banks themselves, those that make the greatest headway will be the institutions that mitigate implementation risks by avoiding overly-ambitious, over-complex projects, choosing to keep consolidation initiatives relatively simple, at least in their initial phases, and focus on realising the true benefits.