Total spending on derivatives software and services by global capital markets institutions will increase from $3.6bn in 2006 to $5.75bn by 2009, a compound annual growth rate of 18%, according to the latest TowerGroup research.
This makes the derivatives market a much faster growth area for software than equities, fixed income or foreign exchange (FX), which are growing at a combined five-seven per cent says the analyst group.
Investment in derivatives IT will be driven by massive growth in volumes, pressure from clients and regulatory agencies and the current lack of automation compared with cash markets, says TowerGroup. Top priorities in IT budgets will be risk management, trading, pricing and analytics, followed by software for accounting and reporting.
Although the backlog of unsettled credit default swaps has attracted a great deal of attention in the last 12 months, it just scratches the surface of the real opportunity for technology vendors, says TowerGroup.
But the firm warns that the derivatives software market is still very fragmented across products and markets. Only a few of the large vendors from the cash market are major players in this space and brokerage firms have only just begun to direct budgets toward derivatives.
Dushyant Shahrawat, research area director at TowerGroup and author of the report, says brokerage firms will look to automate manual processes and replace proprietary applications with off-the-shelfpackages as larger vendors enter the market and bolster their offerings.