Platforms – Are they coming?

I have used this blog to talk about platforms in recent posts. Last week, Richard Veryard, a UK blogger and “business technology evangelist” picked up on what I wrote in his blog here. Richard asks will financial services firms provide “radical improvements to customer experience and services”. He doubts it will happen soon, ends his post by saying “I live in hope”…

I to have hope that financial services companies will innovate in their product offerings and will get away from feeing the customers to death and a focus on their own bottom line to the detriment of their customers.

Examples are starting to trickle in… Here is one from earlier this week from PNC Bank. The PNC Virtual Wallet is a special set of accounts with little to no fees (assuming minimums are met) and provide a set of services around managing cash flow and savings.

Do you know of other examples?

MIT CIO Symposium – Financial Services Panel Notes – “Customer Experience” & “Focus”

I’m at the MIT CIO Symposium and am sitting in on the Financial Services panel. Here are my notes and I apologize if it comes out as a bit of a stream of consciousness:

Panelists are:
Niraj Patel (Witmer LLC)
Marc Gordon (CIO, Bank of America)
Keith Dennelly (MD, State Street Global Advisors)
Joseph McCartin (CIO, National City Corp)
Guillermo Kopp (ED, TowerGroup)

Alignment
Business IT alignment goes beyond business & IT all the way to the customer
One way on of the panelists worked to get alignment was to get on plane with user on flight all the way to Tokyo
B of A… IT is embedded within the business. People sit physically in the same location as the business. IT has a seat at management table. They are completely integrated parts of their businesses. Working to get aligned with customer is their commitment. Marc (and other B of A executives) spends 4 hours per week directly interacting with their customers.

State Street… His group is paid directly by line of business. Alignment is natural for them.

National City… IT used to have a line of business alignment. Now durable process orientation – alignment with customers. Ability to integrate product and services for customer benefit. Key direct reports are called Business Information Officers.

TowerGroup…. Don’t look inside out anymore (read: are the business processes aligned to what is being delivered to the customer). Instead, look outside in… What does the customer need and want? Web 2.0 technologies enables the customer to know faster what the companies can do for them. Clear focus on customer brings alignment both internally and with the ecosystem of suppliers.

What changes do you need to be making based on the economy, etc…
B of A… Doing 3 large acquisitions / integrations at once (typically they did acquisitions serially). The amount of change they are dealing with is unprecedented. They need to focus aggressively on only what needs to be done. Need to be keenly focused. “relentless focus” to handle the capacity of what needs to be done. They have had a dramatic reduction on the number of projects with almost no decrease in total spend.

State Street… Major leadership changes internally. Challenge to bring new leadership team up to speed and to make sure the technology team is aligned to their objectives. Focus is also a key. Customer of experience is a key – information more readily available and timely.

National City… Mortgage mess has made it very nasty. $7 billion recapitalization. Before this – all key projects were protected. These were all transformational. He did have to reduce staff and they did this by drawing down contractors. They closed some systems as they exited businesses.

TowerGroup… Customer driven innovation in products. Collaboration tools. Business intelligence. Customer intelligence. Need to release capacity for innovation. Typical FS firm uses 80% of IT spend for maintenance. Need to push that number down to increase innovation.

B of A… This is a time to differentiate ourselves – bring products to market to help customers in their situation.

How do you innovate given what the consumer is going through?

B of A… Traditionally bank was organized around products. Now it is organized around customer. We are agents of change. We have always had a platform for change, but that is a burning platform today. It is a wonderful time help customers.

National City… Know me, look out for me, reward me, and trust me. What is the customer’s objective? Business architecture review board is all business people and facilitated with IT. This group sets the strategy IT initiatives. Even given the financial challenges of the bank not one of these strategy projects has been impacted.

Are you willing to spend more to get another customer interaction?
B of A…. B of A measures failed customer interactions, and can translate that in dollars, customer experience, etc… It is critical for them to get more customer interactions.

State Street… Increased demand for business analytics. Institutional trading used to be a relationship game, now an analytic game.

From the Q & A

B of A… Expected to be the low cost IT department in the industry. Currently they are 25% better than the norm. The goal is not just to maintain that cost advantage, but improve the advantage.

B of A… Sponsoring the MIT Media Lab for 5 years. The goal of this sponsorship is to answer “what is the next generation of financial services?”

More on platforms….

So one question that came to me after yesterday’s post on platforms is this -> Is better to solve the problem at hand simply and directly, or build / deploy a platform?

Here is one answer I saw recently about whether to switch from PC’s to Mac’s in business.

Adopting—or even just adding—a new platform is more than buying a new computer: current applications need to be assessed for compatibility, sometimes requiring replacement or supplementation; employees need to be trained and conditioned to work in a different environment; and current support staff and procedure needs to be modified—and often supplemented—in order to span both the old and new platforms. The amount of time needed to successfully and effectively deploy something new is far greater than the time needed to throw out an old PC and buy a newer one. (source: http://www.macuser.com/business/macs_in_business_making_the_ca.php)

Switching to a platform is an event. It has switching, training, launching costs. These costs need to be considered. The benefits of a platform are often hard to quantify, but need to be considered as well. Accordingly, there will be many cases where making the solution a platform will not be worth it.

Some thoughts on platforms in financial services

As I’m on my last of 5 flights in 54 hours, I am thinking about the word Platform… This is a word that is being used a whole lot these days. Facebook is a platform. eBay is a platform. So is Amazon. Apple has several platforms: the iPod, the iPhones, the iTunes Music Store, the iMac…

What about financial services platforms? Sure, the firms I’ve worked in talked about their Equities business as a platform to deliver a variety of services to clients (e.g., sales & trading, research, banking, etc…). Then there are the technology platforms: the core order state engines (or order management platform), the messaging platform (was rnet the first platform I used in my career?), and the database platform. Is the instantiation of SOA a platform on which a variety of applications can be built? Sure…

Are there platforms that are external to the financial services firms? Surely, your Bloomberg terminal is a platform, and a pretty useful, albeit expensive one. Other products try to be a ubiquitous platform like Mayor Mike’s, but as I sit on my flight tonight I can’t think of a better Financial Services platform. What did I forget?

What makes a good platform? While not a comprehensive list, good platforms need to be extensible, they need to have utility beyond utility envisioned by the designers, they are foundational, they are simple, they are focused, they are powerful, they scale, and they are open. As we live in the age of Web 2.0 / Enterprise 2.0, I think modern technology platforms need to add two more features: (1) they incorporate, facilitate, and/or leverage collaboration, and (2) they are accessible and/or leverage the Internet (and are reachable via Web Services and/or SaaS?). What did I miss? Do you agree with my list of what is a good platform?

So, why does this all matter? When I designed applications I tried to build solutions that were a platform. One of the people in my career that had big impact on me told me that the best solutions solved not only the problem you were being asked to solve but two others. Over time, I took that to mean you should look to build solutions that either were a platform or solutions that leveraged an existing platform.

Amazon’s EC2 platform has revolutionized how startup technology firms launch their initial solutions. That platform takes away the need to have servers and lines in data center (and all of the staff and technology required to service this). You no longer need to forecast your demand and buy headroom. You simple pay for what you need and provision more space / power on the Amazon platform on demand.

What can financial services learn from this? I’ll explore that in future posts, but I encourage you to jump in and frame that conversation.

Talent challenges for Financial Services companies

Yesterday I had lunch with an old friend (and let me call him Mike for the purposes of this blog post). We had not had lunch together in over 15 years, and we both enjoyed catching up. My friend works at a large bank, and as I explained nGenera’s mission to him, his answer was “well that makes sense, but our firm can’t think in those ways” and “I wish the CIO, Jim, would take the time to consider these issues”.

As I reflect back on the lunch, it is those statements that keeps singing in my head… Why wouldn’t a large multi-national bank be interested in becoming an nGen? Wouldn’t they be better off if they do – and better off in the terms that Wall Street talks about – better off with increased shareholder value? Why wouldn’t a CIO, even in a challenging economic climate, want to strive to collaborate and innovate?

Let’s call Mike and Jim’s firm B.O.B. (Big Old Bank). B.O.B. is an amalgamation formed through purchasing and partially assimilating dozens of banks (some of which were quite sizable to begin with). They have many cultures. They operate in many countries. They popular press is questioning whether they are going to survive. They have a siloed and dysfunctional set of strategies that are not coherent and rational. They have an annual budget process that does not complete until well into Q2 and starts again in Q3. The budgets and strategies are top down and the people on the ground, the embedded leaders, are not consulted on preparing them, so they generally unrealistic, and the goals of the strategy and budgets are largely unmet in the end.

Our hero, CIO Jim, wants to be successful and has been at a firm that was successful. He knows how collaboration works. He knows how motivated empowered teams can do extraordinary things. However, he is fighting a mountain of resistance at B.O.B…. Jim has told Mike it will take 3 years and he’ll change the culture at B.O.B., and will make them a success.

I don’t see how Jim has 3 years to do this – if he does not solve this talent problem, and solve it quickly one of two things (or both) will happen:
(1) B.O.B. continues to have problems competing, and sells itself, shuts down, or other such remedy
(2) Jim loses his job

Jim needs to understand that he is facing a crisis, and in that crisis, he needs to act decisively and deeply. He needs new models of operating. He needs to be an nGen leader and he needs nGen talent.

Specifically, he needs to
(1) Harness the power of his embedded leaders by encouraging and rewarding open, honest, and collaborative communication. Put up a wiki! Look at what Best Buy did with theirs. Leverage this for innovative ideas. Projects that make sense. Solutions that add business value.
(2) Establish a process of continuous strategy, and a vehicle (the wiki again?) to collect and transparently vet all ideas publicly.
(3) Provide skills training for his key leaders on how to operate in a nGen
(4) Let teams self-select to solve issues. Another customer of ours had a consulting company pitch them 9 months and $1mm+ to put up a functioning wiki and get it adopted. The CIO there challenged his team and told them anyone who helped get a wiki up on the weekends would be paid $10,000 each for their troubles. It was done in one weekend for $50,000.

Jim, I know you are crushed right now, but I think it is time you acted decisively and deeply.

A month ends, a chapter ends, a chapter starts

I have been quiet in the blog for a bit too long for my taste, and as April ends here in NYC (and it is a beautiful day here, BTW) I am sitting at my desk reflecting on a lot of things. That led me back to my blog editor, MarsEdit and this post.

A chapter is ending today for me and my team. BSG Alliance has become nGenera in the past week, and around the change in name is a refocusing of my team’s work and some changes to our staffing. Friends and partners of mine are going in different directions. Some are staying with nGenera and are dedicated to taking the nGenera message to financial services. Others are moving on, and I hold out the hope and belief that we will continue to work together, but now as external collaborators instead of as internal partners. These changes have brought on this melancholy, and I’m sure the recent rains in NY (while much needed) did not help.

However, as I look forward to May I am very excited and energized about nGenera. The BSG Alliance I joined almost a year ago has transformed itself in more than just name. As nGenera we are truly something unique and new. We are no longer primarily a services company but rather a product company which collaborates with our customers to co-create their platform for business innovation. We have deep thoughtful research, and an incredible team led by Don Tapscott. We have strong capabilities in our nGen Talent, nGen Customer, and nGen Leadership product sets. We offer expertise on demand for our customers through our network of internal and external collaborators and partners. We have a collaboration platform that we leverage for foster innovation with our customers. We have specific industry focus for financial services, energy, and utilities. Finally, we have partners who bring their software to our customers through SaaS delivery via our innovation platform.

While as a blogger, I have no true idea who has interest in what I put out there, I have decided to rename and rededicate this blog today. I have changed the name from “Tom Steinthal’s Financial Services IT Blog” to “Innovation and Collaboration in Financial Services”. Further, I will use this forum to discuss issues related to nGen’s in Financial Services. Thank you for joining me on this journey.

SOA on Wall Street

Wall Street and Technology magazine posted this article regarding the Future of SOA on Wall Street. Penny and I talked in January, and she did a nice job of quoting me in this article. The only problem is calling BSG Alliance as simply an IT Consultancy. BSG Alliance is a platform firm that help firms become next generation enterprises on demand…

Wall Street… Compliance… Profits…. Could better analytics help?

Yesterday, the WSJ reported that the SEC is looking into Merrill Lynch’s trading activity for potential front-running violations. To quote the article

The trading probe is a broad look at the relationship between big, institutional investors and the brokerage house. Specifically, one area of inquiry involves whether certain Merrill employees improperly stepped in front of orders placed by Fidelity Investments, the large mutual-fund operator, these people said. The period under scrutiny covers 2002 through 2005.
[...]
The practice is known as “front-running,” and previous regulatory scrutiny has resulted in regulatory fines and changes in industry practice. It gives an unfair advantage to traders because orders from big investment houses such as Fidelity often move stock prices.

For example, if a trader received an order from an institutional investor to buy stock, the trader could then step ahead of the order to buy shares for the house account that could then be sold to Fidelity at a higher price, locking in a profit.

While I have no insight in this case in particular, and know that all firms watch for front-running as part of their standard surveillance activities, I do wonder if better business analytics could be useful in finding and rooting out potential regulatory issues before the regulator finds them. Main Street firms such as FedEx, Apple, Dell, and Wal-Mart routinely use business analytics to make business decisions, to improve business processes, to streamline logistics, to target customers, to influence customer behavior, and ultimately to generate income and profits.

Why doesn’t Wall Street follow Main Street’s example in their use of business analytics? Why doesn’t Wall Street use business simulations to model the behavior of traders and trading floors? As the business of Wall Street is more and more automated, Wall Street firms are not following Main Street’s example and building analytics and simulations. Why not? The tools are there. The data is there. The technology is mature. Is it that Wall Street trading houses are still focused on the day-to-day trading P&L and are unwilling to take a step back to look at ways to incorporate best practices from Main Street to their processes? Is it ego? Wall Street is not some mysterious dark place where the lessons of business analytics, simulation, supply chain, and customer experience do not apply. It is a place where these lessons have not been applied.

What a shame. An NGE would look to use business analytics and simulation as part of its standard day-to-day work.

NYSE buys Wombat

Yesterday, the NYSE announced that it purchase Wombat for $200 million (stories are here and here). I have been impressed with Wombat’s product from when they pitched my team a few years back. They also impressed the author of magmasystems blog (I’m just upset he beat me to the punch on the post on this, and I told him that last night!).

Anyway, back to Wombat. It makes perfect sense why the NYSE wants to do this. With SFTI and TransactTools, they have two pieces of Wall Street plumbing that allows for easy networking (SFTI) and easy FIX protocol handling (TransactTools) regardless of the players. For example, at a recent firm, we used SFTI to connect to SunGard to access their Brass product. The NYSE trading floor was nowhere in loop on this deal. It was a networking connection between two financial firms, and SFTI provided the connectivity easily at a fair price. TransactTools allows for FIX connections with any FIX enabled financial player. Now add Wombat, and you can add market data to the bundle of plumbing services available from the NYSE technology arm. It does not matter if you want to trade with the NYSE, Nasdaq, BATS, TSE, LSE, EuroNext, LIFFE, etc… if you want plumbing services, the NYSE is positioning themselves as your choice.

Nice job NYSE. (Wow that was hard to say… Have we turned a corner?)

FINRA fined BD’s for advertised trade violations

// Rant on

FINRA announced this week that 19 firms were being fined a total of $2.8 million for inaccurate advertising of trade volumes.

So what were these firms doing? As a matter of background, sell-side equity trading firms routinely use advertising services from Thomson Financial, Bloomberg, Reuters, and a few others to inform their institutional customers what activity is going on at that sell-side firm. Specifically, there a 3 types of advertising:

(1) Advertised Trades (“AT”) – AT messages tell the buy-side what volume that sell-side firm has traded today in a given security. The theory is if you are a big player in a stock today, then you are more likely to be in contact with buyers and sellers, so the buy-side might be more inclined to send order flow in that stock to you.

(2) Generic Indications of Interest (“IOI”) – IOI messages state the posture the sell-side firm is representing to their customers. These are message like “large buyer of GOOG”, “medium seller of DIS”, “two-way large KO”. IMHO, Generic IOI messages are of limited value beyond potentially putting your name on the customers screen.

(3) Specific Indications of Interest (“Super Messages” and “Natural IOIs”) – Supers and Natural IOIs are messages with a specific price and share amount. For example, buyer of 50,000 FITB. Supers and Natural IOIs are identical in structure with the only difference being by sending Natural IOIs you are representing to the customers that you have a bona-fide customer order behind this advertisement.

Who sees these advertisements? Institutional firms subscribe to the vendors receive these advertisements from the sell-side firms. They used these messages as part of the mix in making order routing decisions during each trading day.

Are these any other uses for this data? For IOIs, no. These messages are for the trade date on which they were sent. For ATs, yes. The vendors aggregate all of the volume sent by the firms and use this data to produce ranking reports. These reports are purchased by both buy-side and sell-side firms to understand who are the consistently large players in given securities.

This is a business, and a big one at that… The sending and receiving of ATs and IOIs is a big business and it is not uncommon for sell-side and buy-side firms each to pay over $100,000 per month in fees to the various advertising vendors. John Q. Public does not see these advertisements (and the share quantities of the advertisements are in terms of thousands of shares, and John Q. Public is not trading in these increments).

What were the firms fined this week doing? (as a disclaimer before I continue, I have not worked at any of the firms fined, so my comments in this section are from my general understanding of practices around the street). The firms cited this week were inflating their volume when sending ATs. For example, some traders who were usually big players in a stock, but in a given day were not, would advertise that they were… To put some numbers to this practice, if these traders normally were 5% of the volume a given stock, but had not traded in that name at all today, might send an AT out that they were 5% of the volume just to appear to be involved. Other firms built systems that kept track of the volume traded and would automatically send ATs for the traders. In some cases, firms would have these systems round up volume sent during the day to appear larger in that stock that they really were.

What rule did these firms violate? There are no regulations directly regarding sending of ATs and IOIs. The rule that the regulators used to justify the fines was that firms must conduct themselves in a just and equitable manner. The regulators started looking at this in August 2006 and released Notice to Members 06-50 which describes the supervisory responsibilities firms have with respect to the sending of ATs and IOIs. From this NTM the regulators state:

The communication of untruthful, inaccurate or misleading information would be
considered conduct inconsistent with high standards of commercial honor and just and
equitable principles of trade.1 In addition, depending on the nature and content of the
communication, such communications may also violate NASD Rule 3310 (Publication of
Transactions and Quotations) and IM-3310 (Manipulative and Deceptive Quotations), as
well as Rule 2120 (Use of Manipulative, Deceptive or Other Fraudulent Devices), Rule
2210 (Communications with the Public) and the anti-fraud provisions of the federal
securities laws.

So who was harmed? The fact that ATs were inflated by many firms was common knowledge by both sell-side and buy-side firms. The buyers of these advertisements (the clients of the sell-side firms) would penalize sell-side firms who were egregious in their inflating their AT numbers. How? They would not trade with them for a period of time, if ever. That hurt immediately where it counts.

So why is my dander up a bit and why put this post out there? I cannot argue that some ATs were inflated. I cannot argue that some firms were worse in this practice than others. I cannot argue there were some traders who had patterns of sending ATs that were more inflated. What I wonder is why the regulators needed to get involved and fine 19 firms. Why wasn’t the option by the buy-side to put firms in the “penalty box” enough as it had been up until September 2006? Where was John Q. Public harmed? Professional, institutional firms were paying for this data. If they felt the data was useless, they could choose to stop paying for it! Lastly, why fine the firms for their advertising in August 2006 when the guidance on how to supervise the sending of ATs was not issued until September 2006.

In the end, the regulators did clean up a practice that was a dirty, and that is clearly a good thing (despite my dander being up!). Firms have put more automation, supervision, and controls around the sending ATs. That makes sense. Some firms have gone so far as to study the true effectiveness of this kind of advertising versus the costs, and in the cases I was involved in this analysis have found the results enlightening to say the least.

// Rant off