Wednesday, February 28, 2007

Governance on-the-fly

Aah! Remember the days when service-oriented architecture (SOA) was being touted as the next big thing in enterprise application integration, a panacea if you like for companies' integration woes as it allowed them to re-use IT components or invoke them as part of a business service regardless of the technology platform or location underpinning them.

SOA is certainly not a new concept. It has been around for 15 years or more, but has come into its own in the last few years with the proliferation of web services standards. But like most technologies that are over-hyped, the initial fervour and enthusiasm soon gives way to the practical realities and considerations that accompany implementation.

It is only once companies started getting their hands dirty that the industry is now starting to have the debate about 'run-time governance and SOA'. Given that SOA allows anyone within an IT organisation to re-use IT components or invoke them as part of a new business service, their needs to be some form of overarching governance framework in place, otherwise the left hand is not really going to know what the right hand is doing.

Needless to say because vendors and companies have been learning 'on-the-job', it is only now with the benefit of hindsight and SOA implementations in place that some of the tarnish of service-oriented architectures is starting to wear off.

In a white paper on Runtime Governance and SOA, Progress Software makes the following comment:

"Many SOA implementations are just not working in production as designed or expected. Problems range from service interruptions to entire business processes failing, to compliance risks that generate costly delays and lengthy triage cycles."

Understandably firms that have or are in the process of implementing SOAs may be miffed that nobody warned them of the pitfalls beforehand. The industry has certainly done a good job of overhyping SOA and then almost as an afterthought, bothering to educate firms about governance and service re-usability issues within a SOA.

"Leading the charge for governance have been enterprise architects who know quite well that for SOA systems to deliver value, there must be control in areas ranging from how a service is built and the process of deployment, to granular
items such as schemas and WSDL creation," write Progress Software.

It reminds me of the Maturity Models that a number of vendors have published regarding SOA, which demonstrate the different levels of maturity of a SOA implementation, with most firms occupying the relatively immature stages striving to attain the peak level of maturity, which let's face it, is not going to happen overnight.

Friday, February 23, 2007

Could Clearstream be up for sale?

Out here in blogger land one does get a certain sense of satisfaction when the mainstream media picks up on themes we have been blogging about. Just to jog your memories, on the 6 February, FinancialTech Insider posted a comment entitled,Deutsche Börse's next move, which ventured whether given the failure of its merger attempts with other exchanges, would the German exchange sell off parts of its business, including the ICSD Clearstream?

Well according to a report in The Wall Street Journal,Atticus Capital,which holds an 11.68% stake in Deutsche Börse,is keen to see it separate Luxembourg-based Clearstream International from the exchange and return cash to shareholders.

In the forthcoming March issue of financial-i-magazine, I pose the same question to Clearstream International's CEO Jeffrey Tessler, who maintains that Clearstream is an integral part of Deutsche Börse group, comprising 40% of its revenues.

But in the rapidly evolving exchange landscape, anything is possible it seems and no one should underestimate the persuasiveness of an exchange's shareholders, particularly if other shareholders start making similar demands.

Thursday, February 22, 2007

Fear and loathing on the acquisition trail

While the NYSE and Euronext put the final touches to their cross-Atlantic mega-merger, some may be thinking was the London Stock Exchange (LSE) right to slight the Nasdaq's advances.

Well apart from the obvious economies of scale and cost synergies that most mergers entail, it is easy to forget about the cultural and integration challenges that a merger on the scale of the NYSE's and Euronext's involves. Having cleared the regulatory hurdle, it is too soon to say whether they will clear the final hurdle, successfully integrating the two companies.

With that in mind then the LSE's 'go it alone' stance does not seem that brazen given that the London Stock Exchange is a revered institution and a merger with a US exchange would present significant cultural as well as technical challenges.

All is not necessarily lost though for those exchanges that say no to mergers. Acquisition is not the only option for the LSE or the Nasdaq looking to eke some value from its 29.16% minority investment in the LSE.

Bob McDowall, senior analyst, TowerGroup, believes that "interoperability" may be the "route to salvation for Nasdaq and the LSE."

In his latest research note, McDowall writes:

"Adopting a strategy of interoperability is a mutually co-operative, lower-risk approach to consolidation than acquisition, which carries reputational risk if it fails. However, for the LSE interoperability offers it the distinct business and technical benefits as a mechanism for the consolidation of exchanges without losing the independence a takeover removes."

According to McDowall, interoperability would allow the LSE to assess over time the extent to which it wants to work with other exchanges; it would also mean less
uncertainty for shareholders and stakeholders.

No rattling of sabres

Well there has been a lot of 'sabre rattling' going on around investment banks threatening to set up multilateral trading facilities to challenge the monopoly of Europe's exchanges.

However, one platform, Equiduct, which resurrected the old Easdaq pan-European exchange platform, appears to be doing a lot more than waving its sabre about provocatively. For those sceptics who thought it may not get off the ground (or was that Project Turquoise), Equiduct is demonstrating all the signs of a trading platform in the throes of going live.

Willy Van Stappen, ex LCH.Clearnet, has joined Equiduct as chief operating officer. He will be focused on the provision of 'best execution' services that Equiduct plans to offer including enabling firms to trade instruments listed across 29 markets via a single platform.

Equiduct has also secured its first round of funding from Belgium-based Bams Angels Fund and a group of London-based industry professionals (presumably that means investment banks or individuals that want to put the exchanges' noses out of joint). Market data service are scheduled for Q3 this year with trading on Equiduct expected to commence in Q1 2008.

Tuesday, February 20, 2007

The war of the MiFID

Heavy with flu I forced myself out of my codeine haze to digest the latest news on, you guessed it, MiFID.You may be thinking I have swallowed one to many cold and flu capsules, as I am about to launch into another rave about the Market in Financial Instruments Directive.

Sometimes it does feel like groundhog day here at FinancialTech Insider but perhaps with good reason. PJ DiGiammarino and his team at JWG-IT, the think tank working with buy- and sell-side firms to make sense of MiFID, has gleaned from the 25 workshops it has held over the last few months with 30 financial institutions, 100 (only 100, you say?) MiFID decisions that firms need to make fairly soon before the day of transposition to MiFID in November.

Based on 150 days of collaborative research amongst the 30 firms that attended its workshops over a 12 month period, JWG-IT has identified the "known unknowns" of MiFID, which it colourfully equates with the 15th century's War of the Roses because of the loosely connected "fiefdoms" within Europe all vying for control over the evolving "common market."

JWG-IT's full report entitled, "MiFID: The roadmap to implementation," is somewhat of a 'Hitchiker's Guide to the Galaxy,' as it not only highlights where the current gaps exist in knowledge and preparation; best execution, trade and transaction reporting, MiFID's treatment of outsourcing, record keeping and customer data management; but it also provides reference implementation plans and frameworks.

And the aim of all this; well to put it bluntly, with less than 200 working days left until MiFID becomes law, it is a not so gentle reminder that firms need to pull their finger out of their proverbial ... They say it is time for action even on the 'known unknowns' (when someone has defined the known knowns of MiFID - the only known perhaps being that MiFID is going to happen - please let us know.)

David Seacombe a director of JWG-IT had this cautionary note for firms:

"Testing of new processes should start within the next two months but it will be very difficult to meet the required timetable, because many small firms still have no access to agreed architectures."

To download a free copy of the report go to and look under the MiFID docs section.

Wednesday, February 14, 2007

Just in time for MiFID

Just in time for MiFID and perhaps just in time for those sell-side firms that are contemplating setting up alternative execution venues to rival the exchanges, the London Stock Exchange (LSE) has finally announced what it plans to offer firms around the Markets in Financial Instruments Directive (MiFID).

Sell-side investment banks under the guise of Project Turquoise have threatened to set up a multilateral trading facility offering faster and cheaper execution of trades than the LSE. Also Equiduct, which is based on the old EASDAQ platform, has announced its plans to establish a pan-European exchange in response to MiFID.

The banks behind Project Turquoise have been accused by sceptics of "sabre rattling", and we may soon establish whether that is the case or not with the LSE dangling a rather 'attractive' carrot in the faces of the disgruntled sell-side firms with its latest announcement, which promises "new market leading technology, an enhanced suite of trading services" and, wait for it, "an attractive new tariff structure."

According to Computing, the LSE has been undergoing somewhat of an IT overhaul, implementing a "real-time" dashboard so LSE staff can better respond to customer enquiries. Apparently it has also implemented a new information reporting system, presumably in response to the pre- and post-trade reporting requirements under MiFID, and the piece de resistance, its new supposedly speedier trading platform, TradeElect.

In terms of pre-trade reporting, the LSE will extend its existing market making quoting facilities to encompass all EU securities, and on the post-trade side, it vaguely refers to enhancements, although with investment firms complaining about how much it costs to report trades to the exchange, it is questionable whether the LSE's efforts will be enough to prevent investment banks like Merrill and Citi going ahead with their alternative trade reporting system, Project Boat (where do investment banks come up with these names?)

Will the LSE's rather belated and vague MiFID announcement be enough to stop the sabre rattling of investment banks? It is anyone's guess, but me thinks it would be foolish for the investment banks, who have made a big deal about exchange tariffs to back down now before the Day of the M {MiFID} has even arrived.After all a little competition is always healthy, they say.

Friday, February 09, 2007

MiFID where art thou?

I am becoming increasingly sceptical of the IT vendors that are crawling out of the woodwork as the deadline for transposition to the Markets in Financial Instruments Directive looms.

As I reported a couple of weeks ago from Finexpo, even MiFID thought leaders like JWG-IT and MiFID Connect believe a number of key questions around MiFID still need to be clarified, not least the most fundamental component of the regulation, what constitutes best execution?

That hasn't prevented vendors from jumping on the MiFID bandwagon. The latest one is IT consultancy Fintecs which has launched a visual software aid, MiFIDMap Workbench, a heat mapping tool developed specifically to show compliance officers how MiFID is likely to impact their own trading processes and to what extent their business processes are compliant.

The idea behind the tool is to help companies in their planning and testing for MiFID compliance in the run-up to the November deadline, enabling companies to compare their own internal data against details of the MiFID Directives.

Anything that can help companies prepare for the minefield that is MiFID is not an unwelcome addition. However, the industry cannot afford to lull itself into a false sense of security that MiFID compliance is as straightforward as implementing a piece of software. And whilst MiFIDMap may be a helpful monitoring tool for compliance officers, unlike previous change events such as Y2K, MiFID entails changes across the business and a number of these changes are open to regulatory interpretation.

If all else fails, one can always turn to the latest tome penned by Chris Skinner, chairman of think tank Balatro Ltd. The book entitled,The future of investing in Europe's markets after MiFID, is published by Wiley.

Yes, it may be difficult to contemplate that MiFID has inspired a book, which is unlikely to knock Zadie Smith off the bestseller list any time soon. However, for those buy- and sell-side firms embroiled in MiFID and anyone interested in finding out how it will change the investment landscape in Europe, Skinner's tome provides a comprehensive overview of the regulation, how it will work, what impact it will have and the technology implications, with chapters contributed by leading industry thought leaders like MiFID Connect, Accenture, the European Commission and the MiFID Joint Working Group.

Wednesday, February 07, 2007

Stock exchanges need to up their game

In this climate of fundamental change and regulatory uncertainty, one would think that IT investment would be at the top of exchange CIO's list of priorities. After all isn't that why the NYSE bought ArcaEx and Nasdaq bought INET, for their technology.

It also perhaps explains why the US exchanges are going after their European counterparts. Not only are they looking to expand their footprint beyond the US into Europe where trading volumes are anticipated to rise. But let's face it European exchanges, at least the major ones that their US counterparts are looking to buy, have much more sophisticated electronic trading systems.

Given the acquisitive mood that the US exchanges appear to be in, is it any surprise that IT spending amongst global exchanges is growing slowly? TowerGroup estimates that exchanges globally spent $2.72 billion on IT in 2006 and that spending will grow at a rate of 3% through 2009 – breaking down to 4% in 2007 and slowing to 2% to 3% from 2007 to 2009.

Not surprisingly exchange IT spending is growing the slowest in the US, where analysts such as Larry Tabb have said that retaining NY's glory as an international financial centre is not just about reducing regulatory oversight, but also enhancing technology and connectivity in the US market.

According to TowerGroup, IT spending amongst European exchanges is growing moderately, while the burgeoning and flourishing exchanges of Asia, trying to cope with stock market 'bubbles', are growing the fastest.

Dushyant Shahrawat, research area director, Securities & Capital Markets, TowerGroup says:
"Of all the public exchanges, those in the United States are currently under the greatest pressure to reduce costs as they go electronic, in order to get their IT expense / revenue ratio in line with that of other financial firms and European counterparts."

Tuesday, February 06, 2007

Deutsche Boerse's next move

Amidst all the machinations we have witnessed in the last few weeks between the Nasdaq and the LSE, one has to ask what the Deutsche Boerse makes of all this.

The German stock exchange knows only too well what it is like to be turned down by the LSE on more than one occasion, having made various bids for the London exchange dating back to 2000.

Watching the protracted negotiations (if one can even call them that) between the LSE and the Nasdaq, one has to wonder what impact this is likely to have on Deutsche Boerse's strategy. The exchange has been unusually quiet in these last few weeks, going about its business. But is it regrouping its resources to launch another bid for the LSE or possibly another exchange, or is it a case of twice bitten ...?

In light of the competitive threat regulations such as MiFID poses for national exchanges and the impact the Code of Conduct on Clearing & Settlement is likely to have on exchanges' cosy arrangements with clearing houses and CSDs/ICSDs, some are suggesting that at some point, Deutsche Boerse may be forced to reassess its vertically integrated approach.

As the exchange and securities clearing and settlement landscape in Europe evolves in response to regulatory and market forces, some interested observers are asking what is Deutsche Boerse likely to do with its post-trade business, which includes the ICSD Clearstream? Will it form separate subsidiaries and then sell them off bit by bit? What is the exchange's next move likely to be?