Microsoftâ Solutions:
Harnessing the power of Database Technology in the Financial Markets
"Virtually everything in business today is an undifferentiated commodity except how a company manages its information. How you manage information determines whether you win or lose."
“…the
quality of an organisation’s nervous system helps determine its ability to
sense change and quickly respond, thus determining whether it dies, survives,
or thrives.”
Bill
Gates
Microsoft Chairman
In the digital age, the ability to manage information has become a prerequisite for success – and indeed this applies to the financial services industry. Financial institutions must react more quickly to customer needs, bring products to market with greater speed, and respond more completely to changing business conditions. To meet these demands, many organisations are developing a digital nervous system—a new approach that allows them to build on existing technology to create highly efficient, integrated systems that collect, manage, organise, and disseminate information throughout an enterprise.
A digital nervous system helps institutions get the right information to the right people at the right time, provides them with the tools to analyse that information, and gives them the power to act on their conclusions with speed. It also eliminates the piles of forms and layers of approvals that can make even simple day-to-day tasks time consuming and expensive.
Simply put, a digital nervous system is the culmination of the next stage of the information revolution. It is a powerful way to marshal the benefits of digital technologies to meet the challenges of the digital economy - and it is becoming increasingly essential. Institutions that embrace this approach are using technology to ensure that employees can collect the knowledge that resides within the organisation to respond with creativity and speed to changes in the marketplace.
The need for speed
During the last decade, the business landscape has undergone a fundamental transformation. The proliferation of personal computers linked together in enterprise networks and the rise of the Internet have played a significant role in the creation of a true worldwide economy in which information travels around the globe in the blink of an eye.
With customers using the web to find out almost instantly who has the best product at the best price, mass production is giving way in many industries to mass customisation. Meanwhile, changes in the economic climate of one region can affect economies around the world.
In the face of these changes, speed has become essential for survival, and the ability to adapt quickly to shifting demands in the marketplace has become a prerequisite for success.
"In a Darwinian business world," says Microsoft Chairman, Bill Gates, "the quality of an organisation’s nervous system helps determine its ability to sense change and quickly respond, thus determining whether it dies, survives, or thrives."
The term digital nervous system implies that this new form of enterprise information management will enable organisations to behave more like biological organisms. This is apt and important.
In biological organisms, the nervous system automatically controls the basic systems - respiratory, circulatory, digestive - that make life possible. It also receives sensory stimuli, transmits them to the brain, and instantly triggers a response. In higher organisms, the nervous system makes it possible to think and plan with foresight and creativity.
To meet the demands of the digital economy, organisations must be able to behave more like organisms. This will give them better reflexes for reacting to stimuli, a more efficient metabolism for managing daily operations, and a sharper mind for guiding plans and actions more intelligently.
But what are the specific business and technology issues that act as stimuli for a digital nervous system within the financial services arena?
And how can technology be applied to create an efficient metabolism for the retail banking market, the corporate banking market or the financial markets?
This white paper will focus specifically on the need for, and advantage of, using database technology as a fundamental piece of the digital nervous system in the financial markets environment.
Harnessing the power of database technology in the financial markets........................... 1
End-user challenges...................................................................................................... 1
Which key decisions have European investment banks made?......................... 1
What concrete action have European investment banks taken?....................... 2
Investment banks should face the future with confidence.................................. 3
Database technology......................................................................................................... 3
1. Robustness and openness..................................................................................... 4
2. Ease of integration, deployment and operation................................................. 4
3. End-to-end data storage, transformation and analysis..................................... 4
Enterprise-wide best practice...................................................................................... 4
Tackling end-user challenges............................................................................................ 6
How can banks capitalise on datawarehousing opportunities?.......................... 7
Exploiting datawarehouses in the financial markets.......................................... 10
Microsoft âSQL Server ä7.0: delivering business solutions throughout the enterprise 11
Harnessing the power of database technology in the financial markets
During 1998, the standard operating practices that support banks’ ability to trade profitably on the open market came under the microscope. The senior management of investment banks, and their clients, took a fresh look at core business processes from front office trading through to regulatory reporting. Such investigations took place amidst aggressive mergers and acquisitions designed to find the optimum institution size, structure and geographical scope necessary to offset future uncertainty.
The
identification of risk, both internal and external to the bank, has become
a key management objective and a minimum client requirement.
In short, financial markets companies
are beginning to make fundamental decisions about the structure of their
operations as well as to speculate on the longer term structure of the industry
in which they operate.
Which key decisions have European investment banks made?
Banks
are prioritising the shortening of time to market cycles for new, exotic
tradable instruments.
Firstly, the identification of
risk, both internal and external to the bank, has become a key management
objective and a minimum client requirement. Trading, lending and asset
management divisions within the same organisation are simultaneously searching
for meaningful, corporate-wide measures of exposure.
Secondly, banks are prioritising the shortening of time to market cycles for new, exotic tradable instruments. Institutions are expanding middle office operations in areas such as global equities research and third party data provision to prepare for the disappearance of traditional Franc and Deutschmark arbitrage brought about by the euro.
Lastly, banks want productivity gains. Tangible reductions in overheads are being demanded at the same time as improving corporate intelligence on internal and external sources of risk and instability.
Banks must speed up the
rate at which their proprietary analysis infrastructure interacts
with its execution infrastructure.
To meet these three objectives banks must speed up the
rate at which their proprietary analysis infrastructure (research,
analytic tools and methodologies) interacts with its execution
infrastructure (settlement, reporting and custody functions). The
introduction of centralised foreign exchange dealing and straight-through trade
processing reflect this trend.
What concrete action have European investment banks taken?
Banking groups have
focused on the acquisition of asset management expertise as a way of
protecting vital distribution links to key institutional investors.
Institutions have merged seeking
lower operating costs, better commercial borrowing rates and to extend the
range of value added services available to existing clients. Banking groups
have focused on the acquisition of asset management expertise as a way of
protecting vital distribution links to key institutional investors. Banks
believe that global, corporate clients want global financial markets expertise,
because:
· A presence in many regions and lines of business is the only guarantee of market share;
· Universal product coverage is the only guarantee that market opportunities can be profitably identified and exploited.
Banks are experimenting with centralised European foreign exchange trading to deliver economies of scale (CitiBank, DeutscheBank, Julius Baer). With the exception of Paris, in all other European financial centres over 60% of trade volumes are conducted by the top five institutions. In particular, banks located in London and Frankfurt, Europe’s two most consolidated markets, are most advanced in implementing centralised research and trade execution. Key issues being by banks evaluating these hub and spoke structures include:
· How to separate local account management, marketing and reporting activity from centralised trading;
· How to extend the centralisation of core business processes beyond the trading floor to include traditional back/middle office activity such as treasury and custody.
Risk management is
becoming the hub of bank-wide business process re-engineering.
Risk management is becoming the hub of bank-wide business process re-engineering. Heavy investment has already been made in proprietary methodologies for measuring credit market, foreign exchange, wipe-out, inflation and basis risk. Even more has been spent experimenting with value at risk (VAR), static gap and earnings sensitivity analyses. Banks now want to use this investment to create a source of sustainable and branded competitive advantage, for example JP Morgan Risk Metrics, Bankers Trust RAROC and XRM:
· To ensure client lock-in and repeat business;
· To underpin operational cost savings achieved through trade centralisation and automation.
Evidence: following the merger of Bank One and First Chicago NBD, the newly formed Bank One Corporation said US$1.05 bn third quarter profits demonstrated ‘disciplined risk management and a focus on improving operational efficiency’. [Source: Waters Information Services (Risk Management Operations, 1998)]
Investment banks should face the future with confidence
Archived market data and
proprietary analysis tools are the most important sources of competitive
advantage given market volatility and tightening regulatory controls.
By identifying the optimum profile of trader activity
and the most productive procedure for deal automation, banks are re-examining
the way they store, distribute and analyse data. Central to this process is the
acknowledgement that archived market data and proprietary analysis tools are
the most important sources of competitive advantage given market volatility and
tightening regulatory controls.
How can banks use archived data to profitably serve new clients with new products? The most cost-effective and simplest solution is database technology.
Database technology is
fundamental to harnessing sunk, core system investment and meeting internal
productivity and risk measurement objectives.
Database technology
At present, the optimum
organisational size, structure, and breadth of product range carried by an
investment bank are unknown.
Database technology is fundamental to harnessing sunk,
core system investment and meeting internal productivity and risk measurement
objectives. Banks across Europe, and the US, are looking to deploy new database
technologies:
· To accelerate the merger of institutions, speeding up new product development cycles and easing the integration of new third party data sources;
· To integrate client/server with centralised data infrastructures so protecting investment in application development (the banks intellectual capital);
· To combine multiple data formats, introduce object technology and create a standardised programming environment with lower overheads;
· To automate the order flow of equities trades from the point of reception through to eventual settlement and reporting.
At present, the optimum organisational size, structure, and breadth of product range carried by an investment bank are unknown. A cross-industry consensus on the key metrics used to analyse ‘per trader’ risk and profitability has not been established. Moreover, best practice for building, deploying and maintaining new applications for new instruments has not emerged.
But database technology has the potential to provide clear direction on these questions. To deliver concrete results, database technology must have the following key attributes:
Database technology must
work alongside a legacy of three generations of computing architecture;
mainframe, mid-range and client/server.
1. Robustness and openness
Database technology must
scale from the trading floor into the heart of middle office operations
where client, product and market analysis is performed.
Database technology must work alongside a legacy of
three generations of computing architecture; mainframe, mid-range and
client/server. The robustness to interrogate heterogeneous databases, parallel
load data into the same table and rapidly recover and back up data is critical.
The ability to publish, distribute and quickly replicate up-to-the-minute
market data is fundamental.
2. Ease of integration, deployment and operation
With each investment bank
running in excess of 150 databases per site, the ability to rapidly
configure, run and optimise OLAP instructions is crucial.
Database technology must scale from the trading floor
into the heart of middle office operations where client, product and market
analysis is performed. From the front office through to the back office,
winning database technology will be optimised for existing applications,
programming environments and the skill levels of different users. Only ease of
integration and automatic tuning features can deliver these benefits in an
acceptable timescale, without making excessive demands on systems memory or IT
support staff.
3. End-to-end data storage, transformation and analysis
Database technology must handle multiple data types such as text, files and graphics to deliver enriched data to the trading floor. With each investment bank running in excess of 150 databases per site, the ability to rapidly configure, run and optimise OLAP instructions is crucial. Only databases with high-end OLAP, ROLAP and HOLAP attributes can support the introduction of advanced workflow technologies, such as smart agents, to track the progress of trades as they pass through individual databases.
Microsoft has identified three key database attributes based on a customer-driven market changes and the operating characteristics and programming environment of the investment banks’ IT systems.
This white paper demonstrates the potential of database technology to directly affect the key business issues of creating, selling, distributing and servicing financial markets products. It explains the role of database technology in front, middle and back office operations and establishes the strategic benefit of co-ordinated database deployment throughout the enterprise.
Microsoft believes that database technology can remove layers of cost and complexity in the way banks work and understand market activity:
·
The successful
application of database technology now will accelerate the future growth of
trade automation and market data distribution at a lower cost of ownership
to banks.
In the short term, this means protecting the investment
already made by banks in writing applications whilst enabling new databases to
scale in both size and complexity. A cost-effective OLAP server to deliver
datawarehousing capability to small/medium-sized operations and individual
departments is an essential component of a winning database solution;
· In the longer term, the successful application of database technology now will accelerate the future growth of trade automation and market data distribution at a lower cost of ownership to banks. These benefits can be seen right across the enterprise, from lower memory demands for PCs on the trading floor to ‘lowest cost’, replication, query processing and back-up of data in the back office.
Financial markets
organisations want to introduce hub and spoke foreign exchange operations,
which will not only deliver reduced back office operating costs, but which
also promises to simplify software upgrades and deployment across the
entire front office infrastructure.
Tackling end-user challenges
Financial markets organisations want to introduce hub and spoke foreign exchange operations, which means integrating a banks’ front-end systems across multiple trading centres, such as Frankfurt, Paris, New York and London, to feed into a centralised processing and settlement system. Not only does this deliver reduced back office operating costs, but it also promises to simplify software upgrade and deployment across the entire front office infrastructure.
In addition to reducing IT support and operational overhead per trader, two core business issues are motivating banks to find solutions to implementing successful hub and spoke architectures:
· The need to deliver a global marketing message to clients and counterparty institutions;
· The need to deliver global services, particularly custodian services, to the fund management industry with a risk management capability.
Despite the clear need
for integrated data, which can exploit the banks in-house expertise to the
full, many institutions cannot distribute this unified data once it has been
aggregated across disparate databases.
Two major obstacles stand in the way of banks realising these ambitions:
Risk management
techniques need to be simplified so that a wider range of users beyond
traditional foreign exchange operations, such as bank departments, can be
more efficient.
1. Despite the clear need for integrated data, which
can exploit the banks in-house expertise to the full, many institutions cannot
distribute this unified data once it has been aggregated across disparate
databases.
2. Risk management techniques need to be simplified so that a wider range of users beyond traditional foreign exchange operations, such as bank departments, can be more efficient. Perhaps the most exciting solution to both sets of problems lies in the integration of deal information with market data using web-based delivery. This then provides understandable measures of positions, profits and limits risk across a streamlined, more efficient back office infrastructure.
Advanced database technology is essential if banks are to benefit from these opportunities. Properly deployed, database technology will accelerate the introduction of hub and spoke architectures, the analysis of risk in all its forms, and the servicing of global marketing operations with enriched data.
How can banks capitalise on datawarehousing opportunities?
Banks should ask themselves four key questions and give serious consideration to the strategic benefits offered by datawarehousing:
· What do we need to fully realise the potential of trade automation?
· How can we monitor and track the profitability of automated trades?
· How can enriched data be presented and distributed to our traders at lowest cost?
· How can growing trade volumes be processed with a minimum of operational overheads and staff re-training?
Winning database
technology can provide a clear, transparent solution at a low total cost of
ownership delivering operational efficiencies, enhanced analytics and
improved management reporting.
Winning database technology can provide a clear, transparent solution to each of these questions at a low total cost of ownership to the bank. To do this it must deliver operational efficiencies, enhanced analytics and improved management reporting.
To automate trade systems successfully, banks can use fail-safe replication, rapid back-up functionality and ease of integration with offsite data stores to ensure that this critical business process re-engineering task delivers returns.
Beyond eliminating costly and repetitive data entry tasks, banks are free to redirect internal resources to productive value-added tasks, to improving client loyalty, and external market and customer analysis.
But the benefits of open
database technology, able to interrogate heterogeneous data sources, do not
end once the initial implementation is complete.
But the benefits of open database technology,
able to interrogate heterogeneous data sources, do not end once the initial
implementation is complete. Banks can deploy virtual agents to run on top of
their database investments to gather, analyse and track individual deals
throughout the banks’ infrastructure. Database administrators can then optimise
processing batches, schedule batches for overnight or weekend processing and
monitor tolerances of mission critical systems. All of these benefits rely on
the robustness and openness of the database.
Banks wanting to reap these benefits should look for databases which can seamlessly integrate with existing applications and systems. This means selecting products which can dynamically allocate memory to tasks, reducing administration and fine tuning existing processes. This will result in an increase in through-put of the system as a whole.
With the future
introduction of web-delivered market information, deploying databases which
are inherently more efficient and flexible than older technologies will
prove a source of lasting competitive advantage for banks.
The technology which lies behind such improvements involves delivering larger (8k) data pages to traders rather than smaller, conventional (2k) pages. This means that traders require fewer updates of information to the desktop as well as enabling voice, video, text and meta data convergence. With the future introduction of web-delivered market information, deploying databases which are inherently more efficient and flexible than older technologies will prove a source of lasting competitive advantage for banks. Datawarehousing is essential for the delivery of the operational and strategic advantages listed above.
|
Exploiting datawarehouses in the financial markets
The business case for
datawarehousing depends on being able to import data for analysis and
export the results in the smallest timescale possible, whilst committing
minimum resources.
Financial markets organisations must satisfy the demand
from traders and decision makers for highly detailed analysis across an
expanding range of niche products. The business case for datawarehousing
depends on being able to import data for analysis and export the results in the
smallest timescale possible, whilst committing minimum resources.
In practical terms, consolidating the data required by users means tracking changes in product codes that are registered in different locations such as London, Paris and Frankfurt, with the accuracy necessary to spot a percentage point opportunity on an exotic swap. The key requirements for successful datawarehousing are:
· The successful extraction of data from operational source;
· Fault tolerant data scrubbing;
·
Only database technology
which is sufficiently flexible in terms of ease of operation, and
deployment will provide genuine enterprise-wide benefits to a financial
markets organisation, at an acceptable total cost of ownership.
Ease of data integration, matching and transformation.
Only database technology which is sufficiently flexible in terms of ease of operation, and deployment will provide genuine enterprise-wide benefits to a financial markets organisation, at an acceptable total cost of ownership.
Microsoft âSQL Server ä7.0: delivering business solutions throughout the enterprise
SQL Server 7.0 provides
the robustness, scaleability and flexibility that investment firms need to
find successful solutions for their core trading and risk management
operational challenges. Microsoft’s database
technology exploits, rather than undermines, an institution’s investment in
existing systems. This enables quick access to core trade, analytical and
settlement data which allows instantaneous interaction between the trading
infrastructure and the execution infrastructure.
The speed of change and burden of regulation,
shortening trade cycles and product lifecycles in the financial markets, as
well as increasing complexity continues to place a enormous strain on the infrastructure
of any investment institution. Under these conditions, there is no longer a
business case for institutions to continuously customise legacy systems to meet
the challenges being placed on the business. As a result, Microsoft’s database
technology exploits, rather than undermines, an institution’s investment in
existing systems. This enables quick access to core trade, analytical and
settlement data which allows instantaneous interaction between the trading
infrastructure and the execution infrastructure.
Microsoft believes that database technology can remove layers of cost and complexity in the way an institution works and understands its business. Whether institutions want to find their optimum structure and product range and execution services following a merger; increase ‘per trade’ profitability; or develop corporate-wide measures of risk, SQL Server 7.0 is the cornerstone for rapid and concrete progress.
SQL Server 7.0 provides the robustness, scaleability and flexibility that investment firms need to find successful solutions for their core trading and risk management operational challenges. Investment banking is a continuous environment, with data flowing all day, every day. Microsoft technology guarantees the reliability of intra/interbank settlement, data transformation, integration and distributed replication.
This leaves firms free to direct resources toward tangible, value-added services for customers.
Global 24 hour trading environments and the need to comply with regulation mean that database technology must do more than deliver short term operational efficiencies. This is why Microsoft technology also provides a platform for deploying applications throughout the enterprise and for integrating externally and internally developed best of breed solutions. Since SQL Server 7.0 is easy to both deploy and maintain, as well as being supported by comprehensive DSS services, the key benefits of robustness and efficient data storage are immediately available to firms.
SQL Server 7.0 is
essential for institutions seeking to profit from the rapidly changing
marketplace, now and in the future, at a low total cost of ownership.
SQL Server 7.0 is easy to
both deploy and maintain, as well as being supported by comprehensive DSS
services, the key benefits of robustness and efficient data storage are
immediately available to firms.
In the longer term, the scaleability, high
availability and low memory demands of SQL Server 7.0 will help institutions
react to a new range of business issues, such as the growth in electronic
commerce and mobile computing. In short, SQL Server 7.0 is essential for
institutions seeking to profit from the rapidly changing marketplace, now and
in the future, at a low total cost of ownership.
For further information, contact:
Nicholas Illidge, European Financial Markets Manager - email: nickil@microsoft.com
Ashley Steele, European Retail Banking Manager - email: ashleys@microsoft.com
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