IS 356IT for Financial Services

April 19, 2023

Course Review

http://www.evergreen.loyola.edu/~pptallon/is356.htm

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Course Objectives RevisitedCourse Objectives RevisitedExtract from Course Syllabus

By the end of this course, you should have a thorough understanding of how IT has impacted the financial services sector and be able to function as a discerning consumer of IT such that you can begin to assess how IT might shape the future of financial services.

Critical Topics Presented in the Course Securities markets:

– How IT has changed securities trading, virtual and emerging markets Brokerage models

– Charles Schwab, Scottrade, survival of online brokerage firms Banking models:

– Online banking, e-banking strategies, creating IT-enhanced banking products Miscellaneous:

– Credit card systems, XBRL

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NYSE: Order Processing

client broker w/ member firm

floor broker located on the

edge of the trading floor

runner

specialist post

broker broker

price quotation

updated streaming stock ticket information

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NYSE Technologies NYSE Technologies Electronic order-routing system through which

NYSE member-firms transmit orders directly to the specialists’ trading post

After execution, a report is sent directly to the member-firm over the same electronic circuit that sent the order to the specialist

Capacity: 2.5 billion shares per daySuperDot

BBSS

Order-management system that enables member firms to quickly and efficiently process and manage their orders

Selectively routes orders electronically to either the trading post or the booths on the NYSE Trading Floor

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NYSE Technologies (cont’d…) A mobile, PDA-like device enables brokers to

receive orders, disseminate reports, and send market "looks," in data and image formats

Monitors used for viewing by specialists Multiple data sources incl.:

Point-of-Sale (POS) books Overhead "crowd" displays

Market montage Various vendor services

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Trading on the NYSE… in NYSE listed securities

Source: http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=table&key=3000&category=3

Average order range (10 years): 198 – 1,058; average order size = 303 in 2013

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NASDAQ: Screen-based Markets

Allow equal access to trading and market information (in theory)

World’s most common market structure Unlimited number of market

participants, so it facilitates expansion No central trading floor

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SuperMontage PowerView Screen

QuoteView

DepthView

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Vol. distribution - NYSE listed stocks

Source: Goldman Sachs Trading & Market Structure Analysis

Other exchanges

3%

Nasdaq InterMarket

15%

NYSE77%

ARCA1%

Chicago4%

2%

1%

12%

0%

Broker-dealers Posit Other ECNsand ATSs

Seeing through Nasdaq InterMarket

Single-counted, share volume

Internal matches only All hours Excluding ETFs

October 2003

Slide based on presentation by Prof. Ingrid M. Werner, Ohio State University

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Vol. distribution – NASDAQ stocks

Distribution by Execution Venue

Nasdaq SM17%

ARCA25%

Liquidnet0.1%

Instinet & Island23%

Posit0.5%

Chicago1%

Other33.4%

October 2003

Share volume Single-counted Internal matches only All hours Excluding ETFs

Mostly broker-dealer upstairs trades

But also small activity on:

• Brut

• NexTrade

• MarketXT

• Attain

• TradeBook

• Other ATSs

2 to 5 percent?

Source: Goldman Sachs, Trading & Market Structure Analysis

Slide based on presentation by Prof. Ingrid M. Werner, Ohio State University

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ECNsECNs

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Consolidated quotes Consolidated quotes

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Block TradingBlock Trading The “Napster” of Trading Strictly sold to the buy-side – suitable for large blocks Launched in 4-2001 with 38 members

– currently has 273 members with $6.66 trillion in equity assets Average trade size is 47,000 shares Traded $11.5 billion of NYSE equities in first year Quantity discovery, not price discovery

– facilitates negotiation of price

April 19, 2023

High Frequency Trading

http://nowandfutures.com/fed_watch.html

15/36http://www.rhsmith.umd.edu/digits/pdfs_docs/papers/nyse_rbv_ver_d.pdf

April 19, 2023

Time is MoneyTime is Money

http://thefinanser.co.uk/fsclub/2009/08/flash-goldman.html16/36

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Regulation coming soon…Regulation coming soon…

Might LiquidNet be able to dodge potential SEC regulations involving dark pool trading?

Click logo above for video.

Almost 40% of US stock traded through dark pools but nobody knows who does what… we only know aggregate data monthly

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ETFs & SPDRsETFs & SPDRs Different from Mutual Funds (buy/sell at NAV)

Trade directly on exchanges during the day Lower expense ratios than with most mutual funds Tax implications Barclay’s iShares traded on AMEX SPDR – benchmark S&P 500, 9 sector SPDRs QQQ – Nasdaq 100

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http://www.spdrindex.com/

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Why use algorithms?Why use algorithms?

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Types of algorithms…Types of algorithms…

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Source: Tabb Group

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Source: Adam Sussman, Tabb Group

Algorithm ChallengesAlgorithm Challenges

Not great with illiquid stocks– If volume is low on a typical day, there’s not much

point in adopting an algorithm Algorithms do not react well to news releases

– Humans are still needed to interpret releases Commoditization is a reality

– Seen one, seen ‘em all (not quite yet) The return of volatility calls for quality algos

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European Markets European Markets Economic Monetary Union ~ quasi-fixed exchange rates (1979)

Fragmented markets – a matter of national pride Expensive way to raise capital

– Resort to bank borrowing, private equity placing

Slow development of an equity culture (26 equity markets)– State owned companies sold off: British Airways, BP, BT

1999: NASDAQ sought to launch a pan-European equity mkt.– 24-hour continuous trading (linked with U.S. and Japanese markets)

Tradepoint, Jiway (U.K.-based electronic markets: ECNs) ceased ops.

Neuer Market: electronic market operated by Deutsche Boerse Traditional markets reacting: London, Frankfurt, Paris

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Clients’ Changing NeedsClients’ Changing Needs

                              

Solutions or life events-oriented– Versus returns-oriented– Seek tailored investments to meet goals, not earn returns

Income & protection-orientation– Versus accumulation & appreciation-orientation of their 40s and 50s– Suggests positive outlook for fixed income, fixed income annuities, principal protected

products, disability insurance, long-term care insurance, and liability insurance Sudden money events may change needs further

– Tax orientation will increase with more assets– Sales will require forethought– Family office services and elder care to become more important– Life planning to grow as more wealth allows reconsideration of goals

Estate planning focus to increase with age– Suggests positive outlook for trusts, insurance, and charitable giving

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Check 21 Check 21 (became law 10-28-04)(became law 10-28-04)

The financial services industry sought law to increase the efficiency of the check processing system and reduce costs and make it less susceptible to delays

The Check Clearing for the 21st Century Act

MICR Code Line

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Aggregation Service

Bank A

Login &Password

from Internet

Bank B

Account info

Aggregatorlogs in

masqueradingas customer

AggregatedView of

Accounts

How Aggregation WorksHow Aggregation Works

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Yodlee Yodlee (My Financial Portal)(My Financial Portal)

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The Changing Face of BankingThe Changing Face of Banking

Envisioning the future of mobile banking…30/36

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Digital Currency• The USD is kind of digital already

• You don’t have to run the printing presses just to expand the money supply

• Buy back bonds, pay with digital deposit

• But Bitcoin isn’t like that…• Removes the central function of a federal reserve (government)• With the full force and backing of… nobody!• How do you get Bitcoin? Exchange rate applies… (weird)• Figure out a way to move Bitcoin currency… easy• How can you increase the money supply… mine more

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StatisticsStatistics

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Productivity Paradox

© Paul Tallon 34/36

Roach, HBR, 1991

… which implies that ROIT is falling

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Background to Sarbanes-OxleyBackground to Sarbanes-Oxley Sarbanes-Oxley Act (2002) was a reaction to emerging corporate

accounting scandals and the ensuing loss of investor confidence The “law” is derived from a combination of:

Sarbanes Oxley Act of 2002 (H.R. 3763) Pending and final rules of the Public Company Accounting Oversight Board

(PCAOB) Pending and final Rules of the SEC (as regards trading/listing constraints) Studies by the GAO and others that may result in new laws and/or new rules

Applies to any existing or prospective publicly traded company Private firms and not-for-profit firms are off the hook for the moment

Senior executives are directly responsible for financial statements “See no evil, hear no evil” is not an acceptable excuse (max) $1,000,000 fine and 10 year sentence for officers who certify financial

statements knowing them to be inconsistent with the Sarbanes-Oxley Act. Increases to $5,000,000 fine and 20 year prison sentence for officers who willfully

certify…

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Critical LessonsCritical Lessons Financial services firms continue to spend vast amounts

on IT in order to increase market share and to create greater efficiency in their operations

IT does not guarantee a competitive advantage– Be careful about making sweeping assumptions

Putting IT into the hands of the consumer helps– Account aggregation, EBPP, e-banking

IT and regulation will become increasingly important Information will be shared via web-services, XBRL Identity theft must be attacked by consumers, financial

services firms and government