http://www.evergreen.loyola.edu/~pptallon/is356.htm IS 356 IT for Financial Services Course Review February 21, 2020 Course Objectives Revisited Extract 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 February 21, 2020 2/36 February 21, 2020
3/36 NYSE: Order Processing client floor broker located on the edge of the trading floor broker w/ member firm runner broker price quotation specialist
post broker updated streaming stock ticket information February 21, 2020 4/36 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 day SuperDot 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 February 21, 2020 5/36
NYSE Technologies (contd) 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 February 21, 2020 6/36 Average order range (10 years): 198 1,058; average order size = 303 in 2013 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 February 21, 2020 7/36 NASDAQ: Screen-based Markets
Allow equal access to trading and market information (in theory) Worlds most common market structure Unlimited number of market participants, so it facilitates expansion No central trading floor February 21, 2020 8/36 SuperMontage PowerView Screen DepthView QuoteView February 21, 2020
9/36 Slide based on presentation by Prof. Ingrid M. Werner, Ohio State University Vol. distribution - NYSE listed stocks October 2003 12% Seeing through Nasdaq InterMarket 2% 1% Other exchanges
Chicago 3% 4% ARCA 1% Posit Nasdaq InterMarket 15% NYSE 77% 0% Broker-dealers
Single-counted, share volume Internal matches only All hours Excluding ETFs Other ECNs and ATSs Source: Goldman Sachs Trading & Market Structure Analysis February 21, 2020 10/36 Slide based on presentation by Prof. Ingrid M. Werner, Ohio State University Vol. distribution NASDAQ stocks
October 2003 Liquidnet 0.1% Nasdaq SM 17% Mostly broker-dealer upstairs trades Distribution by Execution Venue
ARCA 25% But also small activity on: Brut NexTrade MarketXT Share volume Single-counted Internal matches only All hours Excluding ETFs Other 33.4% 2 to 5 percent? Attain
TradeBook Other ATSs Posit 0.5% Chicago 1% Instinet & Island 23% Source: Goldman Sachs, Trading & Market Structure Analysis February 21, 2020 11/36 ECNs
February 21, 2020 12/36 Consolidated quotes February 21, 2020 13/36 Block 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 February 21, 2020 14/36 High Frequency Trading http://nowandfutures.com/fed_watch.html
http://www.rhsmith.umd.edu/digits/pdfs_docs/papers/nyse_rbv_ver_d.pdf February 21, 2020 15/36 Time is Money http://thefinanser.co.uk/fsclub/2009/08/flash-goldman.html February 21, 2020 16/36 Regulation coming soon 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 Might LiquidNet be able to dodge potential SEC regulations involving dark pool trading? February 21, 2020 17/36 ETFs & 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 Barclays iShares traded on AMEX SPDR benchmark S&P 500, 9 sector SPDRs QQQ Nasdaq 100 February 21, 2020 18/36 http://www.spdrindex.com/ February 21, 2020 19/36 Why use algorithms? February 21, 2020
20/36 Types of algorithms Source: Tabb Group February 21, 2020 21/36 Algorithm Challenges Not great with illiquid stocks Algorithms do not react well to news releases
Humans are still needed to interpret releases Commoditization is a reality If volume is low on a typical day, theres not much point in adopting an algorithm Seen one, seen em all (not quite yet) The return of volatility calls for quality algos Source: Adam Sussman, Tabb Group February 21, 2020 22/36
European Markets Economic Monetary Union ~ quasi-fixed exchange rates (1979) Fragmented markets a matter of national pride Expensive way to raise capital 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. Resort to bank borrowing, private equity placing 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 February 21, 2020 23/36
February 21, 2020 24/36 Clients Changing Needs Solutions or life events-oriented 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 Versus returns-oriented Seek tailored investments to meet goals, not earn returns 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 February 21, 2020 25/36 February 21, 2020 26/36 Check 21 (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 February 21, 2020 27/36 How Aggregation Works Login & Password from Internet Aggregation Service Aggregator logs in masquerading as customer Bank A
Aggregated View of Accounts Account info Bank B February 21, 2020 28/36 Yodlee (My Financial Portal) February 21, 2020 29/36 The Changing Face of Banking
Envisioning the future of mobile banking February 21, 2020 30/36 February 21, 2020 31/36 Digital Currency The USD is kind of digital already You dont have to run the printing presses just to expand the money supply Buy back bonds, pay with digital deposit
But Bitcoin isnt 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 February 21, 2020 32/36 Statistics February 21, 2020
33/36 Productivity Paradox which implies that ROIT is falling Roach, HBR, 1991 Paul Tallon February 21, 2020 34/36 Background 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: Applies to any existing or prospective publicly traded company 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 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 February 21, 2020 35/36 Critical 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 Putting IT into the hands of the consumer helps Be careful about making sweeping assumptions 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 February 21, 2020 36/36
