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FLASHBACK FRIDAY: The Mixed Blessing of Technology Spending - Desks Must Spend on Technology to Remain Competitive

Traders Magazine Online News, June 2, 2017

Om Malik

The more things change, the more they stay the same.

Technology has been said to be the one constant in an ever-changing world. Back in 1998, trading floors such as Nasdaq’s, were coping with new technologies – like the Internet, FIX Protocol and others - that while costly, was needed for survival in the 21st century.

Instinet's John Comerford painted a picture of the market back then.

"In 1998, Instinet's core technology was being transitioned from a PDP11 to Unix. Market-wide connectivity was different," Comerford said. "For NYSE names, there was DOT, where response times were in the seconds. For NASDAQ names, Instinet's ECN was the place to trade. And everyone was dedicating resources to Y2K."

Fast forward 17 years and technology remains a top requirement to effectively conduct business. Whether one is on the buy- or sell-side, having the most up-to-date technology is a perquisite to getting business done. But there remains the constant conundrum of how much to spend versus how much the amount spent contributes to the firm’s bottom line. 

Robert Dykes, CEO of OEMS provider TORA said that in the late 1990s, the move to decimalization and regulations like Reg ATS and Reg NMS contributed to technology costs accounting for the largest budgetary line item outside of headcount for the industry.

“That trendline has continued unabated for nearly 20 years since, though we seem to be reaching a tipping point with how much technology cost the buy side and sell side are able to bear,” Dykes said, “ Many technology firms are starting to recognize that reality and those that can deploy solutions that align with these budgets are well positioned to replace legacy technology providers with large fixed cost infrastructure.” 

One broker executive told Traders Magazine that his firm’s technology spend was upwards of $30 million for the latest calendar year or between 5% and 6% of its total expenses. This includes enhancements of existing software, the ongoing development of new software and services and investment in technology to enhance efficiency. And in a static commission rate envrionment, that's a significant portion, the executive added.

Other firms said they were spending more. 

So where does the line get drawn between technology spend and technology benefits? It looks like there’s no certain answer in sight now, as it was back in 1998.

 

This article originally appeared in the June 1998 issue of Traders Magazine.

Huge mainframes. Fiber-optic networks. State-of-the-art telecommunication systems. Worldwide market news delivered real-time.

Sound familiar? It should. These and more are at the very heart of a Nasdaq trading room.

Back in the pioneer days, much of what is today's Nasdaq trading-room technology did not exist. By contrast, some of today's technology has a pedestrian aura.

The consequences of that might be viewed as a mixed blessing desks have no choice but to collectively spend billions of dollars to remain competitive, but in return they transact business at an exponential rate.

Now Nasdaq, an electronic marketplace, is grappling with technology changes as never before.

Electronic communications networks (ECNs), such as Reuters Holding's Instinet, New York-based Investment Technology Group's POSIT equity matching system and an upstart crossing network, MatchPoint, developed by The AutEx Group and State Street in Boston, are helping to raise the stakes.

Never known for avoiding a challenge, the Street is embracing all this technology and more.

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