Spending on data management and storage technology is expected to grow dramatically within the next two years due to rising market transactions and the growing burden to comply with industry regulations.
In Europe and the U.S. alone, spending could reach more than US$2 billion.
Financial services institutions are under increasing pressure to ensure appropriate infrastructures are in place to handle a data deluge, according a recent study Datamonitor PLC, a U.K.-based market analysis firm.
“There is a critical need for storage on one hand and relevant analytics on the other,” says Amit Shah, financial services technology analyst with Datamonitor and author of the report title: The Growing Significance of Market Data within Financial Markets.
Spending by European and U.S. hedge fund management firms (buy side companies) on front office market data infrastructure is set to reach US$484 million by 2009. Expenditure by investments banks (sell side firms) will spike to US$1.9 billion during the same period, Shah said.
Although the report covered only U.S. and European markets, Shah said results also reflect industry realities in Canada. “Since the U.S. is a very close trading partner Canada, firms in the country should monitor and learn from any trends and market changes happening south of the border.”
Data volume in the industry almost doubles in size every year world wide, according to one Canadian technology analyst.
Market data volume is growing in excess of 40 per cent each year said George Goodall, senior research analyst for Info-Tech Research Group, in London, Ont.
“Data is doubling every 2.4 years. Storage has to keep pace, but providers also need to keep the rate of storage price down,” Goodall said.
One of the factors fueling market data growth, Shah said, is the increasing need of institutions to comply with rules set up by various regulatory bodies.
For instance, he said, upcoming directives such as Regulation National Market Systems (Reg NMS) promulgated by the U.S. Security and Exchange Commission and the Markets in Financial Instruments Directive (MiFiD) in Europe will require firms to store data for up to a period of five years for accountability and investigation purposes.
Goodall said stored data is not limited to transaction information. Increasingly electronic correspondence between financial firms and their clients are also being kept in storage. “In the past e-mails and unstructured communications were viewed as letters which were not necessarily critical in investigations. Today they are viewed as possible evidence in case of litigation.”
Data growth is also pushed to extreme levels by automation and the increasing use of algorithmic trading.
Algorithmic trading is the use of advanced mathematical models to aid transaction decisions in financial markets. Experiencing a steady popularity in the U.S. and other regions, the method has made it easier and faster to execute a greater volume of transactions.
Electronic options, auto-quoting, program trading and even involvement of some banks in so called “off-book” trading (moving shares they are holding for customers who want to buy and sell without going through the exchanges) also contribute to the volume.
So what sort of technology with financial firms be considering in the near future?
Goodall foresees a move towards “larger and faster” storage and improved information life cycle management tools.
Vendors will continue to explore different approaches such as storage networks and virtualization to handle data.
“Data back-up will become critical for regulatory and business resumption plan purposes.”
He said systems that can provide flexibility and intelligence in setting auto back-up policies and metrics will be in demand.
These tools will need to enable users to set recovery point objectives (at which point of an operation will data be backed up) and recovery time objectives (the speed it takes for the system to make the backed-up data available for use).
When deploying data management systems, Shah said, organizations must consider interoperability with existing systems. “When firms have invested heavily on a legacy infrastructure, reusability becomes an issue.
“Investigate if it’s possible to update or ramp up rather than overhaul,” he said.
Some organizations might decide to outsource its data storage and management operations. Shah said these companies must take pains to ensure that their outsourcer is compliant with existing regulations.