Where IT, Continuity

1
Where IT, Continuity Security are Headed in 05

• Presented by
• Larry Tabb

2
Agenda

• The Business
• Technology
• Continuity
• Security
• Conclusions

3
Algo and aggregation technologies have
drastically changed the nature of market
US Equity Share volume and trades
Source NYSE, Nasdaq, Cincinnati, ArcaEx
4
Hedge funds etrading much more aggressive as
36 of flow direct moving to 55 in 2 years
Projected order flow 05 07
Projected change 05 07
Broker to
-30
Phone
Algorithm
26
Broker
5
Via FIX
Direct
11
Access
Crossing
100
Network
Source TABB Group Hedge Funds 2005 An Inside
Look at Funding, Servicing, Trading, Technology
5
Both commissions spreads have also compressed
Equity Spread and Commission Compression
(illustrative)
Source TABB Group
6
Brokerage firms will be under pressure to view
business differently
Block Trading
Operations Technology
Market Making
Prop Trading
7
Customer flow market making of commodity-type
business will become more operational
Trading
ManufacturedProducts
Securities
Securities
Operations Technology
Prop Trading
8
End Game banking creating product, consultative
sales, automated trading factory
High Value Consultative Sales
Research
Banking Origination
Manufactured Products
Prop Trading
Operations Technology
9
What does this mean for the business?

• Developing electronic tools will be critical
• Differentiating these tools is more critical
• Robust connectivity to clients
• Streamlined efficiency as profitability per
  trade/share will be minimal
• Global cross asset class infrastructure as
  electronic arbitrage will become more common
• Profitability through scale
• Sales channels and banking will be come key
• Sales manage relationships and technology
• Banking creates product and high value low
  capital services

Source TABB Group
10
What does this mean for IT?

• The Big Bang theory of IT
• Tech differentiation and marketing
• Cost is key
• Need new way to management infrastructure

11
Industry is pushing more tech out to the edge of
the network and beyond
Source TABB Group
12
As firms deliver more tech to clients, their tech
becomes entwined with the brand
What characteristics are most important in
choosing a broker?
Source TABB Group
13
Tech must work, be easy to use well supported
otherwise it can be a disaster

• Firms such as CSFB, Goldman Morgan Stanley have
  created the algorithm business
• Now a huge lead through AES, Redi, Passport
• Very difficult to break in
• Initially more marketing than IT but now a year
  to 2 years ahead of pack
• Goldman Morgan Stanley have large lead in Prime
  Brokerage
• Prime brokerage very tech centric
• Prime Brokerage now generates 20 to 30 of
  profits
• Are 2 to 3 steps ahead of competition

Source TABB Group
14
As spreads and commissions decline, COST becomes
very critical

• Rationalization business and technology
• Most firms consolidating equity and FI business
• While business is not so easy to consolidate
• Technology extremely difficult to consolidate
• Consolidate multiple platforms
• Single global infrastructure
• Outsourcing
• Core competence
• Firms must figure out what they do best
• Find scale provider or facilitator to do balance

Source TABB Group
15
As firms move toward blades service oriented
architectures (SOA) IT needs to be automated

• Need to
• Better mange utilization
• Better manage Service Level Agreements
• Better manage where applications run
• Better manage data
• Implement holistic / autonomic environment
• Implement loosely coupled architectures
• Move towards a utility infrastructure

Source TABB Group
16
A utility infrastructure automates the mechanics
of running a complex IT architecture
High Speed Connectivity
Hardware Operating System
Security Entitlement
Discovery
Monitoring
Data Grid
Policy Management
DataVirtualization
ComputeVirtualization
ApplicationPreparation
Compute GridInfrastructure
Allocation
Provision
Routing Scheduling
Utility Data Center
Metering Billing
Autonomic Repair Respond
Source TABB Group
17
How does this play into continuity management?
18
Managing continuity is harder but will get easier

• Near term
• Very difficult
• More equipment
• Greater decentralization
• Mover moving pieces
• Longer term
• Infrastructure will be more automated
• Data will be persisted in memory-based data
  fabric which will manage real-time updates
• Greater facility to manage distributed updated
  and queuing

Source TABB Group
19
But where are we with BCP

• Virtually all firms have bcp/dr plans
• Tested either annually or semi-annually
• Looking for recovery times between 1 and 4 hrs
• Largest global firms have between 10 to 20 staff
  supporting BCP however have network of
  non-dedicated staff throughout organization
• Buy-side fewer, banks tend to have greater
• Hot sites are generally within 20miles replicated
  to as far at 1,500 miles away using asynch
• While many leverage internal sites, most rely on
  major vendors to help

Source TABB Group
20
US-based firms tend to have more stringent
recovery times than European-based firms
Maximum Recovery Time Objectives for a Selection
of Major Financial Institutions (in hours)
21
Largest global firms using multi-hop tech and
leveraging distributed data center sites
5 to 20minute Lag
Warm Backup
Primary
Hot Backup
Within 20 Miles
Between 100to 1,500 miles
Source TABB Group
22
Firms mostly worried about SEC and FSA as
regulatory bodies
Regulatory Bodies Impact on Firms BDP
Initiatives (2005)

No Impact
Very High
High
Medium
Low
Federal Financial Institutions Examination
Council
Source TABB Group
23
The regulatory agencies (Fed, SEC OCC) are
driving firms to

• Rapid recovery timely resumption of critical
  operations following
• A wide-scale disruption
• The loss or inaccessibility of staffing at least
  one major operating location and
• A high level of confidence that critical internal
  and external continuity arrangements are
  effective and compatible

24
This is occurring in a time where BCP budges are
not getting the respect that some deserve

• None of the firms we talked with discussed vastly
  expanding BCP/DR budgets
• Most firms budgets were flat to declining
• Many firms were more focused on regulatory
  initiatives
• Any upside budget increase was coming from MA
  activity not an increase in priority
• A few of the firms were able to quantify their
  BCP budgets at around 7 to 10 of their IT spend

25
Firms critical factors

• Getting Recovery Time Objectives (RTOs) down to
  maximum levels if not below
• Managing cost
• Managing complexity of increasingly decentralized
  infrastructure
• Better leveraging firms existing footprint and
  disparate locations
• For data replication
• For operational workspace

26
Increasingly security taking a front center role
27
Security breaches have been overwhelming

• DSW Customers at 103 of 175 stores had credit
  card info stolen
• LexusNexus 32,000 customers names, addresses,
  S SSs drivers' license numbers lost
• Bank America lost tapes containing 1.2million
  customers
• Seisint - 32,000 individuals were accessed
  through misappropriation of legitimate customer
  IDs and passwords

28
As overall concern rises, Congress is posturing
to act

• Thinking about limiting the sale of Social
  Security numbers
• Putting regulations around firms that sell
  personal data

29
So are firms

• Clamping down on access starting at network edge
• Reducing access to USB ports and external storage
  media
• Developing better network firewalls
• Clamping down on wireless networks
• Adding higher levels of security and monitoring
• Working with firms to create a level of
  separation between front-end and core systems
• Enhanced monitoring and White Hat hacking
  efforts
• Into data center
• Trying to centralize storage and server
  infrastructure
• Enhanced physical security
• Moving data centers and storage facilities away
  from operations

30
However there are a lot of challenges

• Infrastructure is becoming more open not less
• Keeping all client machines inoculated and
  protected
• As firms extend services to customers
  suppliers, security needs to extend out to edge
• Standards facilitating ease of access not
  secure access
• Well-used products are still very open
• Outsourcing will extend infrastructure out to
  third-parties increasing firms responsibilities

31
Conclusions

• IT critical to firms competitive position
• IT increasingly being extended out to customer
  sites
• This will cause margin compression
• Causing firms to focus on reducing cost of
  infrastructure
• Focus on outsourcing will continue
• Placing more burden on BCP
• Infrastructure complexity increasing
• Ability to pay for infrastructure decreasing
  however is becomes more important
• Also as firms infrastructure extends, and costs
  become greater issue security becomes much bigger
  challenge