Speakers in a session entitled "What's next for securities? The view from the US" suggested that recent difficult years in the US securities industry have demanded dramatic change and laid the ground for a renewed focus on technology and innovation.
Donald D. Kittell, executive vice president of the Securities Industry Association, described how the simultaneous bursting of a number of bubbles, successive corporate and fund scandals and wider security issues have brought about a shift from extreme optimism to "caution and retrenchment" in the industry. This has demanded a "reordering of priorities" and highlighted the need to "overhaul long standing business models", he said.
Short-term it also led to a pull back of investment in innovative technology and saw bold plans put on hold and implementation plans shelved. "However, in the long-run, the case for investing in infrastructure is stronger than ever. As margins contract, the need for efficiency is greater than ever. The blueprint for change in securities processing in the US is well underway," he insisted.
While conditions may be ripe for change, Kittell says that in order for it to happen, CEOs need to come to terms with the new business outlook and existing market uncertainties have to be resolved.
Questions also remain about how the industry will move towards the next generation of complex business market networks. "Should there be regulatory mandates or should it be left to market devices to encourage the more sophisticated players to spin off their own networks? Should we develop incentives to deal with disparities between large and small firms? A combination of regulatory and private mandates are necessary to make real progress in order to get to the next generation," he said.
Taylor S. Bodman, partner at Brown Brothers Harriman, focused on the asset management business which has been through similarly tough times in the last few years. "Maybe the salad days are over for the asset management industry," he surmised.
"Restoring investor confidence is the order of the day. Firms are talking about wiping the slate clean, talking about new and improved versions of themselves and becoming role models for a new era." Rafts of new legislation would introduce sweeping changes "that may challenge our business model to its core", he said.
Like Kittell, Bodman suggests that the industry will emerge stronger. "There is a tremendous burst of innovation coming out of this difficulty. I look at the products and there is much to be excited about. They may not be spanking new but their time has come. We find maybe not just a new push but a new religion."
Bodman sees innovation taking the form of open architecture systems, separately managed accounts and the emergence of alternative assets. On the broker side the focus will be on margins, unbundling and on execution services. "Something really new is afoot," he said.
According to James Leman, president of SunGard Trading Systems/Brass, new technology is also changing the traditional roles of investment managers and brokers. Developments in algorithmic trading are continuing a long-running trend towards asset managers taking more control from brokers. "There are solutions where, all of a sudden, direct market access is available to the buy side. You can see the control now is continually being adopted by the buy side institutions," he said.
But technology will also allow brokers to demonstrate to their customers that they can do a better job and allow asset managers to monitor trading activities by brokers and their own trading departments. "Transaction cost analysis is becoming more important for both the buy and sell side," said Leman.
"The roles are changing in the marketplace and the marketplace is becoming more complex. Therein lies the challenge," he concludes.
Joseph Anastasio, senior client partner at Capco and moderator for the session, questioned how well the US was meeting that challenge. He focused on the continuing debate surrounding the shortening of settlement times.
"Typically it takes 24 to 36 hours of expensive follow-up work to prepare trades for final settlement. This type of inefficiency will encumber growth. The US is way behind the rest of world with its passion for handling paper," he said.
Roger Burkhardt, CTO at New York Stock Exchange provided some insight into how the Exchange was rising to the challenge by moving to "much more automated methods of trading securities".
A "hybrid market proposal" that has been tested and is currently under consideration by the SEC will see a substantial expansion of the NYSE electronic trading facility.
"We want to do something rather different. We want greater choice without sacrificing market quality. This is really the best of both worlds. We want to provide the speed and certainty of auto execution but we're not looking to reproduce the higher spreads and volatility of some other models."
Despite this progress, the view from the US may well be a view from behind. While navel gazing and a passion for paper may be hampering technological advances there, the Japan Securities Dealers Association (JSDA) outlined a plan to make Japan's securities industry paper free within five years.
According to Kazuo Matsunaga, general manager of the reform promotion centre for securities clearing and settlement systems of the JSDA, the decision to dematerialize Japanese stocks and other securities was necessary to maintaining Japan's competitive edge.
"We were trying to reform Japan's stock market so as not to fall behind the US stock market. We had no plans to go further than the US but actually dematerialization will make ours far more advanced than US systems," he said.
Dematerialization will be implemented over the next five years with two years spent on operations, two years spent creating the systems and one year spent testing them. The actual implementation will take the "big bang" approach and occur on day one.
Matsunaga sees two key challenges to the project. "One is that we have a lot of stakeholders in the market and they each have existing interests, so we have to coordinate them." This will involve explaining the benefits of dematerialization which include reduced costs, increased efficiency and mitigated risks. Domestically it will transform the current system of making corporate changes using physical stock certificates.
The other key challenge will be systems development. SWIFT will be working actively with the JSDA on the market infrastructure and also with individual market players on their proprietary systems.
"One of the technical challenges is that there are existing proprietary systems that are functional in the Japanese market. Trying to provide global standards is a kind of competition between existing and global standards. One of the advantages that SWIFT can provide is standardized, safe and resilient messaging services," said Kazuhisa Fujimura, director of the Japan securities industry division at SWIFT.
