Blogging from the Sifma TMC floor

From their designated areas, eagle-eyed sales people call out people’s names from their name badges as they walk past, fishing for leads.

Casually dressed technologists (and probably the odd student) stop at each stand harvesting trade show tat and the odd useful gadget into their overflowing free tote bags.

Yes, it’s the Securities Industry and Financial Markets Association (SIFMA) technology management conference and exhibition in New York.  The free-to-attend three-day annual expo at the Hilton New York draws thousands of people to visit the several hundred exhibitors that range from pure-play capital markets firms – exchanges, alternative liquidity venues, and industry specialists such as Thomson Reuters and Broadridge, through to more horizontal tech firms looking for financial services buyers – things like network management technology, call centre recording solutions, through to data archiving and chip manufacturers.

Among the buzz of conversations, and vendors tackling common industry problems, trends emerge:

• Low latency market data and execution – the latest technology for high-volume message throughput and network traffic management is helping meet the demand for delivery of data in single digit milliseconds, while complex event processing (CEP) technology helps firms get their algorithms executing in microseconds.
• Hosted services  and co-location of trading systems to get closer to the exchanges also helps feed the need for speed.
• New execution venues jockey for market share, while the exchanges expand their data and technology offerings and try to meet market demand for speed and lower costs.
• Compliance is still also high on the agenda, and firms are bracing themselves for the regulatory  reaction to the credit crisis.

On the latter subject, I managed to get away from the Finextra exhibition stand yesterday afternoon (after catching up on posting video interviews to the site) to check out one of the conference programme sessions: Technology and Compliance – Friend or Foe?

It’s an interesting question. Technology (or its misuse) certainly helps many violators of company policies or industry regulation. But its effective use is also the answer to helping business lines and the compliance departments toe the line and avoid financial fines and reputational damage.

According to one speaker, anecdotal evidence indicates that fraudulent activity is more prevalent when market conditions are tough. If hefty bonuses aren’t forthcoming, the theory goes, traders and others might be more tempted to manipulate or attack weaknesses in the company’s operations for their own gain.

Jerome Kerviel’s use of middle and back office passwords that weren’t discontinued when he moved to the front office is one example of lax IT policies contributing to fraudulent activity. Squawk Box fraud incidents, where former traders retained their dial-in passwords to morning calls after leaving the firm, so they could listen to upcoming orders and front-run them for their own gain, are another.

One speaker referred to the case of Morgan Stanley, which was fined $7.9 million last year for not providing best execution for clients. Apparently compliance had caught the problem at one stage early on. But about one month later, one of the developers noted the modification and changed the coding for price determination for external trades back to the original method. The change back was commented in the code, but went unobserved for a number of years and was only picked up when a trader unexpectedly made $400,000 profit very quickly in a fast moving market.

The settlement notice subsequently detailed a further breakdown of communication between business lines, IT and compliance. Apparently a supervisor requested a change to the inhouse developed equity trading system. IT went and made the change. When it was subsequently discovered that the change broke several regulations, the supervisor said they thought IT would check with compliance, and the IT person assumed the supervisor already had.

The conclusion panellists drew from this tale and others: the industry would get itself in a lot less trouble if business lines, IT and compliance departments worked together more closely. This is becoming more important, they say, as regulations increasingly force greater interconnectedness between parts of the business – front office trading systems or finance systems feeding information into mandatory research disclosure notices, for example.