Between 2001 and 2005 the financial industry spent billions on developing new derivatives and other complex financial instruments. Nobody really understood what was going on until it all came tumbling down in 2007/2008. Now, something similar is happening; the financial engineering is swapped with pure engineering. The industry is expected to spend $90 billion on new superfast computer systems equipped with artificial intelligence and advanced algorithms that no one – except for the engineers who made them – really knows how works.
“Investors seeking the high returns it can once again provide have come back, and IT investment is slowly growing as a result. By 2012, we expect the market to reach pre-recession levels.”
The financials markets industry’s spending on information technology will hit almost $90 billion by 2015, driven by strong growth in the Asia-Pacific region, and a bounce-back in the hedge funds sector, according to an analysis by the independent technology analysis firm, Ovum.
The analysts find that the Asia-Pacific region will see some of the strongest growth in financial markets IT spend, as global companies continue to transfer power to the region due to its growing economic strength, advancedtrading.com reports.
In China, IT spending will grow by a compound annual growth rate (CAGR), of 8.8 per cent from 2011 to 2015. Meanwhile, Hong Kong will experience a CAGR of 8.1 per cent for the same period and Singapore 7.1 per cent.
Although the amounts invested will be lower, growth in all three will outstrip the US and the UK and Ireland, which will hit CAGRs of 6 per cent and 5.8 per cent respectively.
Daniel Mayo, financial markets technology analyst at Ovum, comments:
“While there will be growth in nearly every major market, the Asia-Pacific countries will be at the forefront. This is mainly due to global companies shifting their decision-making power from New York and London to cities such as Beijing, because of their growing economic influence.”
Meanwhile, global spending on IT in the hedge funds sector will grow a CAGR of 11.1 per cent from 2011 to 2015.
This is the strongest growth of all the lines of business and is being driven by a resurgence in the hedge funds market as investors seeking high returns forgive the woes of 2008/09.
Mayo adds: “The hedge funds market was badly affected by the financial crash, with investors staying away due to its disastrous performance. As a result, investment in IT fell significantly in 2008 and 2009. However, investors seeking the high returns it can once again provide have come back, and IT investment is slowly growing as a result. By 2012, we expect the market to reach pre-recession levels.”
According to Mayo, much of the investment in all regions and lines of business will be made in risk management systems, as well as reporting systems that allow financial markets companies to provide greater transparency and comply with new industry regulations such as Basel III.
Let’s see how long it takes for the law makers and regulators to catch on this time…
More from advancedtrading.com:
- Deutsche Bank Expands Market Access Platform to U.S. Exchanges
- Man Group On Share-Buying Spree
- Investors Back Hedges to Navigate Crisis
- Defining the Future of Prop Trading
- Hedge Funds Reel in Market Dive
- BlackRock Spends Gold, Bond Profits to Buy Cheaper Equities
Meanwhile, the extreme volatility we’ve experienced over the last few days, are still puzzling many experts.
There’s an interesting article at NorthJersy.com well worth reading.
Here’s some of it:
Wall Street’s wild ride Tuesday may be due less to rational decisions and more to computers automatically trading stocks at lightning speeds.
Large institutional investors like mutual funds often employ strategies to buy and sell stocks or funds at certain pre-programmed prices.
Other traders, meanwhile, employ high-frequency strategies and offload or buy huge blocks of shares in minutes or seconds, depending on how markets move.
“Volatility begets volatility,” says John Longo, a professor at Rutgers Business School.
“No doubt about it, whenever you have these dramatic moves in a short period of time, programmed trading is largely behind it.”
Much of that trading takes place not on trading floors but within vast rows of computer services inside North Jersey data centers.
Years ago, when humans conducted the vast majority of trades on Wall Street, Monday’s roughly 6 percent market plunge and Tuesday’s roller-coaster ride that ended with major indexes recouping much of their Monday losses might have been less dramatic, experts said.
The markets would not have gyrated so quickly, and the ups and downs might have taken place over days, not minutes and hours, experts says.
Some electronic trading strategies involve chasing momentum — automatically buying stocks on their way up or selling as they lose value. And swings in the marketplace will always be driven by economic events — such as Standard & Poor’s downgrade of United States bonds, Europe’s debt crisis and the Federal Reserve’s announcement Tuesday that it would keep interest rates low through 2013.
“Definitely, there will be some events that move markets,” says Frank Zhang, a professor at Yale University’s School of Management who has studied computerized trading, which he estimated accounted for 80 percent of trading volumes (other estimates have pegged it closer to 50 percent.)
Adding: “But I think computer trading exaggerates such events.”
Adam Sussman, a partner at The TABB Group LLC, a Wall Street research and advisory firm, says the high-frequency trading firms feed off Wall Street volatility, which is often fueled by investors’ fear.
“When humans are panicking, the computers do better,” Sussman said.
He didn’t see high-frequency trading as necessarily being responsibility for recent volatility.
“They’re not really causing it, because they’re responding to market conditions,” he says.
I assume some might argue with that statement.
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