One of the two big stories of 2002 was the SIA's decision to indefinitely postpone the switch to T+1, thereby causing everyone, except the large consulting firms, to breathe a sigh of relief. A great deal of time and money was spent on this issue, an issue that was suspect from the start (remember, the SIA decided to make the change, then engaged Capco and Accenture to create the business case). The demise of T+1 led to the demise of the GSTPA; without the pressure of T+1, there was insufficient trade volume through the TFM to cover its costs. To a large extent, the industry's attention is now focused on STP, an issue that was wrapped up in T+1 but which can be cost-justified on its own merits.
EFFECTS ON THE BEAR MARKET
The other big story of 2002 is the impact of the bear market. With assets under management down, investment managers have collectively tightened their belts. Planning horizons have shortened drastically, with many firms only willing to mount projects if they have a payback of one or, at most two years, and managers have adopted a "make do" mentality. Lower spending by managers means lower revenues to those who provide products or services to managers.
One result of this has been a stream of bad financial news from vendors, with most publicly-held vendors reporting losses or very low profits. Vendors, in turn, have been forced to cut costs. For example, Instinet cut 300 jobs (17% of their workforce), DTCC laid off 475 people (15% of their workforce); both Javelin and SunGard Trading Systems reduced their staff by 20%, and the former ILX subsidiary of Thomson laid off 200 employees (23% of ILX staffing).
Some vendors were not able to survive the loss of revenues - TradingLinx folded after showing great promise; Synetix, a joint venture of Capco and Reuters, was announced in February and shuttered in November; Global Crossing filed for bankruptcy; Encompys, the multi-vendor ASP and portal, closed so quietly that no one knew until its investors' annual reports noted their losses; the Deutsche Borse decided to close Neuer Markt, EFA Software closed, listing $25.40 (million?) to Falafel King among its debts; and the list goes on. The Global Equity Marketplace (GEM) Alliance - an ambitious plan of 10 exchanges to create a 24-hour global marketplace - also seems to be a victim of the current climate.
MERGERS AND ACQUISITIONS
Cost savings was given as one of the primary reasons for a string of mergers and acquisitions. The top four ECNs became two, with the Instinet/Island and Archipelago/RediBook mergers. Other ECN mergers and acquisitions of note were Ameritrade/Datek, BondsInAsia/Asiabondportal, and E-Trade/Tradescape. Many ECNs closed, including MarketXT and Atriax. Other high-profile mergers were CREST/Euroclear, ISDA/FpML, GSCC/MBSCC, and HP/Compaq.
Acquisitions were frequent in almost every area of our industry: State Street Bank acquired Deutsche Bank's custody business, Fiserv acquired Investec Ernst; Pershing acquired Deutsche Bank Alex Brown's clearing arm; IBM acquired PricewaterhouseCoopers Consulting; Advent acquired Techfi; Borsa Italiana acquired Monte Titoli; SS&C acquired Real-Time; FT Interactive acquired Merrill Lynch's Securities Pricing; SunGard acquired Tradeline.com, Kronos Software, Guardian iT, and the 88.5% of Brut that it did not already own; BNP Paribas acquired Cogent; Clearstream acquired Filinks, IDC acquired Meridian; BondDesk acquired MPA; ADP acquired Power Securities; NYFIX acquired Javelin; Reuters acquired Easetech Financial Systems and AVT Technologies; ITG acquired Hoenig; and again the list goes on.
OUTSOURCING
Outsourcing was the biggest non-story of 2002. JP Morgan, back in the custody business after its merger with Chase, renegotiated its outsourcing deal with Bank of New York - while BoNY will still be the outsourcer for Morgan's non-US business, the US business will remain in-house. Although, at one point, they were shouting their plans from the roof top, little was heard in 2002 about Mellon's and State Street Bank's plans to turn their lift-out back offices into regional outsourcing centers. No other credible large-scale outsourcers emerged, so, once again, outsourcing remained a topic everyone discusses but almost no one does.
OTHER ISSUES
Other interesting issues of 2002 included the following:
- S.W.I.F.T.'s hard deadline of November 16 for migrating from ISO 7775 to ISO 15022 turned soft, with S.W.I.F.T. continuing to support the old standard, but at a rapidly escalating price. S.W.I.F.T. claims that 94% of its post-deadline traffic was in the new standard.
- Investment managers in the UK completed their first year under regulation by the newly established Financial Services Authority (FSA).
- Business Contingency Planning became a major industry focus after September 11, and this focus will remain for some time.
- The big technology news was Linux and web services, and 2002 may be remembered as the year that Linux achieved legitimacy.
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2002 Cutter Associates, Inc.
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