Over the last decade banks have spent billions on high-frequency trading, but have simultaneously neglected their IT legacy systems, leading to a dangerous lack of data transparency. With the Banking Reform Bill in draft, is the time right for regulatory intervention into an IT overhaul?
In a recent report trade body Intellect called for government regulation to force the overhaul of IT systems in finance. It is argued that complex legacy systems have led to siloed information systems.
Chris Lesley MP, shadow financial secretary to the Treasury, said the availability of accurate and transparent data is crucial to gauge the financial landscape.
"If you ask the regulators, do they really understand what's going on in these complex trading bodies, I'm not convinced they do," he told Computer Weekly at a recent Regulatory Reform and Data Conundrum Conference held by Intellect. He said technology can address this through better visibility and this should be included in regulations.
"High-frequency trading is not innately dangerous, but I am anxious about the comprehension gap," he added.
Keith Saxton, chairman of Intellect's financial services programme, believes the technology is already there to create a clearer picture of the financial system.
"Advancements in super computing and storage technology have allowed us to measures and manage the entire world system virtually in real-time," he said, speaking at the conference.
Supercomputers are becoming powerful enough to predict economic crises, in the same way they are used to predict floods and climate change because they are able to crunch a huge amount of unstructured data, he said.
"I'm not talking about collapsing everything and rebuilding [from scratch]. Banks could take a 'progressive renovation' approach to upgrading infrastructure," he said. "But we do need to get back to analysing cash flow."
He said it was crucial to look at the banks' processing systems in order to create a more transparent view of data. "It might be possible to put a business intelligence layer on top, but that is not necessarily going to change the way you do business."
Customer behaviour will ultimately force banks to change, he said. "For example customers wishing to transact via mobile, that adds a complexity to the transactional [layer] which banks will need to replace" he said.
"But regulatory mandation would ensure institutions all move in the same direction at once."
Question of standards
Robleh Ali, senior analyst at the Bank of England, believes the issue is not a lack of data, which is present every time a deal is done, but more a question of how to use that information in a meaningful way.
However, Ali says regulatory intervention is not necessarily the route to go down just yet. "The key thing with mandation is the timing, and the important thing to my mind is that you are working with industry to find an answer. And when there is one, then it should be mandated."
He cited the creation of standardisation for barcodes in the retail sector as an example of industry coming to an agreement of its own volition without a system being imposed from above.
The Financial Stability Board has proposed a move toward standisation, with a Legal Entity Identifier (LEI) system that will uniquely identify parties to financial transactions, due to come into place next year. "This is one initiative to bring in simplicity, but the next will be to create a [common] language so we can see in a simple way what is going on with the financial system," said Ali.
"The way we handle data at the moment is not scalable. It is currently difficult to create a clear picture without standards," he said.
Ali believes more automation could also be part of the solution. "We don't want to be hacking it around, as the picture degrades every time someone tweaks the information, so you don't want it running through various hands."
Rebecca Healey, senior analyst at financial markets company TABB Group, agrees that automation is key. "We've seen the evolution of automated trading, not just in speed but in intelligence, with the ability to understand where the trades are and if they are good or bad," she said.
"Automation is moving so you can analyse more, so you can go back and explain what you have done and why to the investors."
Board-level understanding
Davide Ferrara, partner at the financial services consulting arm of CSC, said the IT department in finance has typically found it difficult to upgrade systems. Instead banks will often opt for "point in time solutions" to patch any immediate problems. "But this leads them to spending multiples of that money later down the line," he added. "Otherwise they will pay a lot of money being non-compliant, not to mention the reputational risk."
Simon Wills, executive director at trade body Operational Riskdata eXchange Association, agrees. But he said a lack of understanding of the function of data at a board level is also to blame.
"If you look at finance directors, they weren't on the board until the 1980s, then you got CIOs, the next thing could be to get a data manager on board.
"Part of the issue is resistance [in making the case for payback] but it's about the people making those [investment] decisions not having full awareness of the benefits," he said. Incorporating an understanding of the compliance and business benefits of data investments will be crucial to reform, he says.
But while it is unlikely that government will explicitly call for the wholesale replacement of IT systems, a move to ensure regulators can get a better picture of data flow would be a firm nudge in the right direction, and a move that would have benefits beyond the scope of the industry.
