Financial technology in investment banking careers explainedby Paul Clarke
Technology is inescapably intertwined with financial markets. Not only has it enabled investment banks to become more efficient, they’re also engaged in a constant battle to ensure that their IT remains ahead of the competition.
While large tech companies like Google and Facebook are the obvious employment choices for any technology student, big banks employ nearly as many – if not more – people in their IT functions.
J.P. Morgan for instance has around 40,000 technology staff globally, 9,000 people at Goldman Sachs employees work in IT and Credit Suisse has 3,000 techies in Asia alone. Investment banks, retail banks, fund managers, brokers and insurance firms all spend billions on technology. By the end of 2015, the banking sector alone is likely to spend $196.7bn globally on IT, according to research from consultancy Celent.
Goldman Sachs is a “technology company”, according to its CEO Lloyd Blankfein.
“That all industries are being disrupted to some extent by new entrants coming in from technology. We, again, being, you know, technology-oriented ourselves, try to disrupt ourselves and try to figure out what’s the new thing, and come up with new platforms, new forms of distribution, new products,” he said during a podcast in May.
Investment banks and financial services organisations are being disrupted by a new breed of ‘fintech’ start-up firms
Investment banks and financial services organisations are being disrupted by a new breed of ‘fintech’ start-up firms that are producing technology that challenges both retail banking products and are looking to bring more sophisticated technology to divisions in wholesale banking that still primarily rely in human interaction.
The big user of technology in investment banking is the trading floor and everything related to it. Whether it is buying and selling financial products electronically, processing them through smart-order routing systems, or communicating to ensure trades go through smoothly, multi-million dollar technology projects are at the centre of any banks’ strategy.
Business areas like equities and foreign exchange (FX) have long been electronified, with investment banks competing to create the fastest and most client-friendly trading platforms. While algorithms have replaced scores of human traders over the last 15 years, the other areas of banks’ fixed income divisions rely on human traders and salesman even now.
A good example of this is the corporate bond market, which due to the range and complexity of products on offer, has always been viewed as a market where technology would be too complex to implement. Last year, Goldman Sachs’ GSessions bond trading platform, for instance, was quietly shelved after being released to much fanfare. Now, however, there are thought to be up to 30 platforms all competing for market share in the corporate bond market, suggesting that the inevitable creep of technology will affect most business areas in banking.
Banks therefore place huge emphasis on getting the right technology in place. It is often the differentiating factor in giving a financial services company the edge over its competitors. It also helps them save money, and comply with increasingly onerous compliance requirements demanded by financial regulators.
In fact, regulatory projects have become an increasingly important part of financial services organisations’ technology functions. One example is the fact that increased regulation on reporting of financial trades has meant banks have had to invest in both new technology programmes for their compliance teams, but also spend heavily to ensure that their current systems are maintained.
Looking at that annual IT budget figure from Celent above, 75.4% – or $148.3bn – is spent on maintenance and compliance. This means that while banks strive to innovate, there’s still a lot of work for tech teams just to keep the current systems running.
What’s more, despite a proliferation of off-the-shelf technology solutions, large banks still prefer to develop most of their technology within the firm. “To anticipate what are often unique requirements means many of our systems are designed in house and are highly specialized,” says Malcolm Harrow, managing director, head of technology for South East Asia at J.P. Morgan.