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BOSTON – Even though financial institutions are demanding more for investment accountability, transparency, and service, they may not be willing to pay more than they already do for them. That’s according to a just-released report from Aite Group, an independent research and advisory firm, on the top 10 trends in investments and securities for 2006. Instead, firms will aim to “be more creative in how they strike the balance between revenue acquisition and cost control.” “While regulators are still in the car, institutional and retail customers are in the driver’s seat for 2006 initiatives,” said Adam Honor, Aite Group senior analyst and co-author of the report. “However, capital markets firms are looking for alternative fuels to cut cost on their IT initiatives.” The top 10 trends for this year are: market structure changes; pressure from hedge funds; data management conundrum; more algorithmic trading; leveraging the existing trading infrastructure; continued expansion of standards; vamped-up risk management, regulation and compliance; focusing on the `after the trade’; more multi-channel delivery initiatives; and more workflow and alerts. The market structure will undergo a number of changes this year including the launch of new, independent firms but stiffer competition may actually come from the large broker-dealers as they build internalization and/or internal crossing platforms to facilitate block trading with minimum market impact, according to the report. Enabling these structural changes is electronic connectivity. “Not surprisingly, electronic connectivity should once again see robust growth in adoption as market participants seek cost-effective, reliable connectivity solutions to maintain competitiveness in the ever-changing market structure,” Honor said. The hedge fund community will continue to pressure for faster executions, better financing terms, improved research, wider access to various financial instruments, lower latency network connectivity, in-depth real-time market data, and sophisticated trading tools. “Despite the lackluster returns and scandals of the last couple of years, hedge funds have become one of the major drivers of change in the global securities and investment market,” Honor said. “Some large hedge funds have come to the point of functioning like an investment bank as well as a private equity firm, making investments where needed, providing loans in certain cases, and at times, functioning as a market maker in certain securities.” In looking at the “data management conundrum,” several scenarios will emerge including as the industry continues its search for higher margin financial instruments, products and services are becoming that much more complex. With the “exponential growth” in transactional data volume over the last four years, the biggest issue for 2006 here will be whether or not outsourcing becomes a realistic option for those firms looking for relief in data management, the report said. Potential adoption of algorithmic trading within the traditional investment management firms will be carefully watched throughout 2006 as it shed its fad image, the report noted. Improved transaction cost analysis (TCA) tools as well as the emergence of algorithms for portfolio trading, liquid stocks, and additional financial instruments will continue to drive the algorithmic trading market forward. Millions of dollars have already been dumped into the development and maintenance of electronic trading platforms, typically in a single asset class, the report said. “Leveraging the investment already made in these platforms, firms will continue to introduce additional financial instruments that can be traded electronically,” Honor said. “However, most firms will realize that launching new electronic trading services will not automatically lead to immediate success.” The continuing expansion of standards will see more vendors and service providers support service-oriented architecture, which will in turn benefit from integration efforts through reduced costs and reduced marketing time. Under risk management, regulation and compliance, fraud monitoring will be the number one compliance initiative this year, the report noted. Senate Bill 1408 sponsored by Senator Gordon Smith of Oregon, went to the legislative calendar on Dec. 8, 2005. The bill is expected to become law in 2006, which will require all theft breaches to be reported nationally and will penalize firms for non-compliance. Still, “While identity theft and data loss have caused a relatively minor negative financial impact, they have had a significant negative impact on public relations,” the report said. Along with other financial institutions, “credit unions will want to pay attention to how they create their data”- how many people have laptops and are they secure or rethinking ways to mail a backup tape and even being cautious of disgruntled employees, Honor suggested. Another trend involves what happens “after the trade.” To compensate for diminishing trade margins in 2006, agencies will cut costs and improve efficiencies in operations. With multi-channel delivery initiatives, account setup and maintenance will become a primary focus in asset-gathering strategies, the report said. This year will also see improved workflow, along with more alert processing. “It has helped brokerages,” Honor said. “It’s just a suggestion but credit unions might consider focusing on their workflow alerts and how business transactions are processed.” -

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