MIS 3090:IT for Financial Services

Introduction to Class

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Welcome!!

IntroductionsClass basicsSyllabusTexts

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I am…

Dr. Bill Ph.D. in MIS 17 years at VU (Wildcat X 2) Teach ERP, Database, CRM Research in CRM, XML, ERP Interests in…

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Our class…

Brand new!Combination of MIS and FinanceIT for Financial ServicesSeminar format

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Class Basics

HBS casesAdditional readingsHands-onGuest speakersFinal projects

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IT is…

Information technology (IT), as defined by the Information Technology Association of America (ITAA), is "the study, design, development, implementation, support or management of computer-based information systems, particularly software applications and computer hardware." IT deals with the use of electronic computers and computer software to convert, store, protect, process, transmit and retrieve information, securely.

Class Framework

Info. Technologies

Hardware

Software

Networks

Databases

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What are Financial Services?

Financial services refers to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, and some government sponsored enterprises. As of 2004, the financial services industry represented 20% of the market capitalization of the S&P 500 in the United States.

Financial Services

Security Markets

Brokerage Industry

Banking Industry

Miscellaneous

Class Framework

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What’s hot in IT?

Hardware related?

Software related?

Network related?

Internet related?

Financial Services

Security Markets

Brokerage Industry

Banking Industry

Miscellaneous

Class Framework

Info. Technologies

Hardware

Software

Networks

Databases

Increase

d Bandwidth

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Financial Services

Security Markets

Brokerage Industry

Banking Industry

Miscellaneous

Class Framework

Info. Technologies

Hardware

Software

Networks

Databases

Super Computer

simulations

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Financial Services

Security Markets

Brokerage Industry

Banking Industry

Miscellaneous

Class Framework

Info. Technologies

Hardware

Software

Networks

Databases

CRM apps

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Financial Services

Security Markets

Brokerage Industry

Banking Industry

Miscellaneous

Class Framework

Info. Technologies

Hardware

Software

Networks

Databases Integrated Credit DBs

Financial Services

Security Markets

Brokerage Industry

Banking Industry

Miscellaneous

Class Framework

Info. Technologies

Hardware

Software

Networks

Databases

Increase

d Bandwidth

Integrated Credit DBs

CRM apps

Super Computer

simulations

DSS

MIS

TPS

ERP

Systems

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OutlineOutline

How does the NYSE operate (say in contrast to NASDAQ)?

Who are the players involved in the NYSE? Follow an order through the system… What technologies support the NYSE? NYSE and its Networks The Future… mergers and acquisitions

Conclusion

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IntroductionIntroduction The largest securities market in the U.S. (estb. 1792)

Physical mechanism for trading of securities via a competitive agency-auction market (double auction)

– Labor intensive: open-outcry around specialist posts (not straight through processing)

The key to NYSE’s leadership position has been the amount of liquidity is provides to the market

– less a function of its on-going, and somewhat erratic, application of new technologies and systems development

Threatened by NASDAQ and ECNs Private (membership-based) organization until recently

– Predictable reaction to new technology adoption that threatens the positions of the members (if it’s not broken, don’t fix it)

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Trading VolumesTrading Volumes

Source: http://www.nysedata.com/factbook/main.asp

about 2B shares daily in 2007

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How the NYSE Operates…How the NYSE Operates… Orders are sent to a floor broker through a system known as

Broker Booth Support System (BBSS) The floor broker transmits the order to a stock specialist

using the BBSS or prepares a physical paper order – cross trade is possible but subject to specialists’ approval

Orders can also be sent directly by the broker through the SuperDot computer system: this eliminates the floor broker, order goes directly to the specialist’s workstation

– The broker (or client) may not want this as it shows the clients’ hand to the market at large – the client may want to get a better deal than have the order automatically execute – if they walk over to the specialist, they may get a better price

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Follow an order through the Follow an order through the systemsystem

client broker w/ member firm

floor broker located on the

edge of the trading floor

runner

specialist post

broker broker

price quotation

updated streaming stock ticket information

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NYSE Technologies NYSE Technologies Electronic order-routing system through

which NYSE member-firms transmit orders directly to the specialists’ trading post

After execution, a report is sent directly to the member-firm over the same electronic circuit that sent the order to the specialist

Capacity: 2.5 billion shares per daySuperDot

BBSS

Order-management system that enables member firms to quickly and efficiently process and manage their orders

Selectively routes orders electronically to either the trading post or the booths on the NYSE Trading Floor

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NYSE Technologies NYSE Technologies (cont’d…)(cont’d…)

A mobile, PDA-like device enables brokers to receive orders, disseminate reports, and send market "looks," in data and image formats

The monitor is provided for viewing by specialists

Multiple data sources incl.: Point-of-Sale (POS) books Overhead "crowd" displays Market montage Various vendor services

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Specialist Trading PostSpecialist Trading Post20 trading posts

1,500 trading booths on the edge

Every listed security is traded at a unique post by one specialist. All buying and selling takes place around these posts

Specialists manage the market in the specific securities allocated to them. Specialist units can be run as companies or partnerships. There are 12 such firms employing 482 specialists, controlling 2,800 stocks. Specialists can buy and sell for their own account but face stiff controls as they have critical access to order-book information.

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NYSE MarkeTracNYSE MarkeTrac

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NYSE NetworksNYSE Networks The NYSE has 2 large data-processing sites with fully

redundant networks connecting 300 Tandem mainframe processors, 500 communications servers and 250 routers

External Access Network– NYSE Common Access Point (CAP) is a portal to all NYSE

trade-execution products and information services– Allows member firms and customers to directly access NYSE

terminals and services on the trading floor.– Access through T1 or T3 dedicated leased lines or through the

Internet.– Members can connect to their proprietary order-management

system in their booth.

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NYSENet.com NYSENet.com (corporate (corporate services…)services…)

Service for listed companies with individualized company specific trading and performance reports along with a range of more general market data

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Ongoing DevelopmentsOngoing Developments Order books are traditionally private as they constitute a source of

valuable information– NYSE Openbook (from January 24, 2002)

After-hours trading / 24-hour day trading– Neither currently available (after-hours dominated by ECNs)

Meeting the ECN threat (NYSE Direct+)– Trade through rule in effect since 1975– Small trades: limit orders up to 1,099 shares– Processes 10% of NYSE daily volume– 30 second time limit between orders– Try to take business from third market: NASDAQ dealers who trade

NYSE, AMEX and other stocks– Rule 390 (since abolished by NYSE)– Merged with Archipelago or ARCA|EX (major development!!!!!!!!)

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NYSE GroupNYSE GroupNYSE Group (NYX) is now a publicly traded company

Europe is the next round in the NYSE vs. NASDAQ fight NYSE merged with Euronext (LSE no longer in contention) NYSE purchases AMEX in Jan. 2008

stock chart from http://www.cnbc.com.

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ConclusionConclusion Advances in technology has provided the opportunity for

straight-through systematic processing for orders from the trading desk to the trading floor at incredible speeds

Technology has enabled NYSE to operate more efficiently.– NYSE aver. daily volume in 2007: 1.9 B shares– Program trading represents about 60% of all trades daily

The NYSE remains one of the world’s most technologically advanced exchanges and is continually striving to upgrade and enhance current technologies

Little possibility that trading will be exclusively electronic (like NASDAQ) and all trades will be paper-less

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For Next Class…For Next Class… Read

– NASDAQ Stock Market articles– Visit the Philadelphia Stock Exchange website (www.phlx.com)