How Morgan Stanley Can Leverage IT

As previously explained in my last post, IT has transformed the financial services industry as a whole. Still, the question remains: How can Morgan Stanley, one of the world’s top investment banks, leverage using IT? The answer: Morgan Stanley can leverage IT by taking advantage of (1) execution management systems, (2) algorithmic trading, and (3) dark pools.

1. Execution management systems (EMS)

An execution management system is a computer software application that provides access to trading exchanges. These systems often contain intelligent features like algorithms, market data, and predictive technology (www.financetech.com). EMS also allows users to manage orders across various trading destinations (i.e. exchanges, brokers & crossing networks). Consequently, EMS traders tend to work directly with automated transaction networks.

For Morgan Stanley, implementing EMS will allow them to adapt to changing market environments by taking advantage of electronic trading.

2. Algorithmic trading

An algorithm, first identified by the 9th century Arab mathematician Al-Khwarizmi, is a “series of calculated steps strung together to produce a desired numerical goal” (www.britannica.com/al-Khwarizmi). Today, these mathematical formulas can be used to buy and sell large blocks of stock that were customarily traded on the floor of the New York Stock Exchange.

By using algorithmic trading programs executed on high-powered computers, Morgan Stanley can trade literally millions of shares in a day. How? Trading algorithms automatically break up large orders into bite sizes and feed them directly into the market (www.businessweek.com). Algorithms are a way to recapture the large volume of commission revenues lost to rival electronic exchanges. By adopting the practice of algorithmic trading, Morgan Stanley can automate their trading and cut their manual labor costs.

3. Dark pools

Liquidity is of paramount importance to investors, especially large institutional investors like Morgan Stanley. Liquidating large quantities of stocks at lower costs is the function of a Dark Pool Trading System; an internal network designed to privately trade stocks (www.itworld.com/dark-pool-trading-system). These electronic trading systems can match stock orders within a fraction of a second, giving a firm an edge over competitors. Because of its cost and complexity, the system is mainly used by large institutional investors who often trade in large volumes.

Modern financial market changes involving new trading strategies, new product advancements, new regulatory constraints and improvements in technology have dramatically increased trading volumes (www.advancedtrading.com). In addition to increased trading volumes on the public exchanges, the trade volumes on Dark Pool Trading Systems are growing daily. Thus, Morgan Stanley can leverage IT via Dark Pool Trading System to increase liquidity and decrease transaction costs.

By leveraging IT in the areas of EMS, algorithmic trading and dark pools, Morgan Stanley can automate some of its trading activities and, in turn, cut operational and transactional costs.

IT’s Impact on the Financial Services Industry

I am the Chief Technology Officer of one of the world’s top investment banks; Morgan Stanley. With over $750 billion in assets under management, Morgan Stanley serves up a whole menu of financial services (www.hoovers.com/Morgan_Stanley). Although the vital functions of the financial services industry will probably remain an integral part of the development of capital, information technology (IT) has changed the numerous ways in which the industry performs its activities. According to The Effects of Information Technology on Financial Service Systems (www.books.google.com), three aspects of the financial services industry which have been revolutionized due to IT are (1) information dissemination, (2) financial advising, and (3) underwriting.


1. Information dissemination

IT affects information dissemination in the financial services industry in several ways. First, the quantity and quality of accessible information has increased because information is now less costly to assemble, store, and access than it was in non-automated systems. Investors involved in securities transactions are expected to make better-informed decisions because of the increased availability of information.

Next, IT has enhanced the reporting of securities trades. NASDAQ, founded by Gordon Macklin (who also founded the Macklin Business Institute at Montgomery College!) is a "computerized data system that provides price quotations for securities traded over the counter". (www.nasdaq.com) Communication technology, in turn, makes it possible to broadcast this information in real time to brokers all over the country.

Lastly, IT has increased the speed with which information is available to the mass market. With the systems now available, investors have become less dependent on a broker or dealer for up-to-date information. The independent role of investors as information observers has increased due to IT (www.gao.gov).

All in all, IT has affected information dissemination in the financial services industry by increasing the quantity and quality of financial information, enhancing the reporting of securities trades, and increasing the speed with which information is available to the public.

2. Financial advising

The nature of advising in the financial industry has been changed in a number of ways. First, the increased availability of IT has changed the nature of advising by placing more sophisticated diagnostic tools in the hands of both advisors and investors (www.msnbc.msn.com/business-personal_finance). This change in the industry affects the way investment decisions are made and the quality of those decisions.

Subsequently, the reliance on information technology for analysis of personal investment needs has created a move in the financial services industry to emphasize individual human judgment. Although the client/broker relationship still exists, a decline in personalized service has occurred due to the amount of financial information and supporting analytical tools available on internet sites like www.etrade.com.

Finally, while financial advising has been put out of place in some areas within the industry, its importance as a separate and distinctive service may be emphasized in other cases. For instance, many commercial banks offer personal financial advising services to account holders who hold a certain amount of bank investments.

In general, IT has affected financial advising in the financial services industry making sophisticated analytical tools available to public investors, amplifying the emphasis on individual decision-making, and, in some cases, advising has been made a premium service.

3. Underwriting

Underwriting, in the context of investment banking, refers to the assumption of risk by an investment bank or other third party at the time of an initial public offering (www.morganstanley.com/securities_underwriting.). IT has changed how this basic function is performed in quite a few ways. To begin, IT has lessened the time between the creation of a securities issue and its sale. Pricing decisions and market evaluations may be more definite if the time frame in which the security offered is decreased.

Further, price competition for underwriting has increased due to IT. (www.aei.org) IT has allowed underwriters to locate buyers more quickly using the internet. In turn, this has reduced the time in which an investment bank’s inventory remains idle.

Lastly, the emphasis on price competition can also be a disadvantage for firms entering capital markets because the benefits of advice may be forfeited. While sophisticated analytical tools, which are enhanced by IT, may assist corporations in seeking financing, this type of analysis may not be fitted to the needs of corporations to the same level as counseling services provided personally by an underwriter.

Overall, the industry function of underwriting has been affected by IT through decreasing the time between developing and selling a securities issue, creating more competitive pricing, and diminishing the emphasis placed on underwriter’s advice.

As a result of the advancement in information technology, the financial services industry has seen a dramatic change in the ways it performs its activities; especially in the areas of information dissemination, financial advising and underwriting. I believe that the industry and its practices will continue to be transformed along with IT into the foreseeable future and beyond.