Anthony Malakian: 2012: The Year of Untethered Freedom … and Doom

At the end of the year we say things like: “Out with the old, in with the new.” We draft lists, make resolutions, and set goals. But by March, we quietly cancel the gym membership and head to the bar.

So while I could tell you that 2012 will be better than—or even different from—2011, in reality, next year will probably look a lot like this year. The markets will be volatile, which for some of you might not be a bad thing; regulatory demands will be much discussed; cloud computing will continue to evolve; and Asia and Brazil will be the markets to watch. But for the sake of discussion, let’s see if we can find anything to get excited about in 2012.

Regulatory Delays
Heading into 2011, all the talk was about how Dodd–Frank would be implemented. Well, most of it has been pushed back into 2012, and one rule has already been overturned by the District of Columbia Court of Appeals. There’s no reason to believe that this trend will stop. Look at Form PF, for example. This rule was supposed to come into full effect on Jan. 1, 2012. Instead, for the largest hedge funds, this got pushed back until the summer and all the other buy-side firms don’t have to worry about it until next December.

From an IT perspective, the hedge funds that played chicken with the rule won, and now have extra time to either build out their processes in-house, or find a suitable third party.

Meanwhile, the Europen Commission gave us round two of the Markets in Financial Instruments Directive (Mifid II), but it seems the earliest EU firms will have to worry about compliance is 2014. So 2012, like 2011, is most likely going to be about waiting and seeing, rather than implementing.

Layoffs Ahead
There’s good news and bad news about the financial services job market. The good news is that buy-side firms are not as likely to suffer a bloodbath that the banks are currently contemplating. The bad news is that the reason for this is that traditional asset managers and hedge funds already went down this road in 2008 and 2009 and never increased their staffing to pre-crisis levels.

When you’re working with a skeleton crew, the meat has already been cut to the bone. If you can’t get by on the bare minimum and do more with less, then you have bigger concerns—like solvency.

If there is any silver lining it’s this: If you can manage the choppy waters over the coming months, there will be opportunities to nab talented technologists that have been displaced from bulge-bracket sell-side firms.

Mobile Order-Entry
The next wave of trading technology is likely to be the ability to place orders using Apple iPads and other mobile devices. Stuart Breslow, CEO of RealTick, which released version 11 of its flagship RealTick platform in November, says he expects smaller hedge funds to start experimenting with this new operating model by the end of 2012. RealTick 11 offers the ability to kill orders remotely, and the firm will be ready for mobile order-entry functionality once the industry is prepared to take that next step.

I see 2012 as the year when the race to provide the best mobile order-entry solution intensifies. Some firms will stand out; others will fail miserably.

Hacker Attacks
As more buy-side firms embrace cloud technology, it would seem that it’s only a matter of time until the hacker community turns its attention to the financial services industry. The prize for hackers isn’t quite there yet. Credit card companies are currently the perfect soft targets—relatively speaking—because it’s easier converting credit card numbers into purchases, whereas the primary result of a buy-side attack is embarrassment.

Reputational risk is a very real threat to the buy side, and, as the Occupy Wall Street and Occupy the City movements clearly illustrate, there is no shortage of angry, disillusioned individuals, only too happy to exploit firewall weaknesses. Now is as good a time as any to address those security issues.