On September 30th, Google's share price dropped 10 percent in the space of five minutes before Nasdaq intervened and, attributing the drop in price to an error, cancelled all transactions for that time period. This has left some day traders suspicious - and understandably upset if the cancelled trades would have made them money. (Check out the angry comments at the bottom of this article).

While it remains unclear what caused the initial erroneous price - a fat-finger entry is always possible - Mark Palmer, CEO of StreamBase says that smart order routing accounts for the sudden and dramatic drop of 10 percent. Routers are programmed to notice any changes in price and will act immediately - often in milliseconds to a perceived shift in the market. Thus a fat-finger mistake while entering an order - whether it is too high a volume or too low a price can trigger a momentum in the markets. The herd mentality of trading algorithms is no different to that in the pit - when one player appears to be dumping stock, everyone else jumps on the bandwagon. The difference is that in the algorithmic trading world, it all happens a lot faster.

A similar example of errant routing occurred earlier in September when an outdated story about United Airlines’ 2002 bankruptcy filing was mistaken for breaking news and drove the airline’s stock price down from $12.30 to $3. A human error led to this story being entered into a subscription letter that was distributed by Bloomberg and thus feeds into countless firms’ algorithmic trading engines. These engines are programmed to react instantly to market-changing news such as bankruptcies and went into a selling frenzy to get out of their UA positions.

At the end of the day, these trading engines and routers were doing exactly what they were programmed to do. It doesn’t make sense to blame the computers, they are programmed by people after all. What matters is making sure that they are acting on accurate and timely information. As for fat-finger mistakes, there is really little that can be done about those.

Take our anonymous Waters Survey today and tell us how you and your firm are being impacted by the current financial crisis.

How have technologist headcounts and IT budgets been impacted? Has your firm been acquired? / is your firm an acquirer? What is the mood like in your firm? How do you feel about the future?

Help us compile real statistics on the tangible impact to our industry. As always, your answers will be treated in strictest confidence.

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When every day yields new surprises, headlines and record index falls, it's certainly difficult to keep a calm finger on the pulse of what's going on in the financial markets. Nearly one month on from the Lehman crisis that set this spiral of panic in motion, it is hard to refrain from refreshing the news page every minute rather than getting on with what we are all meant to be doing. But getting on with the job is exactly what the buy side has to do at the moment. The money still has to be managed, decisions have to be made and trades have to be struck.

According to a major buy-side survey currently under way and set to be published in the November issue of Buy-Side Technology, the vast majority of fund managers, traders and support staff are saying that it's business as usual for the buy side. True, most of them have not seen turmoil like this at any time during their careers, which often span several decades. Yes, some of their major counterparties have gone under and brokers have had to be suspended because of their financial instability. And never before have clients – whether fund managers or end investors – been asking for as much information about their investments as they are today. But the work goes on. If buy-side firms are to stay in business, they have to just knuckle down, do their job and keep the markets going. That’s certainly tough when no one knows quite what the next few months will hold, but it has to be done.

Technology spend on the buy side will of course be hit as the industry moves into 2009, but most predict that the effect will be not nearly as bad as for the sell side. The fund management industry has not so far seen the same massive collapses and its technology is now more independent from the sell side than it ever was in the past. Buy-side order flow in most asset classes, barring credit, remains steady and so the demand for technology will continue, if a little constrained. So, while certainly not good news for the buy side, the financial turmoil could almost be described as a challenge - which would be a massive understatement for any counterpart on the sell side.

In this modern age, we tell ourselves we can process information faster than, say, our parents or the people who sat at our desks in the early 1990s. But what if we are processing information and responding to events too quickly?

The current crisis has brought us an unprecidented role of federal government in private banking. In the US, the Fed is pumping in funds to keep the markets afloat and it is now the majority stake owner of formerly private enterprises. Likewise, goverments in Europe are taking over portions of private banks and guaranteeing loans in order to avoid panic and a further crash. One wonders if we are over-reacting.

In Amity Shlaes' magisterial overview of the Great Depression entitled The Forgotten Man, she argues that some of FDR's steps to solve the financial crisis were not only unconstitutional, they were heavy-handed and random. One scene showed FDR setting the price of gold at 21 cents. Why that particular number? FDR said that since seven is a lucky number then three times that number is 21.

Who ever writes the great book of the Crash of 08 might have stories just as absurd and bewildering.

Experts say the current turbulence in the financial sector will lead to a lot of changes. New regulation may force investment banks to have stricter risk guidelines, lenders may up their requirements for loans and global institutions may look at ways to pad themselves to avoid the domino effect of the current financial situation.

On a lighter note, The BBC News has been compiling its readers’ best stabs at comedy. So far, the quip that cracks me up most hails from London and it reads:

What’s the difference between Investment Bankers and London Pigeons?

The Pigeons are still capable of making deposits on new BMW’s.

Although the current crisis is no laughing matter, maybe the bank employees that find themselves off the payroll or the investors who saw their life savings melt away can find some solace in cracking a joke.
--Oksana Poltavets, US Reporter for Dealing with Technology

The last month has been one of the worst for financial services firms in living memory. The fallout from recent turmoil is affecting everyone, from the banks at the center of the meltdown to the technology firms that service them. Waters is trying to find out what the outlook is for the fintech industry in its 360 degree survey.

We are asking individuals from the buy side, sell side, exchange and vendor and consulting firms how they are being impacted by market events. What has been the impact on headcount and budgets? Everyone is talking about how risk management is suddenly at the forefront of every firms' strategy--to what extent is this true? Are firms dramatically changing their approach to risk management or are they just saying they are? Is there any risk management technology out there that could have prevented all this and if so was anyone using it? How is risk management technology performing in the current volatility?

Please take a moment to fill in our survey--it's very quick and painless and totally anonymous.

Click Here to take survey

In addition, if you would be willing to speak with Waters about these issues either on or off the record, please don't hesitate to contact me on emily.fraser@incisivemedia.com

Thank you!

How is your investment firm faring in the Crash of 2008? Waters is hosting a quick and anonymous survey to gauge the mood and outlook of the financial services industry. Scared or full of hope? Disaster or opportunity? Tell us in our Waters Survey.

We are asking individuals from the buy side, sell side, exchange and vendor and consulting firms how they are being impacted by market events. What has been the impact on headcount and budgets? Everyone predicts the rise of risk management at the forefront of every firms' strategy. Is this true? Please take a moment to fill out our Waters Survey -- it's quick, painless and totally anonymous.

Click here to take the Waters Survey.

In addition, if you’re willing to speak with Waters about these issues either on or off the record, please don't hesitate to contact Emily Fraser at emily.fraser@incisivemedia.com. Thank you!

Is anyone else tired of the endless gloom-laden news stories and speculation about the dreaded R-word? Most people have known that a recession of-sorts has been on its way for months, but now the news is filled with the latest minister or analyst who has the guts to come out and say, "Yes, It's a recession." One fund manager I spoke to recently said that things will only start to get better once governments and regulators actually admit the scale of the crisis we're in. That is certainly now happening, but recession discussions continue as the share indexes plummet and jobs get axed everywhere.

In its infinite wisdom, the BBC has this week unveiled a sharp new Downturn logo on its website. It's good to see that while Goldmans and other city firms lay off shed-loads of workers, the graphic designers and marketeers are still in high demand. But credit where it's due, the BBC has done a terrific job of covering the markets over the last 18 months and ensuring that what goes on in the board rooms of collapsing Wall Street banks is actually understood in the living rooms of deepest Scotland and Wales. The Beeb's colorful business editor Robert Peston has become something of a credit crunch icon, booming into the British public's homes and offices with his melodramatic, but clear, analyses of the market news.

But the BBC's downturn logo is a sign of the depths to which this crisis has sunk. The terminoology has gone through many guises since the trouble began - sub-prime mortgage meltdown, credit crunch, global economic downturn - and now, finally, it's recession folks. But even now there is wrangling over whether it is really a recession or not and whether the true definition of a recession - which differs depending on the side of the Atlantic on which you sit - has yet been reached.

I don't think there's any doubt that the global economy is in trouble. If Recession is the last word that will be used to 'brand' this crisis, perhaps it will soon be time for the markets to start working their way back.

Human Resources departments at financial firms may want to consider adding massage tables and aromatherapy candles to server rooms. According to a recent study by Menlo Park, Calif.-headquartered IT staffing agency Robert Half Technology, 36 percent of CIOs interviewed say rising workloads as the greatest source of stress to their teams.

Although the study included CIOs from a variety of industries, it’s hard to imagine that IT staffers on Wall Street are not forced to grapple with an increasing workload.

The recent consolidations, buy-outs and layoffs are creating some tough working conditions for technologists. Not only are they tasked with keeping the firm operational, they’re also wrestling with intergration headaches while trying to outshine competition, all with a diminishing staff.

The No. 2 stressor for IT staff is the pace of new technology, with 22 percent of CIOs saying their team is inundated by new software and hardware. Meanwhile, office politics gets 18 percent of the vote.

Maybe “office politics” is another way of saying “trying to stay below the radar so I can keep my job,” but then that would probably be reason No. 1.
--Oksana Poltavets, Dealing with Technology

Following the collapse of the subprime mortgage market, the ensuing collapse of the much larger mortgage-backed securities (MBS), collateralized debt obligations (CDO) and credit default swaps (CDS) markets, and the general impact all this has had on credit markets in general, a lot of people are starting to wonder, are credit cards the next big problem?

It's no secret that many Americans live beyond their means. Rather than aiming to pay off their mortgages and rest secure that they were finally out of debt, many people have chosen instead to take out home equity loans, basically turning the value of their homes into cash to spend on things like new cars, flat screen TVs and so on. It's what has fuelled the growth of the consumer-based US economy in recent years.

It makes sense therefore that as banks become less keen to issue loans, the cost of living rises, and mortgage repayments get costlier, that more and more people are defaulting on credit card repayments. According to a Washington Post article:

"The deterioration in consumer credit, the latest downturn to whack Americans after the housing slump and mortgage meltdown, threatens one of the linchpins of the U.S. economy. Over the past 10 years, credit card debt has gone up 75 percent as Americans' real wages and savings rate have stayed flat. That means Americans have been spending beyond their means -- and fueling economic growth with borrowed money.

Now, the housing crash, financial downturn and contracting economy have made it more difficult for Americans to settle their bills, setting off a downward spiral. As people fail to pay off their credit card bills and other loans, banks must put away money to cover expected losses. So banks lend less. Americans who tended to rely on loans to fuel their spending must cut back, readjusting their spending habits to conform with what they earn."

I agree that credit card defaults are probably the next big problem and some people will have to adjust their lifestyles – which isn’t necessarily a bad thing. Americans spend more than they earn, which is not sustainable. You can’t keep a country growing on nothing so there needs to be an adjustment.

But I don’t believe we will see as big a crash as we did with subprime mortgages. I don’t know for sure but I don’t think there is the same kind of securitization of credit card loans like we saw with the mortgage industry. Firms are too aware – and afraid – of the risks associated with collateralized debt now – or at least they should be. CDSes, CDOs and MBSes ended up being worth a lot more than the actual loans underlying them and so when everything went into default, a lot more was owed than just the underlying debt. Basically the securitization of the debt ended up escalating the problem many times over.

I do think we will see a credit card problem. But I don’t think it will have as many ramifications as the subprime mortgage crisis because I don’t think there is the same amount of securitization – at least I haven’t heard of a market of credit card debt-based derivatives. Please correct me if I am wrong. I’ve no idea if firms are out there buying and selling credit card-backed derivatives. If they are the industry obviously has learned nothing and deserves all it gets. But do we the "innocent" consumers deserve too suffer too? There are protesters standing on the corner of Wall Street who would argue "no".

It's official, there's going to be at least one vacancy in the City of London in the not-too-distant future. Clara Furse, the iconic CEO of the London Stock Exchange, is on her way out and will be replaced by the end of next year at the earliest. That may be some way off, but news reports this morning say that the LSE has already hired a City headhunter to find a replacement for Furse. "Clara has been with the exchange for eight years and it's natural that the board is thinking about succession planning," says an LSE spokesperson.

As the top-level resumes are sent to the LSE, it must be sobering for Furse to know that the end is nigh. Her time at the exchange has been nothing if not colourful. Since joining in early 2001, the Canada-born CEO has fended off numerous take-over bids from rival international exchanges and presided over the technology roadmap that saw the introduction of the record-breaking TradElect and Infolect trading and market data platforms. Not all that long ago, she was hailed as the saviour of the LSE, especially after clinching the Borsa Italiana acquisition last year. In June she was even recognised in the Queen's Birthday honours list, becoming Dame Clara Furse.

But the times they are a-changing. Amidst growing market turmoil, an increasing number of competitiors - Chi-X, Turquoise, Nasdaq OMX and BATS - are forcefully knocking at the exchange's door and it has proven itself far from resilient in response. Not only has its share price tumbled, but a major 7-hour systems outage on 8th September and the failure of Lehman Brothers - which it had partnered to form a dark liquidity pool - did little to restore confidence. Serious work needs to be done at the LSE to stay on top of the market and in the long-term, the board no longer sees Furse as the one to lead it.

If you weren't disturbed by the recent credit crisis and federal bailout, get ready: This one might knock the air out of your lungs. Bloomberg reports that securities firms have set aside $20 billion for bonuses. Not to channel a Fox News populist, but how does anyone inside a Wall Street firm think that this helps their case?

Let’s look at the numbers: Merrill Lynch has a reported $6.7 billion set aside for bonuses. Still viable firms like Goldman Sachs and Morgan Stanley have $13 billion saved for bonuses despite being 28 percent over last year.

“There should be a moratorium on bonuses,” says Barney Frank, chairman of the House Financial Services Committee, in the Bloomberg article. “If nobody gave them, there wouldn't be a competitive aspect.”

Sounds reasonable to us.

The Securities Industry and Financial Markets Association (SIFMA) held it's annual meeting today with a top-notch lineup of speakers--although Treasury Secretary Henry Paulson unfortunately was a no-show.

Mayor Mike Bloomberg kicked off the day with a few jokes and what seemed remarkably like a campaign speech--2009, anyone?--as he pointed out that the US will face much bigger crises in the coming years than the current financial one if it does not focus on its crumbling infrastructure, as well as energy issues and improving schools.

With regards to the securities industry, he pointed to a need for better, smarter industry regulation. When he was a securities trader in the 1970s there was a clear difference between a mutual fund, an investment bank and an insurance company, and accordingly they all had separate regulators, he said. But now that everyone offers pretty much every kind of financial product the regulatory landscape has become confusing and complex. "Agencies are overlapping unnecessarily while some areas are completely unregulated," he said.

This point was echoed in the next presentation, given by Blythe Masters, head of global commodities at JP Morgan Chase and newly elected chairman of SIFMA. Masters, who is credited with the invention of the credit default swap--described by Warren Buffet as financial weapons of mass destruction--described the current legislatory landscape as "a patchwork quilt with more holes than patches". When insurance company AIG collapsed, it was answerable to over 50 state and federal regulators, she said.

There followed a panel discussion on the future of regulation in a post-bailout world. The panel discussed the need for a financial stability regulator to sit on top of all other regulators to provide more transparency and reduce systemic risk. It is likely the Federal Reserve will take on this role, as it already has the knowledge, the staff and the tools to do this. The future of the Securities and Exchange Commission (SEC) meanwhile hangs in the balance. Some believe a merger with the Commodity Futures Trading Commission (CFTC) is imminent.

The panelists acknowledged that overcoming opposing political ideologies to get the right legislation through the US Congress will be a challenge. And considering that the current crisis is a global one, there will need to be a global effort beyond mere cooperation and coordination, if new regulation is to be effective. "Regulation must be global to avoid regulatory arbitrage," said Bob Greifeld, CEO of Nasdaq, who spoke later in the afternoon. NYSE CEO Duncan Niederhauer, speaking before him, said that the last thing the US needs is another Sarbanes-Oxley that will risk making the US less globally competitive.

Regulators around the world will need to come together and work out international standards. Having the same rules will not be enough--as the interpretation and level of enforcement may differ from country to country, said Mary Shapiro, CEO of the Financial Industry Regulatory Authority (FINRA), one of the morning's panelists.

Apparently, the media has become the next-in-line target of the current turmoil on Wall Street. According to Duncan Niederauer, CEO of NYSE Euronext, the news disseminators are partially to blame for instilling fear into investors by running headlines such as "Is Your Money Safe?"

Speaking yesterday at the Securities Industry and Financial Markets Association’s (Sifma's) Annual Meeting, Niederauer recanted a story about a recent rumor circulated by the media that the New York Stock Exchange was on the brink of pulling the plug when the shares traded on the bourse took their first double-digit nose dive several weeks ago. According to Niederauer, the exchange had "no plans whatsoever" to shutter operations, but he was “fielding calls from reporters and investors right and left about it.”

When Niederauer was invited to speak on a business news broadcast a few days later, he warned the reporters that he will take a “swing at the media,” and if they weren’t ready for that, it would be all right with him not to go on the air. Although Niederauer went through with the televised interview, he made it known he was unhappy with the rumors the media was supposedly spreading about NYSE shutting down, instead suggesting the news disseminators “shut down for four to five days and let us do our job.” The boisterous comment elicited a somewhat hesitant, yet quite determined round of applause and cheers from the attendees. (This made this reporter quite uneasy being in that crowd, wearing a “P” like a scarlet letter).

Overall, Niederauer said the main goal right now is to reassure the Street and NYSE “will support anything that will re-instill confidence in investors right now.” We know the securities industry has one thing that can band them together—their disdain for the media.
-- Oksana Poltavets, Dealing with Technology

Yesterday was the 79th anniversary of Black Tuesday - one of the first worst days on Wall Street that saw stock prices plummeting in 1929 amid the crash that preceeded the Great Depression.

Lots of people are making lots of parallels with that time and this. Sadly, many people have lost their jobs and still more have lost their homes. But before we all succomb to the-sky-is-falling-hysteria, it's worth remembering that we enjoy a far more comfortable standard of living than did our grandparents and great grandparents. I hope I am never proven wrong, but I seriously doubt we will see a return to long lines outside of soup kitchens as the citizens of America and other countries line up for their daily free meal.

We take our level of comfort for granted and consider it a hardship if we cannot upgrade immediately to the latest flat-screen TV. We may well have to tighten our belts but let's try and keep some perspective.

Our Waters survey closes at the end of day on Friday 31st October. If you have not done so already, please do take a moment to fill in our anonymous survey and help us build a more complete picture of how financial IT is being affected by the current financial crisis.

Have your IT budgets been slashed? Have headcounts gone down? What is the mood like in your firm right now?

Click Here to take survey

The survey will only take a couple of minutes and your participation will be greatly appreciated. See the December issue for the results of the survey.

Appearing on Fox Business News, Tabb Group CEO and founder Larry Tabb predicts a return to "old-style" banking, where large financial firms shy away from complex financial products. "We're seeing people move out of the stock markets and wanting to keep their assets in deposits which pay low interest so their cost of funds go down. They're rationing credit so when they lend money they are lending it at higher rates and so those spreads widen out," he says. As investors look for more transparent products the demand for complex instruments is going down.

As profts at these old-style banks inevitably go down, they will not be able to pay the same high salaries and people will leave to start up new-style investment banks that will be partnerships and not publicly traded companies, he says. As more and more hedge funds close, Tabb foresees that these individuals will join together with the "renegades" from the old investment banks to form new partnership-based investment banks that will be smaller and more able to indulge in the trading of complex products.