IT in Finance

Table of Contents
Introduction................................................................................................................ 3
Information Technology in Stock Market.....................................................................5
Conventional Stock Trading......................................................................................... 5
Stock Trading Today................................................................................................... 5
Architecture............................................................................................................. 6
Benefits of IT in Stock Market............................................................................................ 7
Costs...................................................................................................................... 7
Self-Directed Investing............................................................................................... 7
Convenience............................................................................................................ 7
Subscription Levels.................................................................................................... 7
Ease of Access.......................................................................................................... 7
Algorithmic Trading..................................................................................................... 8
What is Algorithmic Trading?....................................................................................... 8
Some Distinct Features............................................................................................... 8
Where is it used?....................................................................................................... 8
Common Strategies.................................................................................................... 8
Technological Requirements......................................................................................... 9
Benefits.................................................................................................................. 9
IT in Investment Banking (Wealth Management)......................................................10
Benefits - Customer Perspective.................................................................................. 10
Benefits - Business Perspective................................................................................... 11
Issues & Challenges................................................................................................. 13
IT in Retail Banking................................................................................................... 14
Traditional Banking................................................................................................. 14
IT in Retail Banking................................................................................................. 15
Benefits of Internet Banking....................................................................................... 15
Whats New in Retail Banking?................................................................................... 16
IT in Insurance.............................................................................................................. 17
Benefits - Customer Perspective.................................................................................. 17
Benefits - Business Perspective................................................................................... 17

IT in Finance
Create a Centralized Structure..................................................................................... 17
Ramp up Automation................................................................................................ 18
Use Lean Process Design........................................................................................... 18
Issues & Challenges................................................................................................. 18
Suggestions............................................................................................................ 18
References................................................................................................................... 19

Introduction
One of the industries that has not only embraced information technology but also has used it as a
key driver for its growth is the Banking and financial services industry. Be it the investment
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banking, consumer retail banking, the stock market or the insurance services, each sector has
evolved over a period of time in terms of adoption of new technologies. The journey from
manual accounting entries in the books to carrying out transactions from your smart-phone today
has been an interesting one. In the report below, we have tried to show this transition in various
sectors and the benefits thus derived.

IT in Finance
Information Technology in Stock Market
Conventional Stock Trading
The conventional stock trading method was an OPEN OUTCRY method where the buyer and the
seller will meet on a trading floor and agree trade the stock.
Floor trading is where traders or stockbrokers meet at a specific venue referred to as a trading
floor or pit to buy and sell financial instruments using open outcry method to communicate with
each other. Just like in an auction, there are shouts coming from those that want to sell and those
that want to buy. The specialist facilitates in the match and centralizing the trades. Paper based
stock certificates were issued as a part of confirmation of the deal.
The steps involved in the conventional stock trading are below:
i) Customer calls the broker to buy the shares.
ii) The brokers order department sends the order to the floor clerk on the exchange floor.
iii) The floor clerk alerts one of the firms floor traders who find another floor trader who is
willing to sell his stock.
iv) The buyer and the seller agree on a price and complete the deal.
v) The notification process goes back up the line and the broker calls the customer with a
final price.
vi) A few days later the customer gets the confirmation notice over mail.

Stock Trading Today

Technology changes the way securities are traded. Both liquidity suppliers and liquidity
demanders use computer algorithms to improve and automate their trading. Technology allows
more information to be processed more quickly. Technology, and the subsequent shift to program
trading by computers, has been a major market shift. This has allowed trading volume to
skyrocket.
This should improve the efficiency of prices and allow for liquidity to be supplied at lower costs.
Order handling has largely been automated by mid-size and larger firms. Mutual funds are using
the Internet to communicate with investors and to offer and distribute shares. Investors are
starting to bypass traditional exchanges and dealer-based trading systems. Retail customers are
trading stock on-line rather than calling or visiting a live broker. Few exchanges still have floor
trading (Ex. NYSE) but volumes are low.
The actual trading process now involves fewer and fewer humans. Technological change has
revolutionized the way financial assets are traded. Investors place orders via computer rather
than speaking to a broker on the phone. Trading floors have largely been replaced by electronic
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IT in Finance
trading platforms. The nature of order execution has changed dramatically. Many market
participants now employ algorithmic trading (AT), commonly defined as the use of computer
algorithms to manage the trading process.
Today, the Stock Trading process is very smooth. A user just needs to open a DEMAT Account
online. There are many public and private banks today which provide DEMAT services. The
whole process is regulated by SEBI. Once the account gets created the user is free to trade in the
Stock Market. Thus we see that I.T has limited the role of the intermediaries or brokers in the
Stock Market. This has also resulted in a reduction in transaction costs.

Architecture

IT in Finance
Benefits of IT in Stock Market
Costs
Benefit in electronic trading is that the cost of transactions is much less than using a traditional
stock broker. When you place a trade with real stock brokers you pay a premium for their time.
Automating the electronic trading services reduces the cost of placing trades, allowing electronic
services to charge low transaction fees.
Self-Directed Investing
Many investors pay investment professionals to manage their investments for them. Professional
services often charge commissions that can sap investment gains. This can only have advantages
for those who do not understand investing. Electronic investing allows users to direct their own
investments and buy and sell whenever they please without having to interact with middlemen.
Convenience
Electronic stock trading offers greater convenience than using a conventional stock broker. With
online trading, trades can be made anywhere as long as you have access to the internet. For
instance, if you are on a business trip to U.S, you could make trades from a laptop without
having to call anyone. Accounts are typically accessible at any time of the day, allowing users to
look over their investments whenever they please.
Subscription Levels
Electronic stock trading services may offer a variety of subscription levels for different types of
investors. Some accounts are free and charge fees only when you make trades. Others may
charge monthly fees, but allow traders to make trades for less money, which can be advantageous
to investors that expect to trade often

Ease of Access
One benefit of online stock trading services is that they are easy for anyone to access and use. All
that is required to use most online trading services is an Internet connection and funds in a
checking account to invest. Accounts can often be set up within a few days and transfers can be
made into accounts from a linked checking account on demand, so you can get money into
investments quickly if necessary.

IT in Finance
Algorithmic Trading
What is Algorithmic Trading?
It is a computerized trading system which makes use of advanced mathematical models to make
trade and transaction related decisions (based on a set of instructions) in the financial markets. It
is also known as automated trading, black-box trading or simply algo-trading
Some Distinct Features
There are strict rules implemented in the models which determine the optimal time for an order
to be placed so as to cause the least amount of impact on a stock's price.
The algorithms are designed to divide large blocks of trades to be transacted into smaller
lots. These smaller lots are transacted as per the optimal timing calculated.
The speed and frequency of these transactions is impossible to achieve for a human trader
Where is it used?
Buy side firms: Usually mid to long term investors like - pension funds, mutual funds,
insurance companies etc, who purchase stocks in large quantities but do not want to
influence stocks prices.
Sell side firms: Short term traders, market makers, speculators and arbitrageurs- who
benefit from the sufficient liquidity created in the market by algorithmic trading.
Systematic traders: Trend followers, pair traders, hedge funds, etc find it very efficient to
code their trading rules and let the program trade automatically without any human
intervention.
Common Strategies
Any strategy that creates opportunities profitable in terms of earnings or cost reduction can be
implemented in algorithmic trading. The following are a few trading strategies commonly coded
in algorithmic-trading:
Trend Following Strategies:

In these strategies trades are initiated based on the occurrence of desirable trends. These are
usually easy to implement through algorithms, since one does not need to get into complexity of
predictive analysis.
Example: A trader needs to follow these simple trade criteria:
Buy 50 shares of a stock when its 50-day moving average goes above the 200-day moving
average & sell them when its 50-day moving average goes below the 200-day moving average.
To implement this computer program will be written in which conditions of these criteria will be
coded as instructions. This program will constantly monitor the stock price and the moving
average indicators. It will place the buy and sell orders when the defined conditions are met.
The trader no longer needs to keep a watch for live prices and graphs or place orders manually.
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Arbitrage Opportunities:

This requires the trader to buy a dual listed stock at a lower price from one market and to sell it
at a higher price in another market simultaneously. The price differential is a risk-free profit or
arbitrage for the trader.
If the identification of such price differentials is implemented in algorithms, placing such orders
becomes efficient and easy.
Index Fund Rebalancing:

All index funds have pre-defined periods of rebalancing in which they bring their holdings at par
with their respective benchmark indices. This time frame creates profitable opportunities for
algorithmic traders. These opportunities are utilized via algorithmic trading systems by timely
execution of trades at best prices.
Similarly there are many more trading strategies that are commonly implemented using
algorithmic trading. A few of them are mentioned below:

Mathematical Model Based Strategies

Trading Range (Mean Reversion)
Volume Weighted Average Price (VWAP)
Time Weighted Average Price (TWAP)
Percentage of Volume (POV)

Technological Requirements
Programming skills to code the required trading strategy Hence one needs to hire
developers or get pre-made trading software.
Access to trading platforms for placing the orders and network connectivity
Access to market data feeds required so that the algorithm can monitor these and look
for opportunities to place orders
Back testing is important in these algorithms before they go live in real markets and
hence that level of infrastructure and ability is also required. Also historical data will be
required to back test these algorithms, the amount of data will depend upon the
complexity of rules implemented.
Benefits
Trades are executed at the most profitable prices.
Order placement is instant and accurate; hence there are high chances that the execution
happens at desired levels.
Trades are timed correctly and instantly so as to avoid significant price changes
Transaction costs are reduced and hence more savings.
One can keep an eye on multiple market conditions simultaneously.
Human errors based on manual, emotional and psychological factors are reduced.

IT in Finance
IT in Investment Banking (Wealth Management)
Wealth managers must innovate or else stand to lose clients. New players with technology at
their core are shaking up the private banking industry. Gone are the days when customers were
heavily dependent on their wealth manager or financial advisor for any market information or
making any investment decision. In this age of technology, information is just few clicks away
for even the most nave investor. So, investment bankers have to be really close to their clients
and understand and meet their specific needs. We take a look at the role that IT plays in helping
the bankers achieve their goals and also the benefits that the end customer ultimately gets.
Benefits - Customer Perspective
Access to Market Information

Technology is not only making it easier for people to find the right advice, it enables them to
keep up to date with their own investments. Wealth managers monopoly on access to market
information has gone. The combination of easy access to information and the ability to access a
wide spectrum of independent advice online has changed how people manage their money.
Technology today is providing opportunities for investors to make it more convenient and
efficient to manage wealth. It is not uncommon to see people speculate about stock markets and
property prices, more often than not using a mobile phone to instantly check prices, indices and
the like. They manage their investment portfolio online.
Easy to Track Portfolios

Customers today can track and change anything with respect to their portfolios sitting in the
comfort of their drawing room. Right from knowing the current value of their portfolio to the
details of their financial advisor (if any) and suggestions on different stocks, bonds, funds etc
everything can be presented before them in a very user friendly manner. A sample dashboard is
shown below for reference.

IT in Finance
Goal Based Financial Investment planning

With the focus building on providing more customer centric solutions, goal based investing is
being adopted by many banks. Goal Based Investing or Goal Driven Investing is an investment
methodology where performance is measured by the success of investments in meeting an
individual's personal and lifestyle goals. This differs from conventional investing methodologies,
where financial performance is defined as a return against an investment benchmark. This
approach results in focus of the investment approach shifting from achieving a higher returns
approach to the investment, or exceeding the market returns approach to funding a personal
financial goals approach. This helps the customer to better plan their financial goals as they tie
them up with events from their life. A typical goal-based financial planner is given below.

Benefits - Business Perspective

Client Centricity

In order to be close to the customer and structure your products according to his needs,
investment banks need to know their clients very well and need to identify customers by
themselves and not by account numbers. Hence the focus is to move from an account centric
system to a client centric system.
In the years leading up to the crisis, investment management businesses have moved away from
being client-focused intermediaries, and have begun concentrating on product development.
However in the process, many firms effectively have turned themselves into product factories,
selling to a diverse clientele. Moreover, the different silos of the product factories have become
increasingly complex and separated, making it very hard to see and serve clients in a unified
manner.
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IT in Finance
Today, the shortcomings of this product-driven approach have become increasingly evident. With
capital requirements rising and profit margins declining, a combination of client demands,
regulatory changes and commercial pressures is shifting the emphasis away from products, and
back towards client intimacy and satisfaction.
This also helps the bank in its KYC (Know your customer) initiative. Know your customer
policies are becoming much more important globally to prevent identity theft, financial fraud,
money laundering and terrorist financing.
Use of Analytics & Reporting

Large investment banks have started to invest in analytics to get a better 360 degree view of their
clients. This helps them to understand consumer behaviour i.e. their clients likes, dislikes, the
products which the client will like to go for etc.
Wealth Managers have always had the need to create a variety of reports, some for their own
account tracking purposes, for their customers to walk them through their portfolio status and not
to
mention
the
various
management information reports
require by his own management.
Creating and collating these
reports from multiple sources has
always been a challenge. With the
use of data warehousing and
reporting technologies, creating
such reports has become efficient
and effective.

Cost Benefits

1. IT can reduce banks operational costs (the cost advantage). For example, internet helps
banks to conduct standardized, low value-added transactions (e.g. bill payments, balance
inquiries, account transfer) through the online channel, while focusing their resources
into specialized, high-value added transactions (e.g. small business lending, personal trust
services, investment banking) through branches
2. Availability of a wide range of inquiry facilities about the banks products, helping the
bank in business development.
3. Reduce cost by improving the efficiency of employees by automate business processes.
4. IT has increased their productivity through the followings:
a. Accurate computing of cumbersome and time-consuming jobs such as balancing
and interest calculations on due dates.

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b. Automatic printing of covering schedules, deposit receipts, pass book / pass sheet
(transaction documents), freeing the staff from performing these time consuming
jobs, and enabling them to give more attention to the needs of the customer.
c. Signature retrieval facility, assisting in verification of transactions, sitting at their
own terminal.
d. Avoidance of duplication of entries due to existence of single-point data entry.
Issues & Challenges
Security & Money Laundering

Sophisticated encryption software is designed to protect your account information, but its
difficult to build a perfect system. Accounts may be subject to phishing, hacker attacks, malware
and other unauthorized activity.
One of the major concerns is Identity theft, some online banks take this risk more seriously, and
others dont.
With ease of doing banking online, it has enabled financial criminals to carry out financial crimes
more easily. Money Laundering and terrorist financing are two areas which are being taken very
seriously by large and small banks.
Making the right investment in IT

Billions of dollars are spent technology each year by market leaders, such as JPMorgan and
Deutsche Bank, and most of them have moved some IT centres to low-cost countries and slashed
staff numbers. But this has not been enough to contain costs. According to Celent, a research
firm global bank IT spending grew more than 4 per cent to $188bn this year.
Consultants say the sector needs a radical approach to rid itself of a legacy where each business
unit has its own IT department, trading platforms and back office infrastructure. Advisors say
investment banks need to move on from such a mushroom strategy to create centralised IT
departments.

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IT in Finance
IT in Retail Banking
Retail banking is the provision of banking services by a bank to individual customers rather than
to companies, corporations or other banks. This term is generally used to differentiate these
banking services from other types of banking like commercial banking, investment banking or
wholesale banking. It may also be used to refer to a department or division of a bank dealing
with retail customers.
Retail Banking Product Portfolio is displayed in a structure below:

Traditional Banking
In a traditional bank, a person has to be physically present for conducting various transactions
like checking for deposit, withdraw cash, deposit cash, deposit cheque etc.
Certain disadvantages associated with Traditional Banking are as below:

Long queue and waiting time in the bank.

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Limited Accessibility as banks are not present everywhere.

More time taken in request getting processed.

Bank is open for a limited time and specific days.

Form filling for services such as depositing cheques, cash etc. is manual which increases
chances of error.

Transactions are mostly handled manually which is also prone to error.

IT in Retail Banking
Banking is now no longer confined to the branches where one has to go to the bank in person in
order to withdraw cash or deposit a cheque or request an accounts statement. In todays world,
the Banking industry is fast growing with the use of technology in the form of On-line banking,
Mobile banking, Telephone Banking, ATMs etc. The industry has been consistently working
towards the usage of development of technological changes in banking operations for
improvement of its efficiency and customers satisfaction.
The major areas in which role of IT can be seen in Retail Banking are:

Internet Banking
Mobile Banking
Credit/Debit Cards
ATM
Mobile Wallet like PAYTM

Benefits of Internet Banking

To the Customer:

1. Internet banking provides 24 hour banking facility, which enables accessing your
account anytime. The long queues and the endless wait to get things done in a bank can
be skipped now.
2. Account can be accessed from anywhere by just logging into the banks site and
entering user id and password. Account information can be checked and transactions can
be performed from anywhere via a smartphone, laptop, or any other Internet-accessible
device.
3. A majority of services can be accessed online such as loans, credit cards, savings
accounts, and mortgages. Insurance products can also be bought using internet banking.
4. Some banks provide online portfolio management services. Stocks, bonds, and other
investments can be managed conveniently with online banking and also independent of a
financial intermediary like a stockbroker. For example, through ICICI Securities
customers can trade in the stock market or keep track of the portfolio.
5. Online Booking has become a widely used service by the customers. Such as Booking
Railway tickets through online banking is a widely used service by customers.
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IT in Finance
6. Online Shopping is another industry where online banking is making progress. The
online shopping industry is an advancing industry and one of the important reasons for
this huge growth is the increase in internet banking.
7. Online banking also helps in paying utility bills like electricity, telephone, water etc. It
saves a lot of time. Mobile can also be recharged through online banking.
8. Insurance payments can be made over the internet.
9. It enables Cash Free banking as customers can use Credit/Debit card to make payments
for purchases.
10. Mobile Wallet fulfils the changing needs of consumers by enabling the use of mobile
devices to conduct financial transactions.
To the Bank:

With the growing use of Internet by the customers, Internet banking has become a Mustto -Have rather than Good- to- Have feature. Competitive Advantage lies in the fact how
bank uses Information Technology to its advantage and provide facilities to its customers.
The Bank also gets Unlimited Network as location of the bank is no longer a constraint
to the customer. A customer living far from the bank can also use all facilities of the bank
through the use of Information Technology.
The Bank staff also gets Lesser Work Load as many transactions are done through
Internet only.
Use of passwords, security codes, one-time-passwords and verifications via sms/email
after a transaction is done online/through credit or debit card etc. ensure that there are
lesser chances of Fraud and Misappropriation.
Internet Banking mostly ensures timely completion of transactions. Also, transactions are
much faster and hassle-free. This results in a Better Customer Relationship too.

Whats New in Retail Banking?

Dena Bank installs Kisan ATM with Video & Animation system

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Enables rural consumers who cannot read or write to conduct their banking activities
without any difficulty.
ATM communicates with the consumers using Video and Voice Animation in the
absence of text.
The transactions are completed by a single touch. There are no complicated menu
navigations also like the ones present on the standard Urban ATMs.
Comprises of features like Finger print verification, voice guided animated screens,
one touch-enabled transactions etc. which are especially designed for individuals who
cannot read or write.

IT in Finance
IT in Insurance
Insurance is one of the oldest financial industrial sectors and benefits by IT are very high in this
sector. Earlier Insurance contacts used to be hand written. Insurance industry is crucial for any
countrys GDP, hence improvement in the industry are important for any economy also.
Insurance is data intensive industry. The industry involved high manual work for record keeping
and insurance policies were costlier than todays policies. Implementation of IT in insurance
sector has proved beneficial for both customers and companies alike. Today almost all the
insurance companies take support of IT to keep their businesses running. IT helps insurance
companies to Collect, Process and Maintain information of policies. IT infrastructure has become
a hygiene factor for successful operation of insurance companies. IT operations/functions are
bases on which insurance companies rely to serve the customers and provide cost effective
solutions.
Benefits - Customer Perspective
Customer or users of insurance policies have realized the importance of IT in their satisfaction
level. In todays fast pace lives people have very less time to devote to manual documentation.
Earlier norm was submitting many proofs for address, Date-Of-Birth, health status etc on
paper and personally hand over such documents to insurance agents. Once all documents were
verified then only the insurance policy was issue. The whole process used to take too much time
of customers. Today an insurance policy can be bought in as little as 1 minute. All a customer
need to do is to submit the scan copy of the documents required and buy the policy online. IT has
played a major role in making a customers life easier in purchasing the policy. A customer can
take a look at all the products available online and then decide which one to go for. The increased
available choices have given customers a piece of mind. A customer can take well informed
decisions and feel confident about the choice. Another major contribution by IT to insurance
customers is the cost factor. If an insurance agent approaches the customer the quotation for
insurance policy is high as compared to online quotation. A customer can look at the available
products online and receive a call from insurance company to clarify any doubts before actually
purchasing the policy online.
Benefits - Business Perspective
Businesses have benefited alike by implementing IT to carry on their day-to-day activities.
Earlier a lot of man power was used for record keeping and carry on various calculations
required to process policy data. Today top performing businesses implement IT to achieve
operational excellence. Companies now can do more for less as a result of operation excellence.
Businesses have implemented IT to master following:
Create a Centralized Structure
Top performing companies centralize their IT and back-office processes by keeping up with
latest technology. This improves their productivity and governance. For health insurance a
medical experts are pooled to provide the service and redundancy is eliminated to a greater
extend. This benefit is extended to customers in insurance premium.
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IT in Finance
Ramp up Automation
Top performing companies use highly automated systems such as self service kiosks that help
customers, agents, broker and independent financial advisers to process simple transactions. For
example claim processing of risk free insurance policy can be automated without having much
manual intervention
Use Lean Process Design
Improving response time is key to customer satisfaction and insurance companies are not behind
in implementing lean process design to over come backlog and increase response time. IT
enabled core activities of companies to be streamlined to route tasks and manage workflow
efficiently.
Issues & Challenges
Reporting obligations by the regulatory authority required insurance companies to keep up with
latest IT. In absence of IT reporting will not be reliable and very difficult to gather data for
reports. The technology is changing at a very fast pace and its difficult for insurance companies
to migrate from one to other as migration involves a lot of data processing. The data available
with insurance companies can be as old as 100 years. Companies have to keep this data for
longer period and risk of data loss in migration is too big to be neglected. Consumers are moving
on from one device to another very quickly. Earlier desktops were used, now tablet and mobile
and in future we may have extended displays. Insurance companies are finding it difficult to keep
up with the fast changing technological environment. Security of data is also prime concern for
the insurance companies. Health insurance domain is facing increase in cost year on year and
puts immense pressure on the companies to keep their operations lean so as to reduce the burden
on customers.
IT advance are creating easier environment for humans but on same time insurance companies
have to chase. This is like a dog on its tail and companies are trapped in the chase. For example
we will have driver less cars on the street but in case of unfortunate incident who will be
responsible will be tough task for insurance companies.
Suggestions
Insurance companies should avoid investing too much in the IT enhancement. IT today has
become a commodity and doesnt give any competitive edge to the companies. Insurance
companies should pay special attention to security of the data and cases of money laundering.

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References
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https://en.wikipedia.org/wiki/Goal-based_investing
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http://www.emeraldgrouppublishing.com/learning/ami/issue_02/AMI-Issue02-article05.pdf
http://www.euromoney.com/Article/3394521/Innovations-in-Wealth-Management-TechnologyAwards-2014.html
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http://www.ft.com/cms/s/2/1ccd73f2-3cd3-11e4-871d-00144feabdc0.html#axzz3hCvusC6C
http://www.investopedia.com/articles/pf/11/benefits-and-drawbacks-of-internet-banks.asp
http://www.investopedia.com/articles/active-trading/101014/basics-algorithmic-tradingconcepts-and-examples.asp
http://www.animationxpress.com/index.php/animation/dena-bank-installs-kisan-atm-with-videovoice-animation-system

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