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.