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I am deputy editor at The Banker, a Financial Times publication. I joined the magazine in August 2015 as transaction banking and technology editor, which remain the beats I cover. Previously I was features editor at Profit & Loss, an FX and derivatives publication and events company. Before that I was editorial director of Treasury Today following a period as editor of gtnews.com. I also worked on Banking Technology, Computer Weekly, and IBM Computer Today. I have a BSc from the University of Victoria, Canada.

Friday, 24 July 2009

Hot source

Features

Open source promises to free users from dependence on vendors, lower costs and increase flexibility. Joy Macknight looks at how it is being deployed in financial services

Although sharing technology may seem to go against the culture of financial institutions that have historically held their technical innovations very close to their chests, the open source operating system Linux has moved from the fringes into the mainstream mostly due to the guaranteed support that is being offered by the big technology players like IBM, Novell, Red Hat, HP and Unisys.

Some financial institutions have embraced this new way of development and are moving ‘up the stack’ beyond Linux with new open source projects such as JBoss and MySQL - and the technology companies are working hard to keep apace. Others, such as investment bank Dresdner Kleinwort Wasserstein, are going beyond the widely accepted technology and developing their own projects that are then released to the open source community.

Open source means that the source code of software is available to study, change and improve through a community of developers. Through this method of collaboration, the community works together on innovations to debug systems quickly to make them more secure, stable and scalable. Linus’ Law, named after the Linux creator Linus Torvalds, says: “Given enough eyeballs, all bugs are shallow” which means that if many users view the source code, they will eventually find all the bugs and develop ways to fix them. Open source tools are considered to be high quality, maintainable and ‘tweak-able’ to adapt them to specific situations.

“We describe the adoption trend we are seeing in the financial services as from the edge of the enterprise in,” says Kim Ferranti, Novell’s industry marketing manager for financial services. She explains that typically, businesses are adopting Linux for print servers, email servers, and web servers, but now there is also significant adoption in mission critical areas. “We are seeing it in high performance computing and grid computing,” Ferranti says.

Capital markets were the first to adopt Linux, but now many financial institutions across the market spectrum have looked to Linux to solve a number of problems: cost, performance, interoperability and vendor lock-in.

Werner Knoblich, vice president of EMEA at Red Hat, says: “When the market crashed in 2001/2002, all the investment banks — Morgan Stanley, UBS, CSFB, Lehman Brothers, Goldman Sachs and Merrill Lynch — were sitting on very expensive Unix infrastructures, mostly from Sun Microsystems. They had to lower the costs — so they were the early adopters of Linux technology. In this way, they saved a huge amount of infrastructure costs just because of the price performance of Linux on Intel machines compared to a Sun solution on Sparc technology — the hardware is much cheaper and it has better performance.” These institutions became comfortable with the fact that Linux was reliable and was good enough to bet the bank on.

Linux is also moving into the commercial and retail bank space, which are slow adopters of new technology compared to the capital markets.

The MLP Group, a German-based financial services and consulting firm working in the fields of pension provision, asset management and risk management, decided two years ago to redesign the IT infrastructure for its 300 departments in 160 locations in order to have no dependencies between the infrastructure and departmental organisation. It had 15 months to complete the project, including roll out, but part way through it ran into financial problems because the license and support costs exceeded the planned budget.

Erik Vellmete, IT manager at MLP, says: “At that time, Novell offered us support through Linux and in our contract with Novell we got professional support for free. Plus we got a strong commitment from Novell to help us no matter what happened because, at the time, MLP was its first customer in the financial institution market with more than 150 servers. So we saved on the support costs which amounted to between €100,000 — 150,000 and this was one of the main drivers for our decision.”

Although cost is one of the primary drivers, there are other considerations. “People are looking for interoperability in their systems and integration,” says Deborah Magid, strategy director of strategic alliances at IBM Software Group. “All financial institutions have systems that are quite complex. They have various channels, they have various background systems, and the mergers and acquisitions are huge drivers — these systems come from all different places and didn’t necessarily historically work together.”

Open source can also avoid the issue of vendor lock-in. Federico Vellani, responsible for IT governance at Banche Popolari Unite Group, the largest co-operative credit bank in Italy, says: “Competition between suppliers is a high return factor and helps us achieve efficiency. A multi-vendor environment that meets market standards makes it possible to compare proposals from different suppliers to meet the same requirements. It also means using standard, open source products that can work with each other and guarantee competitiveness and cost reductions without being tied to any single supplier. So the real benefit is freedom — freedom of choice.” The bank implemented Red Hat Enterprise Linux and Red Hat Desktop with 14,000 clients and claims that the savings are significant.

“The aim of the bank is to increase dividends and the value of the shares - and our IT expertise allows us just that: to focus on our goals and not on vendors’ interests. For example, one of the bank’s main goals is to increase revenue so we have therefore developed in-house, and in an extremely short timeframe, a CRM application that is allowing us to do just that,” continued Vellani. “The ability to develop and manage in-house is an incredible competitive advantage because it enables time-to-market reductions. I think we have an extremely high agility compared to other banks, an ability that enables us to choose open source and to acquire that freedom that guarantees great advantage.”

Some financial institutions have also given something back to the open source community. Although Linux is not considered a strategy for MLP — the group continues to review its technology on a regular basis — it has worked with the community to fix some bugs. “There is a Linux project in a Java environment called Axis which we found had some bugs that were a serious problem for our application. Because it would have taken too long to wait for a fix, we fixed it by ourselves and put the fixed source code back into the community. But it is just because we needed a solution at once that we did it ourselves; it is not really that the developers are engaged with the open source community. If we have something new or can fix some bugs, we offer it to the community — we do not do it because of the community, but because we need it,” says Vellmete.

But other financial institutions are more involved. Dresdner Kleinwort Wasserstein has been actively involved within the open source community and developed its own open source project, Openadaptor. Vice president and head of open source initiatives at DrKW Steve Howe says: “In banking, especially investment banking, you find lots of different IT systems. The front office will have a variety of specific systems doing discrete things whether calculating profit & loss or running models for algorithmic trading. In order to amalgamate the risk across different areas on all deals, to be able to settle those deals, and to record them on the general ledger, these specific systems need to talk to each other. What you typically then get within a bank is a huge spider’s web of systems linking to multiple other systems. So we developed software to deal with this internally — basically to be able to write messages between systems very easily.”

Fundamentally the bank decided to test out the possibilities and promises of open source technology. After initially opening up the project internally within DrKW in 1999, the success it experienced encouraged the bank, in partnership with Collabnet, to roll it out externally in 2001. “The response was rewarding. A lot of people outside of DrKW got involved and started contributing fixes — even some of our competitors and peers — and this helped the project to progress. If other banks were doing 10 times the volume or more complex trades or using software in different ways, we found their experiences were brought back to inform us what happens in different situations. So they were fixing the problems that we as an organisation hadn’t yet encountered, but probably would have encountered down the line — and all for free,” says Howe.

But there are still some sceptics. Fergie Williams, head of technical services Europe at HSBC, thinks that the hype is over. “My own view is that this was very much on the agenda about three or four years ago when it was on that curve of interest. This was related to the Linux success, and quite a few people were getting used to the terminology and thinking about the concepts. I think what has happened is that it has gone through the intellectual phase where you get lots of people looking at things from the point of view of the good of the world and then the cold commercial reality creeps in. It has got relegated from the top end of the management down to the people who are more interested in the technology.”

Martin Percival, principal technologist at BEA, adds: “The interesting thing about open source in general is that it forces a very technology centric view and so, as soon as you have got this stuff, you are invariably down looking at the source code and the projects that have been set up to help drive it. Perhaps it focuses people too much on the technologies involved and I’m not sure that that is such a good thing. Some of the open source people are coming out with some ideas around this, but in general what we are seeing are very technical solutions for very technical people. At the time when the industry is trying to move faster and get the job done by business more than programmers, it seems that it’s not necessarily what people want.”

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