Microsoft .NET in Financial MarketsTurning Change into Competitive Advantage

Jeremy Lehman

June 25, 2001

.NET in Financial Markets

Financial services firms are in a race. The advent of networked markets-the emerging market structure driven by increasing global visibility of information-forces firms to race each other in adapting their business models and processes.

The race consists of different legs. Past legs of the race centered on transactional web presence. Current legs address wireless communication and distributing pre-trade information. Emerging legs include algorithm-based or “smart trading”, and performing sophisticated risk analysis using high performance computing. Future legs may address areas such as exchange-traded insurance risk and internal electronic crossing networks (ECNs) within firms that construct virtual instruments in real time.

Competitive advantage lies in the culture, leadership, financial structure, and technology platform to sustainably move faster than competition. Technology’s role is to enable faster deployment of new business processes and applications. Competitive success then requires firms to extend and change these processes and applications more rapidly than the competition.

Microsoft® .NET provides competitive advantage for financial services firms. This paper first examines .NET in relation to structural change in financial markets. Secondly, two scenarios are analyzed: straight through processing and client relationship platforms. The client relationship platform comprises technologies communicating with customers: customer relationship management (CRM), portals, wireless and other technologies.

Networked Markets

The finish line in the race will never be fully reached. The history of financial technology reveals a common theme underlying each step in the evolution of financial technology: a single view in real time across all asset classes. Each leg of the race moves the financial services industry a little closer to this goal.

A single view means presenting users with one picture of the market. For example, the recent rush of fixed income ECNs evolved bond markets from a fragmented, telephone-driven model towards a single view. More recently, utilities such as themarkets.com bring pre-trade information together in a single view.

Real time processes result from the combined effects of exponential growth in bandwidth, increased computing power, and standard ways of representing data such as XML. Gilder’s Law of expanding bandwidth makes information visible. Moore’s Law of growing CPU power brings understanding of this information. XML and other integrating technologies bridge islands of different computing platforms. Seeing and understanding the markets better moves business processes increasingly closer to real time.

Real time processes are an end point more than an immediate reality. Settlement at T+1 in US markets is an example motivated by decreasing risk and increasing available capital. Real time processes can result from automating processes to lower costs and beat trading competition. For example, CSFB’s PrimeTrade 2 trading platform includes modules such as AutoQuote and RoboTrader that automate quotes and executions i. Program trading, much of it algorithmically driven in near real time, increased from 19% to 27% of NYSE volume over the same period from 2000 to 2001 ii.

A single view across asset classes started on the retail side with services such as Merrill Lynch’s Cash Management Account (CMA) and Morgan Stanley’s mynetworth.com. More recently, banks are providing corporates with Web applications to view all their holdings in one place.

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Networked markets force accelerating business model change across two dimensions: Convergence Commoditization

Convergence is occurring on three planes: across financial services market segments, between market participants and market infrastructure, and among retail and institutional. Convergence across financial services market segments is well-recognized and now legally sanctioned in the US by the Gramm-Leach-Bliley Act. The corollary to blurring the lines between banking, insurance, and capital markets is that their products merge as well. For example, insurers are increasingly turning to catastrophe bonds and other forms of alternative risk transfer that were formerly the domain of investment banks.

More subtle but potentially more powerful is convergence between market participants and firms providing supporting infrastructure, such as market data and software providers. As recently as a few years ago, financial markets fell into neat categories of buy side, sell side, exchanges, and technology providers. That reality has changed. Now each category competes with each other. Examples:

OM Group started in 1985 as a Swedish options market. OM Group has grown into a globally prominent software vendor with sales of SEK 3152 million in 2000 (USD $307 million). OM Group shows an exchange evolving to compete with software vendors.

SunGard is generally viewed as a technology provider, yet the firm has floor brokers executing trades at NYSE and owns a stake in the BRUT ECN. SunGard’s far-reaching vision increasingly brings it alongside banks.

Sell side firms are externally offering internal applications for additional income. For example, the LabMorgan unit of JPMorganChase received a USD $1 billion infusion specifically for monetizing internal applications. Banks increasingly compete with software vendors.

The difference between market participants and market infrastructure often comes down to playing a disintermediating role versus a brokerage role. Sell side firms commit capital to make transactions occur, while new entrants generally only match buyers and sellers.

The third area of convergence is across institutional and retail. Historically, the greater scale of institutional sell side firms meant that they lead technology innovation. Innovation now often emerges first on the retail side. For example, order routing systems began with day traders, but now are an integral part of trading. Firms like Charles Schwab & Co. acquired day trading technology firms like CyBerCorp specifically to bring this formerly retail technology to institutional applications.

Commoditization refers to how the information visibility of networked markets renders basic transactions and information worthless. Over the long run, anything that can be automated becomes valueless. Examples include free equity trades from American Expressiii for accounts over a certain balance, and the range of free analyst reports available from services like MSN® MoneyCentral™ and Big Charts.

Executing transactions lends itself well to automation. This means trade execution becomes increasingly valueless so innovation in networked markets is concentrated in pre-trade and post-trade arenas. Firms often respond with one of

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two strategies: increase market share or shift their business model to the next level of abstraction. Market share strategies extract the remaining economic value of commodity services. The enhanced market visibility from greater transaction flow improves overall customer service, particularly in thinly traded markets. Greater market awareness also aids proprietary trading.

The other strategic choice in the face of commoditization is providing value across the process of how a customer uses a commodity service. This is analogous to taking the first derivative of a business process. For example, if investment research is a commodity, then firms shift their role to counselors and navigators of the profusion of available information. This strategic approach means continually pushing the frontiers of complexity.

We can extrapolate past progress towards networked markets to view the future. The inexorable move towards a single view in real time across asset classes will lead to lights out, real time trading around the globe and around the clock with:

Peer to peer transactions. The Web’s effect of making information visible lessens the need for exchanges to act as aggregators bringing information together. Increasing bandwidth means firms can see the market without needing aggregation facilities such as exchanges. Trading will move to peer to peer. Every consumer of liquidity is a potential provider of liquidity. Right now the barriers are primarily regulatory and technological. However, regulation always follows the business direction over the long run and the technology is already being deployed.

Trading engines make trades. Traders will write algorithms, not trade tickets. The complexity of highly interconnected asset classes and the velocity of volatility is already outstripping unaided human traders. Traders will use visual and natural language tools to assemble trading engines that execute trade ideas. These tools need to be self-managing with minimal demand for IT services.

Internal electronic crossing networks (ECNs) within firms. ECNs have had significant impact where securities are traded by open outcry: exchange trading floors. Open outcry also occurs within firms’ internal trading floors. Firms will increasingly expose themselves to trading partners through a firm-wide ECN providing customers and internal traders with a single view across different trading desks and enterprise-wide visibility of risk.

Equal development of capital and risk markets. Financial markets allocate both investment capital and risk. Capital markets are well developed. Simpler asset classes like equities approach the academic definition of efficient markets as close as human nature allows. However, risk is more complex than capital. Risk is inherently a derived and probability-based value. Liquid markets exist only for the simplest and most easily described forms of risk such as foreign exchange. Risk markets are also among the least developed in terms of technology: traders talk over phones and fax trade confirmations. This will change with advancing computer power and the ability of technologies like XML to bring together all the information involved in complex risk instruments. Ultimately, we can expect risk to be traded similarly to equities.

Power shift to the buy side function. Historically, sell side firms led technology innovation due to their larger scale and the greater information visibility afforded by a centralized role in the markets. Two factors change this: technology-based barriers to entry are now lower, i.e. cost, and the Web levels the playing field by making information visible. The sell side leaders will not fade away. Instead the relative value of different functions within a firm will shift.

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Winning in Networked Markets

Firms succeed in this environment by being faster than their competition to adapt to networked markets: faster to deploy and extend business processes and applications in each leg of the race towards a single view in real time across all asset classes. Success requires a technology platform that sustainably accelerates time to market. Once a process and its applications are live, the technology then must enable faster reaction to new customer needs and market opportunities. Microsoft .NET is this platform.

Recent approaches to building applications look similar at a high level. Microsoft’s Component Object Model (COM+), Enterprise Java Beans, and CORBA all share a similar basic structure with reusable components communicating through tightly-coupled protocols in a homogeneous environment. They all look the same because they target the same goal: client/server computing. However, the Web has different requirements from client/server.

.NET is a fundamentally new architecture designed for Web requirements: working across different platforms, new application models like, a wide range of devices, and greater security needs from a high degree of interconnection. .NET leverages proven elements of existing technology such as COM+ where appropriate but introduces new loosely-coupled technology to create a new platform specifically for Web development.

.NET is centered on these principles: Software as a service Bringing distributed computing to the Internet Fully utilize abundant computing and communications Seamless integration of multiple applications and devices Extend user experience to voice, ink, and handwriting Placing the user in control of their information

.NET accelerates time to market and quickens response to customer demands through these elements:

XML Web services are an Internet-native integration methodology using open industry standards. XML Web services enable distributed computing over the Web. Business logic was previously assembled in discrete packages as applications. Applications generally used a tightly bound logical structure, such as COM, because an application would communicate primarily within its internal components. XML Web services change this. XML Web services allow applications to be assembled by aggregating from an array of readily pluggable services. XML Web services cleanly separate the presentation layer (the user interface) from the business logic, enabling better reuse of business logic. XML Web services bridge operating systems, object models, and programming languages by adhering to a common set of standard protocols and file formats.

What is the significance of XML Web services to winning in networked markets? Currently sell side firms interact with clients primarily through person to person communication. This requires many people; one leading investment bank currently dedicates over seventy people to single a major automotive manufacturer. These people are expensive. Compensation costs often total more than half of a firm’s revenue. A major function these people play is integrating information across silos of isolated applications.

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Time to Market

GMAC Financial Services launched MortageRamp to provide an entirely Web-based system to automate the complex process of originating commercial loans. GMAC considered Sun, Microsoft, and other vendors. GMAC selected Microsoft on the basis of a guarantee to go live in 60 days with 99.999% reliability.

MortgageRamp acts as a loan clearinghouse and origination service for 14 leading lenders, including Deutsche Bank, JP Morgan, Allied Capital and Morgan Stanley. In fact, MortgageRamp’s business as a back office service solution for its commercial lenders is now a significant revenue generator. MortgageRamp is now also offered as a white labeled solution under bank’s brands.

Strong support for mobile devices in .NET was one reason MortgageRamp selected Microsoft. GMAC Commercial Mortgage deployed over 3000 Pocket PCs to streamline field services like inspections, reports and appraisals.

MortgageRamp expects to originate $6-8 billion in commercial mortgages this year. An intricate process involving multiple trading partners that used to take 90 to 120 days is now accomplished in ten days or less using .NET and BizTalk orchestration.

.NET XML Web services

Dresdner Kleinwort Wasserstein is using XML Web services to dramatically change how customers and traders interact with the bank. Past approaches to building applications arbitrarily grouped a set of business functionality around the user interface. The different software functions that performed transactions were clustered together by the presentation layer. This client/server approach tends to present the users with a narrow view of one part of the value chain.

DrKW’s XML Web services sever the presentation layer from the underlying business processes. Instead of deploying individual applications, DrKW is exposing the bank’s value chain as a set of software services. These services can be rapidly integrated together. The services provide DrKW’s clients with a common manner to access to bank offerings independent of the delivery channel.

Consider an equities trader covering emerging markets. Their single “application” can contain features to perform equity trades as well as spot fx to cover the purchase and sale of stock. XML Web services deliver the flexible assembly of business logic needed for a single view across asset classes.

Consider a typical scenario where a bank uses one application to price and trade foreign exchange options, a different application for spot fx, and a third to monitor and report positions. The applications are not tightly linked. Traders fill this integration gap. Orders come principally over the phone, which again uses expensive person time.

Instead, envision using XML Web services to embed the firm’s fx offerings at the client’s point of use. The firm offers its clients a menu of XML Web services. Each Web service readily interacts with the other XML Web services since they share a common integration methodology and data stores. The client may choose to embed a Web service within ERP processes to automatically hedge fx exposure or link directly with their equities order management system.

XML Web services drive a single, real time view across asset classes by allowing business logic to readily interact within a firm and across the Internet. They are tools for information transparency.

Native XML is the foundation of .NET. Unlike competitors who have made recent acquisitions or built new modules to bolt XML support on top of legacy functionality, .NET was engineered using XML as the way it represents information. An analyst recently commented: “if someone cuts .NET, it bleeds XML”.

Standards leadership is demonstrated by Microsoft’s role originating and evolving the core set of XML Web services standards. Microsoft either initiated or played a key role in the development of each Web service standard: Universal Description Discovery and Integration (UDDI), Web Services Description Language (WSDL), and Simple Object Access Protocol (SOAP). A survey of the names attached to standards body discussions shows Microsoft’s role driving the evolution of these standards. This commitment to standards translates to deeper and earlier support within developer tools and enterprise servers.

Microsoft has gone further by submitting the C# programming language and the Common Language Infrastructureiv to the European Computer Manufacturers Association, ECMA. Microsoft’s standards commitment contrasts sharply to Sun tight control over Java.

Elements of .NET are also tailored to vertical standards. For example, the team building BizTalk Server targeted a major European clearance and settlement system as a core scenario. The clearance system is the world’s largest user of SWIFT messaging.

Business process orchestration with BizTalk Server extends previous concepts of workflow to:

o Integrate internal applications and trading partner relationshipso Manage complex processeso Convert messaging formats and span message transportso Enable long running transactions across days or months

BizTalk Server was designed specifically for integrating business processes internally and with trading partners. In contrast, Tibco and MQ Series Integrator suffer limitations resulting from their roots in market data and queuing. The section on straight through processing will address orchestration in more detail.

Device support is pervasive throughout the .NET architecture. For example, Microsoft’s Adaptive User Interface technology can sense the type of remote device employed by a user. Adaptive User Interfaces creates the appropriate

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communications dialect for the device by transforming the XML emitted by an application. The Adaptive User Interface technology is manifested in the Mobile Internet Toolkit, which integrates tightly with Visual Studio .NET enabling a developer to use the familiar drag and drop model to build applications for devices easily. The Mobile Internet Toolkit allows developers to build applications for devices in the exact same manner as developing for desktop computers.

Microsoft Mobile Information Server takes the next step by providing mobile access to numerous types of data sources, such as Microsoft Exchange Server e-mail, calendar, and contact data. Functioning as a secure bridge between enterprise and carrier networks, Mobile Information Server manages personalization and network access for mobile devices.

Microsoft is developing platforms and applications for:

o Feature phones able access some data from an intranet or the Web. Microsoft Mobile Explorer™ wireless communication platform plays a leading role as the only microbrowser for both WML and HTML.

o Pocket PCs with greater data capabilities and larger displays, allowing more advanced applications; they are equipped with a keypad or stylus for inputting data.

o Smart phones that are bigger than a feature phone, smaller than a Pocket PC. They offer both voice and rich data capabilities, such as color displays. The Microsoft smart phone, code named "Stinger," will provide an "always up-to-date" Pocket Outlook® messaging and collaboration client, as well as Web-browsing and location services.

o Tablet PCs that bring an adaptable, ergonomic form factor to extend PC capabilities by driving Windows with a pen. Tablet PCs will fully support all Windows applications while offering voice, pen, keyboard, and mouse as navigation options.

o Advanced Set Top Boxes using Windows CE and Windows XP Embedded that extend television to a digitally controlled interactive medium on par with the Web.

o XBox gaming platform that extends Microsoft’s coverage of the device spectrum into consumer markets. Xbox is attracting notice for its potential to reach retail financial services customers.

Developer productivity translates directly to speed to market and competitive agility. Built for the .NET Framework, Microsoft’s next-generation programming model for XML Web services, Visual Studio .NET is the core of .NET developer productivity. Visual Studio .NET is a tightly integrated environment for drag and drop development and consumption of XML Web services. Developer productivity is also increased by the .NET Framework’s relative simplicity and highly componentized design.

Microsoft intends to allow developers to focus on business logic unique to their organization. ”Plumbing” tasks common across businesses should be pre-built or abstracted away from developers. Towards that end, Microsoft will provide a range of off the shelf XML Web services collectively known as HailStorm. HailStorm services will work across a wide range of devices and operating systems. The wholly-XML based services will include myNotifications, myProfile, myInbox, and myCalendar.

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Stinger Smart Phone

Microsoft's smart phone software, code-named "Stinger," combines a PDA and mobile phone, integrating voice capability and personal information management. Manufacturers including Mitsubishi, Sendo, Samsung, Texas Instruments, and Trium will to use Stinger for their 2.5G and 3G wireless initiatives.

.NET XML Web services

FinancialCAD provides analytics for valuing financial instruments to 140 of the Fortune 500 as well as investment and central banks worldwide. FinancialCAD’s customers needed tools for market to market valuation of derivatives and underlying instruments due to recent changes in US accounting regulations. Ernst & Young LLP turned to the FinCAD.NET suite of XML Web services for derivatives valuation and sophisticated hedging analysis as part of their financial assurance services. FinCAD.NET offers nearly 2000 XML Web services for quantitative analysis across all primary asset classes.

.NET allows developers to use the programming language best suited to the task or their abilities. It does not limit developers to one language, as does J2EE and SunOne. The twenty-three .NET languages currently announced include COBOL, SmallTalk, Fortran, Perl and Python. .NET languages all address a common set of base software classes used by each language enabling deep language interoperablity.

Programming language integration is readily accomplished with .NET. For example, COBOL components can be called from SmallTalk and Perl. Previous approaches have not met expectations because they integrated logic at the periphery. They acted as glue to connect what were basically free-standing units of code. .NET is different. All code exists and executes within the .NET Framework’s Common Language Runtime.

Deploying new applications occupies a significant portion of time to market. .NET logic is deployed by simply copying the components. No other steps are necessary. The Common Language Runtime is responsible for making sure that any shared files that the application needs are present, and that the application can always run.

Lower total cost enables firms to move faster than competition because they can perform more projects than competitors for the same investment. Lower total cost allows a firm to pursue riskier projects. The lower cost of building on the Microsoft platform drives a higher net present value or internal rate of return relative to building the project on a more expensive competitive platform.

Proving cost benefits requires finding direct comparisons. The Transaction Processing Councilv provides one of the best comparisons through their TPC-C benchmark. The benchmark applies the same rigorous transaction processing scenario across all entries. The benchmark is divided into sections for raw performance and price/performance. Price covers total cost over five years.

As of May 9, 2001, Microsoft held all ten top positions on TPC-C price/performance. Finding a direct comparison requires looking at the raw performance rankings. The number six entry on Windows 2000 has a total system cost of $5,305,571vi. By comparison, the similarly sized number seven entry based on Fujitsu servers running Solaris cost $11,449,392vii.

Microsoft now also holds 4 of the top 5 raw performance winners including the overall leader. In the only top entry not wholly based on Microsoft technology, IBM chose to employ Windows 2000 and Microsoft COM+ for their number three entry using the DB2 database.

Professional Developers using Visual Studio® development system number over six million globally. Building on .NET allows firms to tap the huge pool of Microsoft developers. This speeds time to market by ensuring a ready pool of talent.

The .NET platform provides competitive advantage in financial markets by enabling a firm to consistently move faster than competitors to deploy and evolve business processes and applications. .NET represents a fundamental rethinking of Microsoft’s technology platform towards Web-driven business processes. .NET provides the tools to connect information leading to a single view in real time across asset classes.

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Straight Through Processing

Straight through processing is often viewed as a problem limited to the back office. This perspective sees STP as a non-customer facing cost center. In actuality, STP is about customer relationships. It is an opportunity to gain competitive advantage. .NET achieves STP by to rapidly integrating business processes and allowing for agile change and extension of processes.

STP comprises a broad set of issues. The competitive fitness of a technology platform for STP can be measured against three core requirements:

Integrate business processes across internal applications Integrate trading partners into business processes Bridge the proliferation of communications protocols in the trade cycle

Integrating Internal Applications

.NET outperforms competition at STP because it was designed around business processes instead moving data between applications. XML Web services provide connectivity across platforms. BizTalk Server orchestrates the process.

BizTalk Server automates business processes through messaging and business process orchestration. Messaging capabilities address routing, validation, auditing, and transformation across communication protocols such as conversion from FIX to CMS. Orchestration extends workflow to include complex state management and long running transactions. Orchestration provides detailed management of the overall business process using visual and programmatic tools.

BizTalk Server uses XML as its native communication format. BizTalk Server can communicate with flat file formats such as ISITC or SWIFT, and over transports such as EDI, SMTP and several other methods. Security capabilities include support for encrypted messages and digital signatures. Native XML support leads to higher performance and richer functionality compared to competitive middleware where XML support is a recent addition.

Competitors to BizTalk started by integrating systems, not processes. Tibco’s ActiveEnterprise grew from moving market data on trading floors. IBM MQ Series Integrator started with queuing. Both perform their original intent well, but did not meet the needs of business processes. In response, Tibco acquired five different applications to bolt on top of Rendezvous. IBM chose to license NEON’s software. Stacking a series of acquisitions or licensed software on top of the original package leads to problematic integration, cost, and complexity.

BizTalk orchestration enables rapid business process integration using a simple, visual model. Equally important, orchestrated processes can be modified and extended quickly. For example, consider two firms competing to be first to market to introduce a new product. The product makes new demands on existing compliance processes.

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Operational Risk Management and STP

As settlement times compress, firms are looking beyond the usual dimensions of market and counterparty risk to manage operational risk. These efforts can also lead to significant positive effects on productivity.

Barclays Capital formed the Global Technology Settlements Strategy project to transition the bank to straight through processing. Barclays had duplicate back office infrastructures handling different instruments with inconsistent processes. These systems ran on a mix of Unix and mainframe systems.

Barclays selected the SunGard eProcess Intelligence suite to automate exception processing and for real time, intra-day reconciliation. SunGard’s eProcess Intelligence suite was implemented to provide global cash reconciliation, capture confirmation mismatches, and build a data mart to analyze and predict sources of exceptions.

Barclays radically increased the efficiency of settlement services. Cost per deal dropped considerably and Barclays was able to decrease staffing by 40%. Barclays’ world class settlement capabilities have enabled the bank to act as a driving force creating the Continuous Linked Settlement Bank's processes. Barclays first contributed to CLS Bank as a beta member and intends to act as a founding Settlement Member.

Firm A’s business analyst uses BizTalk orchestration to visually diagram the process. A developer then visually binds the process diagram to its implementation. The compliance process functions by passing XML documents and flat files between applications.

Firm B uses Tibco Rendezvous. Location transparency often means “everybody gets everything” since Tibco frequently uses a network protocol that cannot be routed to specific machines. Networks are heavily stressed since every message is going to every machine. Firms usually respond by setting up a series of sub-networks. The sub-nets have an interest list that controls which types of messages can pass from sub-net to sub-net.viii

Firm B’s analyst outlines the business process on paper. Since Rendezvous does not provide a high-level overview of the processix, a developer needs to map out the locations in the subnets of the different applications to be integrated. The interest lists on those subnets must then be reconfigured to allow the relevant messages to pass among subnets.

Secondly, the developer finds some of the applications must be adapted to communicate with Rendezvous. This requires a complex process of building adaptors because Rendezvous communicates using its own proprietary format. The XML documents must be placed into the Rendezvous wire format then reconverted by the application.

Firm A gets to market faster because integrating and extending business processes is performed in one place-BizTalk Orchestration Designer-and uses open standards such as XML to pass data. Firm A also has a management perspective of the overall process. It can measure performance and manage exceptions from a process, rather than message-based, point of view.Integrating Trading Partners

XML Web services and orchestration bring trading partners into STP processes. XML Web services rapidly bring together trading partners by adhering to a common set of widely supported communication protocols. Since the protocols are open, a platform’s competitive fitness for STP hinges on developer productivity and the degree that developer tools adhere to the standards.

Microsoft played a key role in the initial development of the XML Web services standards. Microsoft people continue to be leading contributors advancing the

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BizTalk Orchestration Designer enables rapid mapping of visual process flows to their implementation.

BizTalk Orchestration at a Leading Investment Bank

The asset management organization of a globally prominent investment bank required a common message bus to bridge disparate legacy systems and messaging protocols. The bank required a system capable of scaling to handle massive transaction volumes.

Extreme Logic, a consulting organization and Microsoft partner, designed a solution based on BizTalk Server. The solution provides a common channel to validate, route, store, and log both individual and multi-part bulk messages.

The bank set high goals on expected future message throughput. Extreme Logic created a test harness using the bank’s trade order management systems to test messages resulting from over a million daily trades. The Biztalk Server solution met the requirements.

products of standards bodies. Microsoft has taken further steps to submit both the C# programming language and the Common Language Infrastructure to the European Computer Manufacturers Association (ECMA). Commitment to creating and advancing standards translates to early and deep support within developer tools and server products.

BizTalk orchestration plays a key role with trading partners. An advantage of orchestration is integrating both internal applications and trading partner relationships with the same tools. In contrast, IBM’s MQ Series Integrator requires the addition of WebSphere to communicate with trading partners. Orchestration provides a simpler, single technique for internal and external communication.

Managing long running transactions is a unique capability of BizTalk. An STP trade cycle has several steps with significant time delays, such as waiting for clearing information. Computing resources cannot be tied up waiting for a response. BizTalk enables transactions to be persisted over long periods of time and provides capabilities for rolling back failed transactions.

Spanning Communication Protocols

BizTalk Server can consume and emit XML, flat file, EDI and other commonly used forms of messaging. BizTalk messaging natively works with XML. For example, a FIX 4.2 message is passed to BizTalk Server as a flat file. Internally, BizTalk Server represents the FIX message as XML and uses XSL style sheets to map the message to a SWIFT flat file message.

Client Relationship Platform

The race to adapt to networked markets extends to the technologies that deliver client relationships. The constant introduction of new innovations in wireless, CRM, portals and related areas can tempt a strategist to view each new development in isolation. Success requires a coherent approach that fits each new development within a guiding framework.

The client relationship platform consists of the systems between a financial institution’s transactional systems and its two categories of customers: the institutional buy side, termed pre-trade, and with retail consumers, or personal financial services (PFS). Both pre-trade and PFS systems perform one of four functions: generate news and analysis, organize information for relevancy to the client, deliver it to the client, and enable analysis that leads to transaction decisions.

Pre-trade and retail arenas have distinct business objectives. The key issue with pre-trade communication is coping with information overload. Pre-trade systems need to help the buy side navigate the torrent of information produced by the sell side. PFS systems need to present a single view of a customer: their holdings, opportunities, and profitability.

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Client Relationship Platform Goals and Functions

Analyze

Communicate

Generate

Organize

Function

• Identify valuable information

• Enable analysis

• Integrate with trade and post-trade actions

• Branding

• Auditing

• Reach high net worth market

• Single view of customer

• Customer segmentation

• Campaign management

• Analyze transactions

• Total cost

• Scale

Institutional/Pre-tradeGoals

Retail/PFSGoals

Firms can structure their client relationship platform by evaluating how a technology achieves pre-trade or PFS business objectives within the four functions. A proposed technology is examined for its ability to achieve each business objective within each function.

For example, a sell side firm is considering using Investment Research Markup Language (IRML) to create reports for the buy side. A strategist can start with the analysis function, gauging how IRML enables the sell side to find the right information, how IRML allow analytics to integrate with transaction systems, how IRML helps build the firm’s brand, and how using IRML within client analytics affects compliance and auditing. The strategist then looks at IRML’s ability to achieve the same business objectives in the communicating, organizing, and generating functions.

Institutional Pre-trade

The core issue in pre-trade communication is sifting through the huge flow of trade ideas, research reports, indications of interest, regulatory filings, and other information to capture the valuable elements leading to transaction decisions. When a person finds the right information, they then need flexibility to transform and compare the information to other parts of the picture. Individual pieces of pre-trade communication rarely lead to transactions in isolation; they require evaluation relative to other pieces and within patterns.

Consider two sell side analysts who attend a breakfast meeting for SuperCo. Analyst Emma uses the WorldStreet Net peer to peer communication platform from WorldStreet, a Microsoft partner providing an Internet-based network delivering customized sell side to buy side communication. Analyst Michael uses legacy communication methods. Both analysts decide to upgrade their recommendation on the company’s stock.

Emma is in a cab going from the breakfast meeting to her office. She uses her Pocket PC to author a trade idea and marks it as a WorldStreet package. She

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Achieving a Single View in Real Time for Pre-Trade Information

Pre-trade data falls into three general categories: structured information like market data, semi-structured information such as research reports that are often organized in portals, and the previously unorganized area of digital media feeds such as Bloomberg TV. Digital media feeds convey a great deal of the global economy’s real time information, yet until recently there existed no mechanism to search and categorize content.

eNow has built an infrastructure that simultaneously monitors and indexes thousands of live content streams, all converted into XML, then delivers to end-users only the information they desire. Using Windows Media Services, eNow provides a single view in real time across sources including television and radio networks, local and international newswires, securities filings, Web site content, message boards and chat rooms. In particular, through its partnership with DirecTV, eNow provides notification and delivery for the spectrum of relevant broadcast television feeds, which are presented in the Windows Media Player.

For example, a trader can be notified the instant her watch list is mentioned in breaking news. Alternatively, a portfolio manager can query eNow to show all media content related to his holdings from the last five days.

eNow is currently working with several of the largest investment banks to implement their system.

includes a voice attachment. The WorldStreet package goes over a wireless link to her firm.

The WorldStreet system at Emma’s firm reads the topic of the package and adds related research and analytics generated elsewhere the company. WorldStreet NET next attaches personalized information for each customer who will ultimately receive the packages. For example, a salesperson sees that the analyst for the company’s sector will be in the same city as their customer. The salespeople receive the packages and forward them to their customers. In a matter of minutes, Emma’s trade idea has been broadcast to the world.

Michael, on the other hand, joins a morning meeting of the sales force. He verbally outlines the opportunity over the hoot and holler. The sales people then start dialing clients based on their best guesses of who may be interested. The sales people move slowly from client to client hoping that the idea is relevant. Michael next writes up a recommendation for the next day’s morning fax and for mail to customers.

Emma and Michael’s firms both work with two portfolio managers: Kira and Brandon. Kira receives Emma’s WorldStreet package while Emma is still in her cab. WorldStreet directs all of her communication to Microsoft Outlook as a single integration point. Kira has a profile set with WorldStreet determining which analyst she trusts and which are blocked from sending information. For example, Kira accepts all communication from Michael’s firm related to US equities, but none from Emma’s firm except from Emma.

Kira is on the train that morning commuting to work. Her Outlook inbox prioritizes her WorldStreet messages based on her watch list, top holdings, and favorite analysts. She has Outlook Mobile Manager set to push WorldStreet packages to her cell phone if they are related to her stocks on her watch list. When she opens Emma’s package she finds that her firm’s WorldStreet system has enriched the package with an analysis from her buy side firm’s analyst along with analytics on how SuperCo would affect the portfolio she manages. Kira agrees with Emma’s recommendation and sends a buy order to her trader at 8:30 am when SuperCo is at 42.

Brandon rushes to his office at 6:00 am to tackle the mountain of communication waiting for him. Each of the thirty brokers who cover him communicates at least once each day. Brandon plows through 42 voice mails, 210 emails, 12 faxes, and 23 research reports making guesses about relevancy based on subjects and titles. When Brandon finds an interesting idea, he browses the Web for more information. Every time he goes to an individual firm’s Web site he leaves a trail that alerts salespeople at that firm to his interest. To use aggregating Web sites, he exposes his profile to a wide range of firms that contribute to that site. At 1030 that morning, Brandon hears a voice mail from the salesperson at Michael’s firm and decides to buy the stock. By this time SuperCo’s stock has climbed to 45. Kira’s trader sees an indication of interest to buy SuperCo from Brandon’s broker. Kira’s trader acts on the IOI and takes the profit by selling to Brandon.

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Building a Single View of PFS Customers

ASB Bank, based in New Zealand, has 800,000 customers who generate 35 million transactions per month. ASB had used an Oracle data warehouse to store transaction information. ASB wanted to expose the customer information in the data warehouse beyond the handful of technical experts who were proficient with the Oracle database.

ASB turned to Onyx Software and Microsoft SQL Server for its Automated Client List project. Automated Client List is a data mart drawing on the data warehouse. ASB planned an eight week prototype period but instead found they were ready to deploy the live application. ASB attributes the rapid time to market to the productivity and integration between the SQL Server Analysis Services, Data Transformation Services, and Visual Studio. ASB built on their initial speed to now deliver business agility by consistently adding new features to Automated Client List within hours of receiving requests.

Automated Client List gives a single view of customer behavior to suggest additional product and cross-selling opportunities. Customers are segmented by potential profitability to identify appropriate opportunities for pro-active marketing. Unlike the Oracle system accessible by only a few people, Automated Client List is now a key tool used by 600 relationship managers. ASB found that the intuitive interface and browser-based architecture used by Onyx required virtually no training and low effort to deploy.

The success of Automated Client List led to a “match race” between SQL Server and Oracle for the core data warehouse. ASB found that SQL Server outperformed Oracle in performance in addition to providing more flexible access to the data. ASB decided to migrate the data warehouse to SQL Server. The success of these projects has resulted in ASB Bank standardizing on the Microsoft platform for development efforts at the bank.

Smart Tags Office XPBiztalk ServerSQL Server Analysis ServicesXML for AnalysisIRML/RIXML/XBRL

HailstormCorechangePlumtreeOnyx SoftwareSiebel Systems

Worldstreet Biztalk ServerMobile Information ServerMicrosoft Instant MessagingMSN MoneyCentralMicrosoft MoneyWeb servicesHailstormWindows Media Technologies

Biztalk ServerOffice XP

Technologies

Analyze

Communicate

Generate

Organize

Function

Client Relationship Platform Technologies

Personal Financial Services

Profitably offering personal financial services starts with knowing your customers. Successful firms begin by building a single view of a customer: their transactions, profitability, and likelihood to respond to marketing efforts.

Based on this understanding, firms can segment customers to efficiently allocate resources. For example, customers may fall into a retail bracket emphasizing low cost with automated transaction channels, a mass affluent bracket focusing on customized products, and a high net worth bracket providing expert advisory.

Profitability increases much faster by expanding the type and volume of transactions with existing customers compared to winning new customers. Cross-selling is the quickest way to introduce new types of transactions and increase the overall volume of transactions with a customer. Cross-selling demands a single view of the customer.

Competitive success requires moving beyond a transaction culture. Transactions are the raw material for data mining and customer relationship systems to identify leads and initiate sales campaigns.

Sales campaigns can focus on expanding existing relationships by identifying customers likely to respond to an offer, deploying the right marketing assets based on the customer’s segment, and analyzing results to both update the customer’s likelihood of acting on an offer and to determine future offers.

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PFS Business Cycle

Segmentation

Data points

Transactions

Leads

Single customer view

Campaigns

Cross-customer view

• Transactions• Profitability• Probability of

transactions

• Retail – total cost, automated channels• Mass affluent – customized products• High net worth – expert advice

+

Envision two consumers, Marie and Bob, who maintain relationships with ProfiBank. As a high net worth customer, Marie has worked with her Financial Advisor to set specific goals, such as saving for retirement, which the FA has translated into risk tolerance guidelines. Bob is a retail customer.

ProfiBank uses Onyx Software to maintain a single view of their customers. Onyx works with Microsoft SQL Server Analysis Services to monitor transactions on a daily basis. At one point, Analysis Services finds that Marie and Bob’s largest monthly withdrawals have changed. Past data mining has shown ProfiBank that changes like this often reflect a change in mortgage or rent payments as part of a move. Onyx identified this as a cross-selling opportunity for home owners’ and renters’ insurance.

Onyx initiates two individualized sales campaign as BizTalk business process orchestrations. Onyx uses BizTalk orchestration to power its sales campaign functionality. This means a pre-defined series of actions are initiated specifically for each customer. BizTalk orchestration automates passing information between several applications to form a business process.

Marie’s orchestration first invokes a Web service that returns a view of her risk profile across her portfolio. The next step is to send a notification to her Financial Advisor (FA). The FA views a proposed semi-customized brochure to be mailed to Marie. The FA approves it and the brochure is mailed out. Three days later, when the orchestration is timed to expect that Marie has received the package in the mail, the orchestration reminds the FA to contact her. The FA calls her and advises Marie on home owners insurance relative to her overall risk profile.

Bob’s orchestration is different since he falls into the retail category. Bob receives a phone call with an automatically generated message. Bob also sees a customized message and targeted banned ads the next time he logs into the bank’s Web site to check his accounts.

Marie sees a single view of her finances through a tab in her Microsoft Instant Messaging client and on her cell phone. The individual XML Web services that

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deliver her information update each other to reflect transactions. Marie’s myLocation service offered as part of Microsoft’s HailStorm initiative indicates how to reach her at any given time. She has set rules on what type of notification may reach her based on her location at a given time.

Marie is in her car when her FA calls. myLocation indicates that her cell phone is the active device. Her preference is set to route messages from her FA to her cell. She reads the message and decides to buy the home owners’ insurance. Her accounts immediately reflect the transaction as well as schedule recurring payments.

.NET Competitive Advantage for Client Relationship Platforms

Microsoft’s offering spans the entire client relationship platform. This translates to faster time to market-and rapid evolution of deployed processes and applications- through an integrated platform where components readily work with each other. Developers can leverage skills across multiple functions. The information technology organization develops the critical mass of expertise to move fast rather than relearning a new approach for different components. For example, a developer skilled at Visual Basic can use those skills in developing BizTalk orchestrations.

Communicating with clients often forces a choice between richness and reach. Technologies with broad usage, such as email, typically have less ability to provide high value financial services compared to people-intensive channels. The Microsoft platform removes this choice by providing rich functionality within widely-used technologies.

Smart Tag technology exemplifies bridging reach and richness. Smart Tags act within Microsoft Word, Excel, and Internet Explorer to recognize text and present the user with actions based on that text. The actions can be linked to real time data over the Web. For example, a user can click on a ticker symbol in Excel to get a quote from MSN MoneyCentral. Microsoft Office has 250 million users. Smart Tags reach these users with all the rich functionality of Excel.

Analysts have recognized the Microsoft platform’s ability to achieve far-ranging client contact. From Business Week x:

i Securities Industry News, March 19, 2001, “CSFB Ready to Roll Out Revamped E-Platform”ii NYSE Quick Reference Sheet, http://www.nyse.com/marketinfo/marketinfo.html, as of May 8, 2001iii http://finance.americanexpress.com/sif/cda/page/0,1641,4988,00.asp#QUALIFY as of May 8, 2001iv From the working documents submitted to ECMA: “While compilers are most concerned with issues of file format, instruction set design, and a common type system, programmers are most interested in the programming library that is available to them in the language they are using. The Common Language Infrastructure (CLI) specifies a Common Language Specification that shall be used to define the externally visible aspects (method signatures, etc.) when they are intended to be used from a wide range of programming languages. Since it is the goal of the CLI Libraries to be available from as many programming languages as possible, all of its functionality is available through CLS-compliant types and type members.”v http://www.tpc.org/vi Compaq ProLiant 8500-X550-96P, 229914 tpmC, 23.08 $/tpmC, available 9/30/00.vii Fujitsu PRIMEPOWER 2000, 222772 tpmC, 51.40 $/tpmC, available 6/30/01.viii Tibco traffic that is not UDP is multicast. Multicast requires specific routers and introduces considerable complexity.ix A high level view of a business process is possible with Tibco products by using other elements of the ActiveEnterprise suite. Adding additional components means adding complexity, risk, and expense.

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“Add it up, and Microsoft's ability to elbow aside rivals is staggering. Start with Windows. Analysts expect computer makers to sell 160 million PCs running Windows next year. On the Web, its MSN Internet-access service has 5 million subscribers. More than 50 million surfers hit its MSN portal each month. Its free e-mail service just landed its 100-millionth account. And its instant-messaging software is approaching 30 million users.”

Microsoft's vision is to empower people through great software - any time, any place and on any device. Microsoft invests USD $4.3 billion in R&D on an annual basis- more than Sun, Oracle, and America Online combinedxi. Consider devices: Microsoft is partnering with hardware vendors to develop new form factors such as the Stinger Smart Phone, the Tablet PC, and introducing the XBox in a home entertainment arena expected to hold promise for personal financial services. These are existing products; long term investments in speech recognition and natural language interfaces are only now becoming products. Microsoft is and will continue to be the innovation leader in technologies to reach out to clients.

Conclusion

.NET is a technology platform designed fundamentally around performing business processes on the Web. .NET’s business process orchestration, rapid development of XML Web services, native XML, and adherence to open standards enables firms to act faster than competition to deploy and extend processes and systems.

Financial markets are a key strategic area for Microsoft. Financial market requirements have a direct feedback loop to Microsoft’s core products. A recent interview between Fast Company magazine and Microsoft’s CEO, Steve Ballmer confirms this: xii

Fast Company- ”So you how do you make sure you’re getting fresh new perspective…?”

Ballmer - ” [our] financial services customers… We’ve dispatched a number of key development people to New York so that they can spend time with Merrill Lynch, Goldman Sachs, and other businesses that will fundamentally shape our product strategy.”

BizTalk Server is a key component of .NET. BizTalk Server is a messaging and process automation hub designed from the ground up for business processes. It integrates applications, connects trading partners, and orchestrates processes within a single package. Unlike its competitors, BizTalk was designed at its core around business processes. This process-centric focus, combined with rapid visual development of processes, native use of XML, and the ability of XML Web services to span different technology platforms, makes BizTalk Server well-suited for straight through processing.

A firm’s client relationship platform consists of the systems that generate, organize, deliver, and allow a client to analyze pre-trade and personal financial services communication. Each of these four functions is critical to outflanking competitors in building client relationships. The Microsoft platform spans all

x Business Week, June 4, 2001. Cover story. http://www.businessweek.com/magazine/content/01_23/b3735001.htmxi Business Week, June 4, 2001. Cover story.

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four functions, which enables rapid time to market by ensuring elements readily interact and by reusing developer skills. More importantly, the technologies to reach out to clients are core to Microsoft’s vision. The technologies for pervasive, personalized financial services will result from Microsoft’s relentless commitment to achieve the company’s vision: empower people through great software - any time, any place and on any device.

Microsoft .NET is the next generation of Internet computing: orchestrating complex business processes across trading partners and assembling XML Web services that collaborate to perform a task. .NET drives competitive advantage by enabling the rapid deployment and evolution of digital business models.

Jeremy Lehman is Chief Technologist, Financial Markets with Microsoft Corporation. He may be reached at jeremyle@microsoft.com.

xii Fast Company, March 2001, pg. 145.

This is a preliminary document and may be changed substantially prior to final commercial release of the software described herein.The information contained in this document represents the current view of Microsoft Corporation on the issues discussed as of the date of publication. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information presented after the date of publication.This White Paper is for informational purposes only. MICROSOFT MAKES NO WARRANTIES, EXPRESS OR IMPLIED, AS TO THE INFORMATION IN THIS DOCUMENT.Complying with all applicable copyright laws is the responsibility of the user. Without limiting the rights under copyright, no part of this document may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), or for any purpose, without the express written permission of Microsoft Corp.Microsoft may have patents, patent applications, trademarks, copyrights or other intellectual property rights covering subject matter in this document. Except as expressly provided in any written license agreement from Microsoft, the furnishing of this document does not give you any license to these patents, trademarks, copyrights or other intellectual property.Microsoft, BizTalk, Mobile Explorer, Money Central, MSN, Outlook, Visual Studio and the BackOffice logo, Visual Basic, Visual C++, Windows, and Windows NT are either registered trademarks or trademarks of Microsoft Corporation in the United States and/or other countries.Other product or company names mentioned herein may be the trademarks of their respective owners.Microsoft Corporation • One Microsoft Way • Redmond, WA 98052-6399 • USA

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