Making XML Work in Business
by Alan Kotok
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Pages: 1, 2, 3
Serving Financial Services
Financial services is another industry where information plays a vital part of the business. Bruce Sharpe of SoftQuad described the needs of their financial industry clients and how XML meets them. In the world of finance, content, for all intents and purposes, is the product. And timing is critical. Investment banks and brokerage houses were among the first companies to integrate the Web into business operations, and a number of them now use XML to create new information products and channels for delivery to the customers.
Sharpe said the Web did not automatically provide benefits to the investment analysts who prepare many of the time-critical advisories for the clients. Investment companies had long-established processes based on paper, but these processes generated errors and took valuable time. In many cases, the companies’ original web processes paralleled the paper-based operations, offering the analysts only more work, time, and errors and no real added efficiencies.
For financial analysts, the ability to separate content from presentation makes it possible to tag free text and data for future reference or reuse. In the often tight regulatory environment in which analysts work, XML helps provide better audit trails. When financial companies can organize their information into databases, XML can provide further benefits. The analysts can assemble the data into customized products for customers, using preformatted templates or stylesheets, giving customers more focused and personalized information products as well as faster service. For customers in the financial services industry, the institutions can syndicate the content and customers can republish the information on their own sites.
Sharpe listed the savings that investment houses realize as a result of XML. The main benefits are the increased efficiency of the highly-paid analysts. Companies can reuse data that would otherwise take valuable time from the analysts to research and recreate. The use of XML eliminates the manual processes held over from the hard copy days, as well as parallel processes introduced with the first web pages. And the customized information products create closer relationships with customers.
A Very Steep Pyramid
While manufacturers like Freightliner and financial institutions may realize significant benefits from XML, a closer look suggests that these companies have large, complex, and demanding information needs that make the investment in XML worthwhile. In both cases the use of XML has direct and significant financial implications, since each Freightliner truck carries a high price tag, and investment decisions usually involve significant capital outlays. Thus the potential number of companies or organizations able to realize these benefits is relatively small.
Counting these organizations is not easy, but assume for the moment that larger companies are more likely to need the information-management opportunities offered by XML. It is the larger companies which have operating divisions and greater financial and regulatory reporting responsibilities and are thus more likely in the market for XML information management systems. A look at the last U.S. economic census (1997) shows that the distribution of large to small companies resembles a very steep pyramid. American companies with 500 or more employees – the traditional cutoff between large and medium or small companies – number just over 16,000 or barely 0.3 percent of the total number of companies.
In fact, the vast majority of businesses in the United States are small. 89.5% of American businesses have 20 or fewer employees. (See "Statistics About Small Business and Large Business from the U.S. Census Bureau." http://www.census.gov/epcd/www/smallbus.html). XML needs to deliver value for the large number of smaller companies if it is to achieve sustained ubiquity.
E-business, for the Longer Term
Fortunately XML has another major application area that can offer this kind of business value. The hundreds of e-business frameworks, vocabularies, and protocols that have emerged over the past two years indicate an intense interest by many industries in taking advantage of XML’s ability to exchange structured data between companies and organizations. And some of the XML 2001 sessions provided a preview of the way businesses can benefit from these developments.
The conference devoted an entire day of its e-business track to financial applications. In this track, Rick Schumacher of Wall Street Systems discussed the Financial products Markup Language (FpML), which was designed for use with a type of investment called a "derivative". Derivatives are contracts based on expectations of the future value of often volatile financial measures such as interest rates and foreign exchange. No two derivative contracts are alike and each often needs individual negotiation.
Derivatives are traded privately, usually between institutions, not through an exchange. As a result, they do not have the usual regulatory protections found in trades made through the NYSE or NASDAQ. Information is the lifeblood of derivatives, so any news with a bearing on the contract is eagerly sought out. Again, timing is critical. The value of contracts can change markedly in hours or even minutes.
Schumacher said desktop technology made derivatives trading possible. With spreadsheets and databases, analysts at investment banks or brokerage houses could design and run financial models to help predict movement of interest or foreign exchange rates, to help reduce the overall risk of derivatives. But because the companies trading in derivatives had to keep these models secret, most of the interactions between companies were manual.
The industry thus faced the challenge of finding a way to describe a standard electronic derivatives document that would still enable participants to develop a complex and individualized contract for each trade. With the structured and extensible nature of XML, the industry could design a vocabulary to meet these conditions. The FpML organization is supported by 11 large investment banks and brokerage houses, as well as financial systems vendors and networks such as Reuters and S.W.I.F.T. Its current specifications cover overall architecture and interest rate derivatives, while it is working on foreign exchange and equity derivative products.
