Sunday, January 27, 2008

Technology Initiatives and Innovations at Merrill Lynch

Technology at Merrill Lynch

In 1997, the NASDAQ marketplace began an evolution unparalleled in its history. The surge in electronic trading created an escalating number of investors and increased number of transactions. For Merrill Lynch, to ensure that investors received “Best Execution” on their orders required an increasing commitment to sophisticated technology solutions.

According to George Lawlor, a Managing Director in U.S. Equities at Merrill Lynch, “ This extremely fast moving and complex new business environment meant we had to introduce change into our systems. For Merrill Lynch, it was no longer acceptable to analyze a small statistical sample of our order flow. As part of our strong commitment to our clients, we wanted to look at every single order, every single day, for Best Execution. Given that statistical analysis could not support us any longer, we embarked on a mission to use automation to enhance our performance. We decided to create the industry’s premier Best Execution system.”

Merrill Lynch selected Mantas to build its Best Execution Analysis and Monitoring System (BEAMS). The goal of this system was to monitor execution quality with an electronic audit of trades executed at Merrill Lynch. It was also to order flow sent to other broker dealers. With BEAMS, Merrill Lynch has certainly been able to improve its execution quality. But there are other benefits that the company didn’t originally envision that are now coming to fruition. “One benefit is that BEAMS has proven to be a good diagnostic tool for our technologists,”explains Lawlor. “The other is that the BEAMS Best Execution scorecards are becoming a significant marketing tool for us.”

Despite this edge, Merrill Lynch has still to adapt fully to the onslaught of technology. While discount brokerages such as Charles Schwab have been successfully transitioning to the Internet, Merrill Lynch is still struggling with the business strategy and competitive issues posed by the Internet and online trading. The company realizes the competitive threat that the Internet poses to its existing business model of delivering investment information, investment recommendations, and stock transactions through its brokers. Thus it has already created a unit called Merrill Lynch Online that provides online access to Merrill Lynch’s research reports. However this website is only accessible to its high net-worth clients, and not to Merrill Lynch’s entire customer base of retail investors. Merrill Lynch is also testing a website called where guests can create a watch list of stocks, and pull up full text research reports that are covered by Merrill Lynch stock analysts.

While it is coping with the Internet enabled challenges, Merrill Lynch has continued to invest in sustaining innovations such as its Trusted Global Advisor (TGA) system. The TGA system, which cost over $800 million in development, is designed to deliver “advice, customized research, Financial planning, and asset allocation” to its clients. Merrill Lynch believes that it can successfully integrate its TGA system with its Merrill Lynch Online offering. However, it remains to be seen whether Merrill Lynch can successfully integrate a sustaining innovation with a disruptive innovation.

Merrill Lynch was built on relentless client focus and that is still true today. That is the company’s value proposition. With this as the focus, Merrill Lynch continues to move ahead in its stated goal: “To build on their rich heritage of industry leadership and establish a foundation from which the company can continue to invest for growth in revenues and profits while producing strong, consistent financial performance; attracting and retaining top talent; and, above all, add more value to every client relationship by meeting a broader array of client needs and innovating and executing winning strategies on their behalf.” Merrill demonstrated these fundamentals when it renewed its investment research through collaborative teams across diverse fields.

This optimism is reflected by Stanley O’Neal, Merrill Lynch’s Chairman and CEO: “We finished 2005 at Merrill Lynch on a very strong note, with a compelling revenue performance and record earnings for the full year. Our performance underscores the increasing overall strength and balance of our franchise, which is the result of the investments we have been making throughout the company in people, technology and addon acquisitions. We expect continued investment in our businesses to enhance our prospects for additional, profitable growth in the coming years.”

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