Linux’s Perfect Storm

The highly-competitive financial industry has a history of adopting IT trends ahead of the curve. The Street's forecast for Linux? A strong buy.


Though nobody knew it at the time, it turns out that April 1, 2001 was an important date in the annals of the Linux operating system. That was the deadline (mandated by the Securities and Exchange Commissions) for equities markets and trading companies in the United States to switch from their centuries-old practice of trading shares in fractions of a dollar to a decimal-based trading system.

Aside from making things a little more tricky for day-traders, the decimalization of stock exchanges like the Nasdaq and the New York Stock Exchange (NYSE) created one high-priced headache for IT departments, who not only had to deal with the conversion itself, but also had to cope with the massive increase in trading volume that came with the switch from listing shares in sixteenths to listing shares in cents.

As if 2001 hadn’t been hard enough for finance industry IT managers: budgets had been slashed, and fee-based trading was adding complexity and sucking clock cycles from machine rooms, leaving IT managers to squeeze every last “flop” of productivity out of their networks.

These conditions were ideal for what UBS Warburg’s Executive Director of IT Steve Russell calls “a perfect storm” in the financial industry. For Russell, that perfect storm blew into his organization in September 2001.

For years, Russell had been watching the performance of Intel systems creep up to the level of their RISC competitors, but by the fall of 2001, the price/performance advantage of Linux on Intel over Solaris on UltraSPARC — a ten to one difference, according to Russell’s calculations — was too great to ignore.

UBS Warburg realized that one way of keeping revenue streams positive in tough economic times would be to increase its IT capacity, and this tenfold price/performance advantage made Linux worth, at least, a test. “[A tenfold advantage] starts getting to be real money, even by banking standards,” Russell told a group of analysts in June 2002.

By the beginning of 2002, UBS Warburg began its Linux conversion and, within a year, it had rolled out a brand new system management infrastructure based on Red Hat Linux, Dell servers, and Tibco’s Rendezvous messaging software.

And UBS Warburg is not alone in its adoption of Linux. In the last year, Merrill Lynch, Credit Suisse First Boston, and Lehman Brothers have all begun testing Linux as an alternative platform for a variety of mission-critical applications. Morgan Stanley has been using Linux for mission-critical apps for over two years. 2002 was the year of the “first movers,” says IDC/Meridian Research Analyst Damon Kovelsky, but in 2003, he predicts, “It’s going to start entering the mainstream.”

In the data center, Kovelsky estimates that Linux accounts for less than five percent of Wall Street implementations — one-tenth the share held by the most dominant vendor, Sun Microsystems — but that the number is growing as more and more financial firms begin to understand the benefits of using Linux. “You have an application — let’s say an order management system,” he says. “If you do it on Linux, you can cut out about two or three servers. That could be a lot of money. When you include personnel, there’s a savings there.”

One of the ways that Linux vendors have strengthened their reputations in the Financial market is, ironically, by becoming less Linux-like. Distribution vendors have slowed their release cycles, making it easier for IT managers and ISVs to keep pace. “We actually like the fact that we only get one or two releases a year, as opposed to one every four hours whenever somebody changes something,” says Merrill Lynch’s Director of Global Database and Middleware Technology Mark Clark, speaking at a panel at OracleWorld.

Clark says that the open source overabundance of choice can sometimes be a problem for IT managers who want to know and control what’s running on their networks. His team became aware of the Linux diversity problem three years ago, he says, when they realized, “We had three different versions of Red Hat to support.” That was two more than Merrill Lynch wanted.

Despite Linux’s “perfect storm” conditions to drive adoption, IDC/Meridian’s Kovelsky cautions that there are still a number of factors that are slowing the uptake of the operating system. “Red Hat is still considered a bit of a vendor risk, due to [the company's] size,” he says. “I think that’s erroneous, but that’s still the perception on Wall Street.”

Another barrier is institutional resistance to change. “A lot of it boils down to a religious war,” he says. “You have people who are die-hard Sun users… and they don’t want to see change there.”

One App at a Time

The greatest single problem for Linux today is application support. Though Oracle, IBM, HP, and Computer Associates have championed the Linux platform, support for financial applications on Linux is not yet on par with Solaris. Kovelsky says that problems with the Sybase database — which is popular on Wall Street — “have stopped some projects.” He adds, “Firms have done trial runs with Linux and they can’t get it into databases… it becomes a very difficult integration effort.”

The financial industry application portfolio is extremely diverse, and there are a large number of individual ISVs that will have to get the Linux message before Linux will be able to catch up with Solaris. So far, popular application vendors like MacGregor and Sungard have not publicly announced Linux support, although Sungard claims to have a number of Linux projects in the works.

While customers and ISVs may consider Linux a worthy alternative for Web serving, printing, and email, when it comes to serious financial applications — trading platforms, and risk management applications, for example — Sun, HP, and IBM remain the dominant platforms.

But the proprietary Unix hegemony is beginning to crack, helped in part by vendors like Intel and IBM, who have — ahead of many ISVs — been convincing their financial customers of the value behind Linux and then actually putting those customers in front of software vendors. According to Mark Clark, “[Linux] is one of the few products where I haven’t been inundated with ISVs trying to sell me something,” he says. “[Instead,] the user community is influencing the ISVs.”

Last September, IBM created its first Linux “Center of Competency” for Wall Street, which has done marketing, offered education on Solaris-to-Linux porting, and played host to over a dozen financial industry customer events showcasing partner applications running on Linux. Big Blue says that the first center has been such a success, it plans to open a second Linux center in London very shortly.

Another prime mover in the drive to port financial applications to Linux is Intel, which has been organizing round table sessions for over a year where “we basically call in vendors one at a time and beat the crap out of them,” according to one IT executive. Intel has got enough high-level financial executives together in both New York and London over the last few years to create a new kind of Linux community where customers and vendors can meet and talk about applications — and Linux. Intel Strategic Relationship Manager Diana Gowan says that the events are “a forum for the firms to share their ideas on what their long term plans are.” She adds, “They’ll say what they’re looking at with Linux and what they’re concerned with.”

IBM’s Worldwide Program Director for Linux and Financial Services John Vitkus says that with over 1,200 DB2 applications now running on Linux, the penguin’s marketshare is “not as large as Unix, but is growing faster.”

One interesting aspect of Linux’s adoption in the financial Industry is that unlike the Internet revolution, which was led by smaller, more nimble start-up companies, the Linux charge into financial services is clearly being led by the big boys. Merrill Lynch, Credit Suisse First Boston (CSFB), and UBS Warburg have all been testing a variety of Linux-based applications for the last year or so, and are just now beginning to roll out production systems.

These systems are not simple one-off Web applications. Last year, CSFB migrated its worldwide order routing architecture to Linux, and if that three-server test case works out, CSFB plans to move its entire enterprise architecture to Linux. Morgan Stanley plans to move its North American equity market data platform to Linux. And Banco do Brasil recently announced that it hopes to completely replace most of it’s 70,000 European windows licenses — including desktops — with Linux.

In the long run, Merrill Lynch is looking to develop a single trading platform for its global operations, and is using Linux to created a global managed service offering. Creating managed services, the thinking goes, will make it easier to some day support a single platform. Based on a 4-node, 32 processor RAC configuration running Oracle 9.2 and Red Hat Advanced Server 2.1, Merrill Lynch’s Clark says that as opposed to the six to ten weeks it took to provision new systems in the past, their Linux systems “are provisionable in a matter of hours.”

In a recent report on Linux in Wall Street entitled “Wall Street Romances the Penguin,” Tower Group Analyst Dushyant Shahrawat wrote, “Large firms have also been relatively less apprehensive about the level, nature, source, and degree of service and support available around Linux.” Put simply: the large firms have the money, the tradition of in-house application development, and the depth of experience to experiment with something new. “Smaller firms are more dependent upon third-party providers,” wrote Shahrawat, “and have thus often lagged behind larger firms in adopting Linux.”

And one of the most popular Wall Street application vendors, Reuters, shook up the industry last May by announcing a major Linux porting effort. The company says that by the first quarter of 2003, it will have 16 of the 20 applications in its popular Market Data System, which can be used to serve customized market data from 263 exchanges around the world, ported to Linux.

Reuters Chief Technology Officer Mike Sayers says that his company has seven clients beta testing the port right now. He agrees with UBS Warburg’s Russell that the “planets are aligned” these days to favor Linux’s low-cost approach to computing. “Right now, if you talk to financial services, they’re interested in three things: cost, cost, and cost,” he says. “The other part is the markets are growing hugely — the market data rates are just exploding.” He says the increasing demand for raw data processing makes Linux all the more appealing. Sayers adds that Linux appears to deliver about twice the performance at about half the cost as compared to RISC alternatives, and says that, currently, about eighty percent of the Market Data System sales are on Solaris.

Jumping with Java

It may be one of the great ironies that after spending years selling the financial industry on its cross-platform Java development environment, Sun may have ultimately created a Solaris to Linux migration path. UBS’s Steve Russell says that in his particular case, “The thing that’s enabling us to use and leverage Linux quickly is Java.” He explains, “Basically, if you move to Java or app servers, you’ve done all the work to abstract the operating system. So, if you’ve done all the development work, which is really the hard bit, you might as well be on the cheapest computing platform.”

And in the case of Banco do Brasil, its Windows-based banking application has been rewritten in Java, so now it can be run on any operating system, including Linux.

Though Java is probably not the most popular development environment in the financial space, Linux also has an advantage when it comes to Wall Street’s most popular language: C. Because of the dominance of Unix, and the large amount of in-house application development performed in the financial industry (until 1999, Russell says, UBS Warburg had more developers than Microsoft), Linux’s similarity with Unix gives it a huge advantage when it’s being evaluated next to Windows as a RISC alternative. Russel says that he’s found that the porting burden for C applications was “33 to 66 percent lower for Linux than it was for Windows,” and if lower cost is going to force developers off their beloved Solaris servers, Linux is usually the next best thing.

The Future

If 2002 was the year of beta testing serious financial apps on Linux, 2003 will be its make or break year. The Tower Group expects the number of Linux servers in the financial securities industry to grow by 22 percent annually over the next three years — with the vast majority of this growth coming at the expense of proprietary Unix systems, which Tower expects to lose market share at the rate of 18 percent per annum.

The highly-competitive financial industry has a history of adopting IT trends ahead of the curve, and optimists see this industry as a test-bed for Linux’s success throughout the enterprise. With the help of a strong push from IBM and Intel, Linux is off to an amazing start. The great question of 2003 will be whether or not it can maintain its momentum.

Penguin Velocity

There are three areas where Linux is picking up steam on Wall Street:

  1. Workload consolidation. Moving applications over to low-cost Linux boxes makes a lot of sense, but IBM says that their customers are moving some Unix workloads onto Linux on the mainframe as well.
  2. Numeric-intensive workloads. One way to crunch financial data — risk analysis, market analysis, quantitative analytics, and portfolio management — is to string together a whole mess of Linux machines. This could be a big growth area for Linux as financial firms suddenly discover that they can afford to do advanced analysis that would have been prohibitively expensive in the past.
  3. Application solutions. As Linux’s middleware support picks up, vendors are combining different applications and running them on the Linux platform. For example, information from a number of different financial applications could be integrated and processed in one platform that runs entirely on Linux.

Robert McMillan is Editor at Large for Linux Magazine. He can be reached at bob@linux-mag.com

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