IT operations are energy-hungry and eco-unfriendly, making trading operations – banks’ most IT-intensive functions – increasingly unsustainable. But some improvements are being made. Michelle Price reports.
Environmentalists have missed a trick: preoccupied by air travel, runways and the aviation industry in general, they have long overlooked workaday environmental hazards. Those wishing to address the issue of climate change need look no further than their own PC, mobile phone or BlackBerry.
Information technology (IT) industry analyst Gartner calculates that IT energy use in the public and private sectors accounts for about 2% of all energy consumed globally each year – and that figure is probably conservative. Calculating the exact impact of global IT operations on the environment in terms of its resulting carbon emissions is more difficult, however. According to Henry Garthwaite, financial services leader at Carbon Trust, a not-for-profit, UK government-backed organisation, many organisations calculate carbon output for specific activities using different variables. Where IT equipment and operation is concerned, the calculations are also complicated by the energy sources used to run IT operations and the processes used in manufacturing the equipment.
In a recent report, however, environmental charity Global Action Plan (GAP) estimated that the IT industry accounts for about 3% to 4% of carbon emissions – a figure that is privately supported by other well-regarded environmental bodies. As consumption of IT grows, the IT industry is likely to outstrip the aviation industry in its contribution to global warming, says GAP. When viewed from this perspective, it seems clear that the IT industry – to say nothing of its major customers – has got off lightly. Now, however, the secret is out.
High consumption industry
The banking community – as both a voracious consumer and enthusiastic builder of IT – is necessarily implicated in this finding. Carbon Trust notes that the banking industry is near the high end of the IT consumption spectrum, with IT operations accounting for 20% to 30% of overall power usage in top-tier banking institutions. This is a sizeable proportion of what is already a huge overhead for the banking industry. In its recently published Citizenship report, for example, Citi revealed that its net annual electricity consumption for 2007 totalled 2832 gigawatt hours resulting in 1,404,179 metric tons of carbon dioxide – although it did not reveal the direct cost of this energy. The Banker has learnt, however, that smaller global banks spend more than €1bn a year on energy – and that does not include the indirect costs of operations outsourced to external providers.
Like Citi, many banks – perhaps motivated as much by their ballooning energy bills as by their expanding carbon footprints – are turning their attention to their IT operations to identify where savings, both in terms of energy usage and hardware consumption, can be made. HSBC, Lloyds TSB, Morgan Stanley, Barclays, UBS, Wachovia, Credit Suisse and Goldman Sachs are among a number of major banks that have made vocal commitments to reducing their annual carbon emissions volume, and many of them are now overhauling substantial chunks of their IT estates.
Trading intensity
Perhaps the most noteworthy activity in this regard relates directly to the operations of the banks’ trading business – a realm that has traditionally enjoyed a lengthy free reign of unrestrained technology consumption. In recent years, however, developments in the marketplace have brought considerable pressure to bear on this area of banks’ IT infrastructure. Now, the long-term sustainability of the banks’ trading operations, as they are currently managed, is in doubt.
Clive Hawkins, head of foreign exchange at UBS, has keenly observed this shift in the trading environment. Prior to his current post, Mr Hawkins was the head of European equities technology at UBS. During his time in the industry, he has witnessed the rapid development of electronic trading, driven in part by the fragmentation of liquidity and, in turn, an explosion in trading volumes.
Mr Hawkins says that five years ago, few equity desks were trading electronically; yet now it is a matter of competitive necessity to trade this way usually deploying complex, high-performance, computer-intensive algorithms that can be executed with the minimum amount of latency and high levels of reliability. These stringent requirements have driven the relentless demand for high-performance networking and hardware, in particular blade servers – self-contained computer servers designed for high-density computing – which consume up to 10 times more electricity than normal servers.
In other areas of the trading environment, the rise of complex credit products has had a similar impact on computing resources. Here, however, it is largely the requirement of regulation, in particular Basel II, rather than competition or client demand that has forced the expansion of the IT footprint, says Mr Hawkins.
“If you value a deal for a client, you are usually valuing it from one set of parameters. But when you do it for a regulator, you need to shock or slide many parameters, for example, interest rates or volatility,” says Mr Hawkins. These vectors have to be created by running the pricing algorithm many hundreds of times and altering the parameter set, he says. The entire process is computationally intensive and requires a lot of hardware to support it. “The more varied your asset classes and more exotic your instruments, the more hardware you need: there is a direct correlation,” he says.
Monte Carlo simulations are the predominant means by which such products are valued. In some banks, they have been found to consume nearly 50% of the trading floor’s local data centre. In addition, the requirement to store the data associated with structured product valuations and electronic trading of equities has increased demand for storage space by 50% to 100% year on year, according to Steve Wallage, managing director of data centre specialist-research house BroadGroup. Under business continuity requirements, such data must be backed up and replicated, often inter-regionally. This practice again places tremendous strain on the trading desks’ local data centres, not only in terms of the amount of hardware required, but also in terms of the amount of energy needed to power the hardware and in turn to cool the heat it generates.
Energy limit
EDF, the local energy supplier to banks based in London’s financial outpost, Canary Wharf, told The Banker that even a single generic, on-site micro-data centre consumes as much power as a small market town centre. For micro-data centres supporting trading desks, the power consumption is likely to be even higher.
More alarming, however, is the long-term trajectory provided by AEA Energy & Environment, the lead contractor for the UK government’s Market Transformation Programme, which is designed to support the implementation of government policy on sustainable development. According to Anson Wu, a consultant at AEA Energy & Environment, such energy consumption is not expected to slow any time soon. If current cross-industry trends continue, the energy used by data centres in the UK alone will grow a staggering 100% by 2020, he says.
If the picture at the bottom of the IT stack were not gloomy enough, IBM estimates that as much energy is consumed at the desktop level – on PCs, screens, printers and the like – as in the data centre. Here, again, the trading floor, which is packed with multiple screens, telephone lines and central processing units, is highly energy intensive. Consequently, some investment banks’ trading floors have reached the legal limit governing the amount of power they are able to draw from the grid. This presents a serious operational and safety challenge: in one recent case, a bank’s London-based trading floor was drawing so much power that the main cable leading into the trading floor overheated, melted and caused a power outage.
AEA Energy & Environment calculates that power consumption in this area of the IT environment will increase by a further 14% over the next 12 years if current cross-industry trends at the desktop level continue. This is likely to be higher still for trading floors. At all levels of the IT value chain, hardware and energy consumption is unsustainable.
Wastage and inefficiency
But the banks’ IT operations are not chiefly determined by high consumption levels. They are also defined by extraordinary waste and inefficiency. Elaine Heyworth, head of environmental management for Barclays retail and commercial banking, says that waste is IT’s “major problem”. IT hardware suffers rapid depreciation and early obsolescence, especially in the investment banking arena, where trading desks are constantly competing on the basis of ever-increasing speed, capacity and performance. The environmental implication of hundreds of thousands of servers prematurely discarded and replaced on an annual basis is particularly poignant in light of a fact provided by the UK’s highly regarded British Computer Society: the average piece of hardware can consume up to four times as much electricity during the manufacturing and disposal process as it does during its operational lifetime.
That the hardware itself is operationally inefficient does not help matters. The average desktop PC, for example, wastes nearly 50% of the energy that it draws from the power outlet in the form of heat and sound. Reto Lutz, head of IT international environmental management at UBS, has been given the task of identifying and eradicating such inefficiencies across the bank. He believes that, despite efforts by the US Environment Protection Agency under its Energy Star labelling scheme (designed to promote energy efficiency standards across a range of electrical goods), energy efficiency standards have not yet achieved the necessary market penetration in the IT space.
“Particularly on the server and storage side, we see that the market is still very slow in moving towards energy-efficient solutions,” says Mr Lutz. “A lot of vendors talk about energy efficiency but if you look at what kind of power efficiency their products have, it is often less than 80% or 70%. This is something that has to be addressed.”
Hardware hoarding
Many vendors defend themselves against this accusation by pointing to under-utilisation of the hardware by the banks, which, being extremely rich in IT spend, have never been forced to optimise their IT assets. The cross-industry average utilisation rate for servers ranges from about 5% to 15%. For non-networked storage, this figure doubles but rarely does the average utilisation hit the 50% mark. Many organisations are therefore incurring the cost, and emitting the carbon, associated with operating servers and data centres at 100%, when the business is only using between 5% and 30% of their capacity.
Due to their unique performance demands, it would be reasonable to assume that investment banks are less likely to be guilty of this level of under-utilisation than other industries. But Dr Bhaskar Dasgupta, former head of strategy and change at global infrastructure, ABN AMRO, has found otherwise. In investment banks, “the tendency is for users to specify big boxes, rather than performance”, he says, and this demand has traditionally been unthinkingly met by IT. “Previously, there were no questions asked. When you ran out of space, you just bought another server.”
This practice of accumulating hardware, rather than building out performance, is also driven by trading desks’ highly proprietorial attitude. Historically, “trading desks were driven towards their own goals in terms of hardware usage”, says Mr Hawkins. “Five years ago, it would be difficult to convince a desk to share a physical server or services with other areas, or reuse on a software components level.”
Mr Hawkins and Dr Dasgupta agree that the culture of hardware hoarding is now declining, as many organisations turn their attention to cost reduction.
Sustainable interest
This observation suggests that the movement towards more efficient, sustainable IT operations is driven mainly by an interest in achieving cost-savings. Barclays’ Ms Heyworth says she does not appeal to sentiment when attempting to persuade the bank of the virtues of improved IT efficiency. “I don’t speak the language of ‘I want to save the polar bears’. I talk the language of business,” she says.
Presently, she has little choice. Regulation directly governing the sustainability or efficiency of corporate IT provision has so far been notable by its absence.
Banks are not necessarily motivated by cost savings at every level, however. At many, the green IT agenda falls under the aegis of the corporate social responsibility (CSR) department, whose presence and internal power has grown appreciably in recent years. Carbon Trust’s Mr Garthwaite says this shift is “dramatic”. Broadgroup’s Mr Wallage says that many data centre managers are under pressure from their CSR departments to reduce energy consumption, suggesting that the IT issue has penetrated beyond the departmental bottom line in some organisations.
The ever-pressing desire to manage and mitigate reputational risk is also exerting its influence on the management of the IT estate, says Mr Garthwaite.
For banks that remain unmoved by cost and reputational risk, external pressure to establish more eco-friendly internal practices is growing fast. Under the UK’s Climate Change Bill, which is due to become legislation this summer, energy-intensive corporations will be forced to track their energy usage, including that relating to IT.
The US Energy Bill recently passed by Congress is a further indication that global legislators intend to monitor corporate energy use and efficiency more closely. And in Europe, the Joint Research Centre of the European Commission is working on a voluntary code of practice regarding data centre energy efficiency.
Many analysts, including sustainable IT specialist The 451 Group, anticipate a steady flow of further legislation and initiatives that will reward energy-efficient IT, in both the US and Europe. New York State, for example, already offers tax credits to organisations that operate from ‘green’ buildings, and it seems likely that many other US states and European countries will follow suit.
Dynamic allocation
Both directly and indirectly, the banks’ IT operations will be forced to bear ever-greater scrutiny from both internal and external regulators. Many managers are starting to feel the strain. Richard Muirhead is the CEO of Tideway Systems, a technology provider that helps financial services organisations understand and map their vast IT estates. He has been party to conversations with board members at major financial services firms who say they are “under pressure” to force changes and to rationalise their IT estates, he says.
IT managers and departmental heads at some banks are now directly accountable for bills that were previously not seen by anyone outside the finance and facilities departments. This strategy is forcing the issue at a managerial level. At Barclays, for example, the chief information officer is now held accountable for IT energy usage, says Ms Heyworth.
Rising costs
In particularly enlightened cases, departmental managers are even being billed not only for their energy consumption, but also for their hardware usage. Morgan Stanley is a case in point. The investment bank’s managing director for Morgan Stanley Electronic Trading, Andrew Silverman, told The Banker that he – like all other department heads – is charged for the amount of resources his business consumes – including the electricity and hardware used at the data centre level.
To optimise these increasingly limited IT assets, trading desks are devising more dynamic ways of configuring their hardware capacity. This practice, known as ‘load balancing’, involves pooling hardware resources and spreading the workload across a number of networked computers. “It is possible to statically configure your hardware capacity, but if you do that you have to overprovision; you have to take the worst case volume scenario about what that particular instrument is going to do,” explains UBS’s Mr Hawkins. “If you have dynamic configuration and load balancing, you know you have got a pool of hardware and that you’re going to be able to load balance between 100 machines.” Dynamic configuration now presents a distinct trend in the trading arena, he adds.
UBS has enabled 17,000 desktop machines for grid-computing. This effectively allows the bank to ‘scavenge’ out-of-hours processing power from office PCs to run many parallel risk computations across a number of trading desks simultaneously. Credit Suisse has also deployed grid computing to leverage existing IT resources and create a high-performance computing platform for its collateralised debt obligation risk application, without adding any new hardware.
For PCs that are not required, HSBC and UBS are using software management technologies, such as Wake on LAN, to achieve remote shut down of PCs that traditionally have been left dwindling all night. The effective use of such software management tools at the PC level can result in up to 50% energy savings, according to Gartner.
Virtualisation trend
At the server level, the use of virtualisation has grown extremely popular. Virtualisation technology allows the separation of the operating system from the hardware, allowing multiple operating systems to function on a single server. Many banks have used virtualisation to free up hundreds of servers, allowing them to consolidate their data centres. UBS uses virtualisation technology “to more intelligently share physical servers among developers, testers and production users”, says Mr Hawkins.
In these examples, technology, perhaps ironically, offers a means of solving the problem of IT’s rampant energy consumption. As such, technology itself is not to blame. Rather, the evidence suggests that IT within the trading environment has been over-supplied, under-utilised and, in many instances, poorly managed by parties whose interests have been best served by pursuing quick, performance-enhancing and capacity-enhancing fixes, rather than a strategic and judicious optimisation of assets.
FIVE THINGS YOU NEVER KNEW ABOUT IT
- The average PC loses 50% of the power it draws from the outlet in the form of heat and sound.
- A small onsite micro-data centre consumes about the same amount of power as a market town centre.
- The average server will utilise as little as 5% to 15% of its capacity.
- The average piece of hardware can consume up to four times the amount of electricity during its manufacturing and disposal as during its operational lifetime.
- IT’s carbon footprint is set to exceed that of the aviation industry.
