Posted in: Institutional Capital Markets
Reducing cost per trade is a constant challenge for banks and brokers. Nick Clarke, Executive Manager – Institutional, looks at how firms can make smarter technology choices to drive cost-savings.
All firms are under pressure to increase efficiency and reduce operational costs. This is especially true in the capital markets space as changing regulations add complexity and competition increases. Economic pressures are only increasing as the world deals with the COVID-19 pandemic.
To help understand what firms are doing to control costs, GBST recently sponsored an industry survey conducted by independent consulting group The Value Exchange. Over 200 market participants in various roles and finance sectors around the globe shared their views in the Grey Cost Per Trade survey.
Unsurprisingly the results showed that the vast majority (81%) of brokers and banks think it is important to calculate cost per trade. Over half of these respondents believe its “critical” to do so.
The figure drops when it comes to measuring it though – only 68% of respondents are actively tracking it. With disjointed global operations, indirect cost attribution and legacy technology, tracking cross-business costs is apparently easier said than done.
But from this two-thirds of respondents, we can gain a valuable insight into what makes up the cost per trade. The survey indicates that 36% of direct costs come from staffing and 18% from IT. This is good news as it means that the elements making up over half of the cost per trade can be controlled.
One of the available levers to control these costs is post-trade technology. Today’s middle and back office systems can drive huge efficiencies in operational costs.
For banks and brokers wanting to reduce operational costs, we suggest focusing on these three areas:
Automation and exception management
A well-configured and optimised post-trade system should mean that fewer than 1% of trades need intervention. Further efficiencies come from economies of scale in combining regions or asset classes.
APIs are critical too in increasing automation; your back office system may not always have all the information it needs to process a trade. A system that can intelligently request information from other systems can prevent the need for a human to get involved.
Moving to the cloud
We’re seeing a major shift away from on-premise deployment to cloud-based solutions as firms upgrade from legacy technology. Aside from the obvious physical infrastructure cost savings, moving to the cloud can drive other significant cost per trade savings.
One obvious driver of cost savings is scalability. Systems that can take advantage of cloud scalability can save cost in two ways. The first is by no longer over-provisioning infrastructure to cater for peak loads which may only occur once or twice per year. The second is being able to dial down usage in quiet times. Systems which can use native cloud infrastructure such as AWS Aurora for cloud-native database services provide scalability from a very low cost base.
Another saving is in the area of business continuity. Because cloud providers such as AWS and Azure provide three data centres in every region, you can save by implementing a three-site disaster recovery (referred to as Active-Active-Active). Not only does this reduce costs by 25% over the traditional two-site Active-Standby model but it also provides a higher level of availability and resilience.
Solving specific challenges with technology
Reducing the cost per trade is top of mind for most firms but it can be difficult to know where to start. In our experience, the best results come from a critical look at the root cause of cost drivers. Look for manual touch points or the movement of unstructured data (like PDFs or emails) and investigate why these processes are still in place and whether they are controllable by the firm. Newer technologies and better connectivity can solve problems that were deemed too hard only a few years ago.
Your technology partner should be able to support you with this. Even better, they’re already doing it by adapting their technology stack to the new capabilities offered by cloud computing and API connectivity.
For example, a common middle-office challenge is the manual effort required to process allocation files received in different file formats. Your clients won’t necessarily want to change their formats, resulting in your staff being mired in spreadsheets. How do you automate this and improve client service at the same time? This is where chatbots with machine learning capability can help – a simple chat exchange with the bot automatically updates the file into the correct format and it learns for next time.
This type of practical application of modern tech is where operational teams, IT teams and vendors should be collaborating for maximum return on investment.
With the Grey Cost Per Trade survey predicting IT as the fastest growing cost over the next five years, firms must start focusing on where they can make the biggest savings. People and systems will always make up a large portion of cost per trade, but there are plenty of opportunities to reduce them with the right post-trade technology.
Get in touch to discuss our Syn~ post-trade platform and our Syndy chatbot
Read more about the Grey Cost Per Trade survey