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The accelerating trend of global broker consolidation presents a significant challenge. Our active involvement in addressing this issue globally, particularly in assisting non-bulge bracket banks and smaller broker groups to remain competitive, has provided valuable insights into both the problem and potential solutions.
The problem is straightforward. Firstly, bulge brackets and large broker groups enjoy cost-effectiveness due to the high-volume lower execution fee charging model introduced by exchanges. Secondly, they offer comprehensive one-stop-shop services, including global services, execution, research, settlement, and clearance. This gives them a significant negotiation advantage when competing for new DMA or DSA buy-side client agreements.
The solution lies in technology. Technology plays a crucial role in calculating execution costs. It should ideally not exceed 15% of the desk's total cost. This is a significant factor in cost management and the key differentiator on the business service front that can help a desk stay competitive. With this in mind, here are some effective strategies observed in the market.
The ideal scenario for those desks seeking to remain competitive would be to manage technology costs, driving them down to 8-10%. This would ultimately afford them a stronger negotiation position against the aforementioned giants who benefit from lower exchange fees. Why is this advantageous? Because the first batch of
giants opts to host on-premises and develop in-house, erroneously believing they can become robust and agile engineering and networking powerhouses, with only a few exceptions proving successful.
The reality is that building in-house necessitates three to five years of exceptional engineering and project management. However, the
profit and loss pressures inherent in the industry often make such projects unfeasible, resulting in historically poor delivery on in-house initiatives by sell-side agency desks.
Moreover, the second batch of giants is currently in the expensive grip of a few major global FinTech players. History has illustrated that the sell-side is generally reluctant to swiftly adopt new technology. In conclusion, it's evident that addressing broker consolidation requires a nuanced approach that prioritises technological innovation and strategic partnerships.
In the end, success hinges on one's ability to adapt quickly. The rule is simple: the smaller you are, the faster you should be. Being small and slow is a guaranteed formula for failure.
So, how can technology assist smaller desks in staying competitive? Leverage your smaller size as an advantage by moving swiftly and collaborating with new disruptive technology firms that offer pricing and platform flexibility. The largest margins are often gained through the effective and seamless execution of complex workflows. This requires vendors with the capacity to deliver customisable solutions. Avoid closed systems and invest instead in the open API and microservices economy.
Embracing open APIs enables rapid adaptation to new revolutionary services such as AI analytics or blockchain based solutions. Additionally, adopting a microservices architecture ensures that your system remains adaptable and agile.
Collaborate with vendors who understand the importance of integration and access to the best value liquidity. Leveraging Software as a Service (SaaS) to its fullest extent is crucial. Remember, you're not in the business of developing and maintaining technology but rather utilising it as your primary vehicle to achieve execution goals.
Furthermore, it's time to break free from ossified thinking and embrace new solutions. With electronic and algorithmic trading gaining dominance, and with the existing algorithmic infrastructure of global brokers, consider Algo Management System (AMS) solutions. These solutions provide a unified interface for your execution services while connecting you to internal native markets algorithms and a network of best execution algo services worldwide. With robust algorithm benchmarking, execution cost analytics, and dynamic routing, you can automate your execution paths, ensuring competitive service to your clients.
Ultimately, make technology work for you, not against you. Don't become a victim of outdated concepts. Embrace broker consolidation as an opportunity for growth and advancement in the industry.
Download your free copy of the latest Financial Technologist magazine here.
