4
Feb
Broker-Dealers: Is Your Cart Filled with Expensive Clients?
It surprises me that many broker-dealers we talk to still consider the act of “billing” or “invoicing” their clients for monthly trade activity an operational task, rather than a strategic leverage point. In an era of decreasing commission dollars and greater competition for order flow, shouldn’t everyone be looking to gain every advantage to maintain existing customer business, if not increase business?
At Firm58, we see two main reasons why broker-dealers are stuck in this operational mindset. First, some BDs simply state that “we’re charging ‘X’ mils and making a profit, why do I need to change?” The truth is, each customer has a unique set of demands, and receives differentiated levels of service.
Two retail customers don’t walk into a grocery store, fill up a shopping cart each and get charged the same amount of money for a shopping cart full of groceries. It all depends on what was purchased. Might the store make a profit with this strategy? Sure. In the short run, the average price might compensate but, over time, those that require less (or fill up the cart with less expensive goods) will shop down the street where they’re charged only for the goods they purchased.
On the other hand, those that fill up the cart with expensive items (are provided more than what they are paid for) will continue to fill up the cart with expensive goods and become smarter about asking for more, at the same price. Soon you’ll be left with customers that are eating away at profits, and your business will suffer.
Differentiated pricing that represents the costs of the services provided isn’t new in capital markets; it’s just sometimes ignored in favor of an “overall profitable trading business.” Shortsighted decisions like this come back to haunt firms.
Second, many firms don’t have the systems to properly charge for the services provided with a mark up for their costs, thus have to rely on a flat rate. Why is this so hard? Well, measuring the daily costs of trades made across many exchanges with complex fee structures, maker/taker fees, etc., is difficult. It takes investments in infrastructure and resources to manage this properly. These investments are typically viewed as “operational” and do not get the same level of commitment as those viewed as strategic (i.e., revenue generating).
But imagine being able to use this execution cost data to support smart order routing, or simply provide greater transparency to customers for compliance. If you consider all of the possibilities for tracking costs at this detailed level you’ll see it’s not a tactical cost, but in fact a strategic investment in your business and your customers.
For those that get it, pricing and billing both present a unique opportunity to differentiate services, maximize revenues of existing business, and generate new business (e.g., by offering competitive cost-plus billing). Those businesses that address these functions strategically will thrive in all economic cycles, not just the upswings.
22
Dec
2010 Themes Confirmed: Transparency, Cost Reduction & Compliance Matter
For the past year, Firm58 has been beating the drum in support of a handful of trading themes including market complexity and rate structures, transparency & compliance, and TCA, among others. At times, it seemed like we were the only ones highlighting the urgency of these issues for broker dealers, execution venues and trading firms. As it turns out, we are not alone. The December 2010 issue of Traders Magazine echoes many of the aforementioned topics in their “2010 Review.”
One big theme for Firm58 this year was the way in which brokers are re-inventing their client relationships, and now thinking about how to offer and measure the cost of research. The TABB research, Reinventing the Relationship: Institutional Brokerage Profitability and the September webinar we hosted with Larry Tabb covered this issue at many levels. The bottom line: Commission dollars are down 25% from 2008, and brokerages are struggling to find ways to keep their share, let alone increase that percentage. Traders Magazine addresses this issue in its article, “2010 Review: Agency Brokers Dive Into Research.
“Transparency has also been a big theme for Firm58 this year, and a recent poll in Traders Magazine supports the buyside’s desire for more transparency from the sellside.
A recent poll in Traders Magazine shows that 75% of respondents believe the sellside should provide more transparency as to where the buyside's orders are routed and how they are filled.
We believe there’s growing consensus, and as a result a change in compliance requirements coming that will require visibility into fees at a trade level, including child trades of large, complex orders. Where was it routed? How much did it cost? What rebates did it earn? These are all legitimate questions.
We addressed this in various times through our blogs, “The Wave of Transparency is Upon Us,” “Lightspeed Financial’s Middle Office,” and “Market Structure Changes Post Trade Needs.”
We look for transparency to be more than a buzzword next year and potentially a compliance requirement that will be difficult for many firms to address unless they have the right middle and back office infrastructure. Traders Magazine addresses this very topic in its article, “2010 Review: Dude, Where’s My Order?”
Another theme Firm58 addressed this year was the growing market structure complexity and the changes in fee structures. It’s widely known that Firm58 is the billing solution for many exchanges and execution venues. One of the reasons for our success in this market is our ability to model highly complex and ever-changing fee structures, the maker-taker models, and more. This past year, option markets started to offer liquidity rebates on some equities, and Firm58 has been right there helping them process these trade-related details. You can see an example of this in our work with the Boston Options Exchange (BOX).
Other options exchanges have begun to offer maker-taker rebate/fees, and that is highlighted in Traders Magazine’s, “2010 Review: Options Exchanges Cotton to Maker-Taker.” Just this week we announced our relationship with CBOE Holdings’ C2 Options Exchange.
Finally, Traders Magazine also has an article this month on TCA. The article, “TCA is OK But Needs Work” states that “institutions have expressed ‘disappointment’ and ‘frustration’ with trade-cost analysis’ inability to identify opportunities for institutions to improve overall performance by wringing new efficiencies out of the trading process.” This issue was at the heart of a recent post, “The Expanding Significance of Explicit Costs TCA“ by one of our founders and Managing Director, Sam Mele.
At the center of this TCA issue is the need for trading firms to have more information at their finger tips to make not only better decisions about trade routing and execution but client performance and profitability. With commission dollars significantly down, explicit cost TCA will become a much larger issue over the next two years. Brokerages that understand and address it will have a distinct advantage over their competition for those hard-earned and dwindling commission dollars.
Big themes, big issues, hard problems to solve. As a subscription-based software provider with a strong track record of success, Firm58 is well-positioned to help address these important revenue, cost reduction, and compliance issues for capital markets firmst large and small.
21
Dec
What Financial Services Can Learn from Telecom
In our work with leading financial services firms, we’re often surprised to learn of the large number of execution venues and broker dealers – both large and small – that continue to manage their billing processes using spreadsheets or outmoded systems. Why would manual processing of this standard back-office procedure be considered disadvantageous, or even dangerous? The answer is painfully simple: Today’s markets are competitive and only the strong will survive.
Industry Similarities
This call for modernized billing systems is a familiar song. It was sung loud and clear a decade ago when telecommunications was the fastest growing industry in the world. In order to remain competitive, telecom providers needed to update legacy systems, in order to consolidate services to a single bill, provide customers with access to call detail data and associated fees, track and invoice for taxes to growing a multitude of jurisdictions, and ultimately, position their companies for growth in a highly competitive global environment. The trend continues today in what some consider the third wave of evolution for billing services in the telecom industry.
A recent Booz & Company report, “Evolution or Revolution? Strategies for Telecom Billing Transformation” shows that billing improvements are now one of the top telecom IT priorities, with 71% of survey respondents placing it in the top three priorities for 2011. The study goes on to say, “Executives are experiencing firsthand the critical role of the billing process in supporting new products and pricing models, bringing them to market quickly, improving revenue capture, and reducing costs.”
Drivers of Change: An Industry Comparison
Despite the obvious differences between B2C and B2B industries, billing for financial services firms, in many ways, is similar to that of the telecommunications industry. Today’s financial firms need to process and invoice more complex trades and more parties, roll out competitive pricing in response to changing market conditions, and improve customer service in order to attract liquidity and differentiate. However, in contrast, capital markets firms are much further behind than their telecom counterparts.
If telecom is in the midst of its third wave of innovation, capital markets firms are slow to recognize the first. Arguably, with more money flowing through the financial system, as well as an increased focus on regulatory and compliance requirements following the global economic crisis in 2008, automating billing and revenue management processes should be much higher on the list of priorities for any broker dealer or execution venue that wants to thrive during this recovery period and beyond. The lack of focus, priority and urgency demonstrates that capital markets firms have yet to recognize the strategic benefits of billing beyond simple automation.
A Blind Eye Does Not Beget Better Billing Practices
Manual billing may have been an acceptable way of dealing with month-end invoicing back when there were fewer execution venues and trades moved through the system mostly intact. But today, in a high-frequency world that eschews latency of any kind, trade complexity is the norm. And with trade complexity comes errors, inefficiency, and delays. Today, few firms can confidently and more importantly — immediately — answer these questions:
- Were we overcharged?
- Did we receive all of the rebates to which we are entitled?
- Was the correct rate applied to that trade?
- Do we have easy access to historical trade detail in the event of an audit or compliance requirement?
- How quickly can we implement a price change?
Today, there are a number of billing solutions built specifically for capital markets firms. These systems automate bill-related activities including calculation, presentation, and collection. Solutions such as those offered by Firm58 support revenue-generating efforts by helping firms implement flexible pricing models and cost-plus billing in order to support new high-frequency clients and provide detailed analytics about their revenue streams. In addition, firms offering Software as a Service (SaaS) platforms allow for web-based access to post-trade details to enable self-service in near real-time.
Bracing for the Future
During the late ‘90s, telecom companies experienced a challenging regulatory and competitive environment. On the regulatory front, the Telecommunications Act of 1996 passed with a goal to “open up markets to competition by removing regulatory barriers to entry,” forcing regional phone companies to open up their networks to inter-carriers. In quid pro quo fashion, this act also allowed regional phone companies to provide long distance services, unfortunately regional phone companies needed to develop a billing system, adding huge costs and delaying market entry. Ironically, as regional phone companies focused on developing a long distance billing solution and compensation solution for inter-carriers, the small inter-carriers focused on their product offering. The inter-carriers began to offer more complex bundled services (email, phone, dial-up, paging), which the regional phone companies had a difficult time billing for.
For those telecom firms whose billing systems could not scale in support of new wireless products and complex pricing requirements, the future was bleak and in some cases, ended in buy-out, merger or bankruptcy.
If similar technology revolutions in other industries are taken into account, there is no question that modernized billing capability for capital markets is a strategic differentiator. What remains to be seen is who will emerge victorious and who will be cast away while the sea change passes them by.
18
Oct
Lightspeed Financial’s middle office
We are pleased to announce our newest customer, Lightspeed Financial. 
Recent industry research indicates that leading brokerages will be those firms that proactively manage service and measure costs across their trading relationships. Lightspeed Financial, a leading provider of direct market access trading technology, risk management solutions, and brokerage services for professional retail active traders and institutional investors, is an example of a leading brokerage.
Lightspeed Financial CEO, Stephen Ehrlich, says, “As a broker dealer with a sophisticated and growing client base, it is imperative that we employ equally as sophisticated and transparent services to manage our trading operations. By consolidating many of our middle-office functions with Firm58, we are able to accomplish those goals and achieve significant operation efficiencies in the process. This is a win for our clients and a win for us.”
We look forward to helping Lightspeed Financial continue to grow its firm and meet its post-trade goals. For more information about this announcement, please view the press release.
