The SEC announced yesterday its ban on broker-dealers providing “naked access” to traders, most notably referring to some of the smaller High Frequency Trading operations that do not have their own direct access. According to published reports, more than 30% of the trading in U.S. markets is conducted through naked access.
It’s hard to argue with the SEC’s decision. While I am not personally one who likes too many controls and oversights into business, this decision seems to be consistent with public sentiment — both business and investor — to add more transparency, accountability and proper risk controls into the market. After the dramatic events of the Flash Crash in May 2010, the SEC is addressing market participant concerns that unmanaged market access can cause unforeseen events, and helps investors gain confidence to re-enter the U.S. equity markets.
Firm58 is a proponent of sponsored market access. These services offer great benefits to the U.S. markets by way of greater deal flow and liquidity, but with the proper safeguards around risk and accountability for the individuals using such access. Recently, we announced a relationship with LightSpeed Financial who, among many other things, provides sponsored access to its clients. Firm58 will be providing core middle- and back-office solutions to help LightSpeed Financial manage this activity and provide greater transparency in the process.
It’s great to see the SEC realize the benefits of proper sponsored access and continue to support that business model, while addressing the greater market and investor concerns of naked access. Firm58 is well-positioned to help capital markets firms reap the benefits, transparency, and accountability of such controls while improving operational efficiencies and protecting revenue.
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.
Over 5 years ago when our founders created Firm58, one of the core principles was that changing market structure (i.e., more trading venues, digitization, etc…) was making post trade financial analysis & reporting exponentially more complex. They were clearly right. Everyone knows how hard it is to, daily, look at your OMS records, your clearing files and try to reconcile what happened across which “markets” and at what fee/rebate. Customers demand more transparency into their trade activity. Companies are scrambling at best to keep up. The largest brokerages are scrambling to make sense of all this post trade data in order to reduce their Brokerage, Clearing and Execution costs, which typically represent the 2nd or 3rd largest spend in their organizations.
While I was at the Rosenblatt Financial Technology Summit in New York two weeks ago, Joe Gawronski (President) and Justin Schack (Director of Market Structure Analysis) led off the conference with a talk on regulatory reform and the impact on competition in the industry. In that talk they reviewed some of the historical facts that have lead to today’s market structure. In particular, two slides (shown here) detail the changes in market structure from 1997 to now, and put some hard facts around this problem of market fragmentation and complexity. The duopoly in US Equity Markets we knew 13 years ago has been replaced with at least nine market places or venues making up almost 98% of the volume.
What does that mean for you? As we’ve been saying for years, if you’re a brokerage of any size, and you’re trying reconcile monthly exchange invoices and fees against your daily trading activity, good luck. Spreadsheets and MBA’s are working overtime to give you (at best) averages and a high level view of the business. Granular trade by trade analysis, and detailed views of clients is impossible without a system to help you. With the pending changes in regulations and compliance around trade detail and transparency you will clearly be at risk.
I’ve been asked many times why I started Firm58. The simple answer is that I saw a huge opportunity to improve post-trade processing which were confirmed by my experiences and helped along by friendships. I also cannot deny that I thrive on the excitement and fun that comes with developing an idea, building a team and a product, and seeing it grow. I’m also lucky to have a family that supports the lifestyle.
I’ve been developing both pre-trade and post-trade software for the financial industry for many years. I saw the advent of modern trading systems in the early 1990s, the explosion of ECNs in late 1990s and was activated by how they transformed the industry. These changes not only provided everyone (you and I) with the ability to trade virtually any stock any time, but they also brought a new level of competition which drove down the cost of trading. When I got out of college in the mid 80s, my dad set me up with his broker so I could invest my newfound money. I called the broker and bought LTV steel. At that time, I paid $200 in broker fees. Today I could do the same thing, by simply logging onto my computer at 1am and placing an order for $10.
In the late 1990s I began working with financial firms that were increasingly frustrated by their post-trade operations, be it their internally managed middle- and back-office systems, or their back-office service providers (e.g. clearing firm). For these firms, inefficient post-trade operations limited their businesses opportunities and slowed them down. Financial firms struggled to expand their customer base because they typically had the burden of integrating their trading systems, offering new products (equity, options, futures, etc) was difficult because their system and/or service providers may not support it, and finally the lack of competition in post trade processing meant high costs.
One of Wall Street’s favorite companies in the dotcom era was Ariba. I was familiar with ERP and CRM applications from my days at Oracle and Siebel, but Ariba was talking about something new, a supply chain from buyers to sellers. With their software application, they improved the supply chain by linking buyers and sellers through a network much like the internet. I began to think about the supply chain in the financial industry.
My friend and founding partner, Sam Mele, worked at Ariba for many years. We’d been friends for many years, having met while working together at Oracle. Though we no longer worked together, we often golfed together and shared ideas. The confluence of his knowledge of supply chains and network models and my experience with ECN’s and post trade processing was strong. We found similarities between the supply chain concepts offered by Ariba and the way ECNs connected buyers and sellers to marketplaces. We took these concepts and applied them to post-trade processing in the financial industry and found compelling solution. We road tested the idea with large and small financial companies and received positive feedback.
From there, it was full speed ahead. In December 2004 we secured our first round of financing and officially started the company in February 2005. Today we have nearly 40 employees and a list of impressive customers both large and small.
Next week I’ve been asked to attend the 2nd Annual Financial Technology Summit in New York put on by Rosenblatt Securities. Thanks to Vikas Shah and the team at Rosenblatt Securities for inviting me to the event. I’m really looking forward to it.
I will be part of a panel discussion that day entitled: Demystifying Post-Trade: Understanding back office innovations can pay dividends. We’ll be discussing the shifts in regulations and compliance, along with the ever changing demands of customers for greater transparency into their trading fees. With transaction volume and commission dollars shrinking, and with regulations and compliance increasing the demands on trade by trade transparency, there’s a bigger requirement on the sell-side to more accurately and more timely process, account for and report on daily trading activity, including the measurement of client profitability.
The panel is going to dive into the post-trade problems and discuss potential solutions. It’s next Thursday, September 30th in New York and I’m sure I’ll post some comments here after the event.
Next week Tabb Group and Firm58 are hosting a webinar (Tuesday, September 21 @ 1pm ET) discussing the new brokerage relationship and the importance of capturing the right costs/fees and measuring client profitability, accurately.
For many years it’s been standard practice for brokerages to charge their trading customers some average mil rate and hope this covers the cost of doing business across all clients, even if some are unprofitable and others are unfairly overcharged as a result. This has left a brokerage’s revenue “unprotected.” As a result, profitable clients leave for better business relationships and unprofitable clients demand more services…at a loss.
Further, as clients have become more sophisticated and request arrangements like “cost-plus” billing, or do business with a bank across multiple asset classes, this method of average costing is misleading banks as to the profitability of a client, and regularly results in the distribution of even more services to underperforming, or unprofitable clients. In today’s economic and political environment, this is a recipe for business disaster. Leading firms are already addressing these issues.
When you compare these costs today, the 2nd or 3rd largest expense in any financial institution is its Brokerage, Clearing & Execution (BCE). In addition, the explosion of new markets (or trading venues) and the complexity of calculating fees or commissions, including commissions for adding liquidity, has made the effort to accurately capture and apply these costs across multiple client accounts almost impossible.
The webinar highlights the problems for firms ignoring the warning signs. Competition is eating away at firms that cannot accurately calculate and manage the cost of their trading clients. The webinar will also offer suggestions to address this critical need.
Not surprisingly, Firm58 is helping many firms with the technology behind this complex problem. Firm58 can help firms manage their costs more accurately and Protect their Revenue streams more proactively, thus enhancing their competitive positions in any market.