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.