Increasing Visibility into Exchanges to Keep Broker Dealers in the Green

As floor pits are replaced with automated and algorithmic trading, exchanges are following suit, with new and alternative markets popping up at a growing rate.

The benefits of taking trading online are clear—a recent Money article points out that blizzards of the magnitude hitting the Northeast lately would have shut down the market completely just a decade ago—but few funds or firms look past the initial trade.

While these new exchanges are a great way to diversify the market, keeping track of the shifting landscape can become a near impossibility for brokerages executing thousands of trades every day.

Just as markets went from fractions to decimals, analog to digital, back-office processes need digitization in order to keep broker dealer operations profitable. As exchanges continue to evolve there are a number of benefits for broker dealers who prioritize their account and position visibility.

Prevent overcharging

With the high volumes of trades a broker dealer executes over the course of a day, keeping up with even a few different exchange fee models can be time-consuming, resulting in inconsistencies that get overlooked. A spreadsheet simply won’t work fast enough, or handle the extensive logic required for back-office personnel to catch everything day-to-day. Post-trade software can process trades on a near real time basis and determine how much they’re each costing a firm— allowing brokers to not only address any red flags on the exchange side, but adjust their rates in accordance with changing or new fees, so that trades are as cost efficient as possible.

Drill down into P&Ls

New exchanges also challenge individual desks across an organization to come up with new approaches to maximize profitability. While a firm-wide Profit & Loss sheet might suffice for certain operations, having a detailed look at how each unit is doing can be extremely valuable, especially when firms have multiple offices across different countries.

A recent example of this can be seen in the dismantling of the Royal Bank in Scotland’s Investment Bank.  As digitization creates faster market trades, structures become more complex and in some cases margins lower, making it much more difficult for some businesses to turn a profit because the spread is becoming too small. By allowing broker dealers to allocate costs back to which desks and even traders completed a transaction, sophisticated software can distinguish profitable units from those that are struggling, helping investment banks to stay in business.

Intelligently route trades to improve cost efficiency

Finally, by increasing visibility into costs on a daily basis, broker dealers can better assess pending volume discounts at exchanges and direct new trades accordingly. Without this strategic advantage, brokerages are likely to miss out on lower transaction rates, hurting their competitive edge in a crowded market.