Tomorrrow's Operating Model

How, where and why are financial services firms transforming their operating models today - in an effort to drive efficiencies, increase transparency and reduce risk?

Grey Costs Per Trade

Tracking and measuring the total costs of the trade have never been more important in the financial markets.

Whilst trading volumes have continued to grow globally, the rise of low-cost ETF platforms have driven fund managers and brokers to seek out ever greater efficiencies in the last decade. At the same time, new regulations have been launched globally to drive transparency on this exact point (e.g. the MIFIDs). And with  economic uncertainty growing, 2020 looks set to be a year of unprecedented cost control.

How are Asia’s brokers offering the world to their clients?

In a world of globalised investments, how are Asia’s broker-dealers managing their global expansions?

Grey Costs Per Trade

Tracking and measuring the total costs of the trade have never been more important in the financial markets.

Whilst trading volumes have continued to grow globally, the rise of low-cost ETF platforms have driven fund managers and brokers to seek out ever greater efficiencies in the last decade. At the same time, new regulations have been launched globally to drive transparency on this exact point (e.g. the MIFIDs). And with  economic uncertainty growing, 2020 looks set to be a year of unprecedented cost control.

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71% want to but only 30% do

Despite 71% of the industry seeing value in the metric, it was a great surprise to learn that only 30% of our industry is tracking a cost per trade in 2020 – least of all COOs. Although investors see costs per trade as closely linked to regulatory compliance (notably MIFID), brokers see accurate management of their trading costs as a source of competitive advantage.

Yet neither side is tracking more than half of their real trading costs. Misled in some cases by MIFID’s Transaction Cost Analysis guidelines, 50% investors are missing up to 45% of their costs behind every trade – overlooking out of pocket expenses and IT system costs most of all. On the sell side, half of the industry is missing up to 28% of their costs per trade – with the costs of risk and capital being the major areas of oversight.

These critical gaps in cost tracking are an urgent problem today: giving rise to incorrect resource allocations and driving the wrong behaviours. As new regulations (such as CSDR) take effect, poor cost visibility will mean that both the buy- and sell-sides face cost increases of up to 60% – without being able to track or control the cause.

Allocated costs: the new organisational frontier

There are several reasons for this oversight. With 29% of back office systems run on a single-country basis, disparate IT systems make cost tracking almost impossible. Yet organisational barriers (between Operations and Treasury, for example) are the main obstacle to clarity: obscuring visibility of up to 42% of the cost of a trade. Allocated costs, most notably capital costs and the cost of risk, are systematically overlooked by firms across the investment cycle – with 38% of respondents failing to track costs because “they don’t own them”.

The result? Divergent paths and impeded return on investment. Operations departments turned to Robotics / RPA and to greater offshoring in 2020 – whilst treasuries sought greater credit lines from their Banks.

But by Q2, COVID-19 had quickly made both options impracticable.

The corporate action problem is big … and growing

62% of practitioners around the world are paying out more than USD2million in corporate action errors. And the only thing that seems open to question is whether that number should be higher – especially if you include the opportunity cost of (non-)elections.

But whilst provisioning and contingency funds may have made this tenable in the past, the events of 2020 have undermined our fragile corporate action infrastructures even further. Record numbers of events have begun to behave differently (becoming more complex and subjected to rescheduling, etc.), creating a major drain on scarce, manual expertise. At a time when regulation is driving us towards improved timeliness and transparency, corporate actions have risen to #1 in the investment agenda in 2021.

Today the costs of corporate action errors risk spiralling – driven not only by a shift in corporate action behaviours but also by a strong focus on highly complex business activities (such as prime brokerage and structured products). Change is needed to support this landmark change. Now.

Grey Costs per Trade (2020): Many problems…

But where to start? There is no single corporate action problem – as challenges vary by investment activity, event type, customer profile and asset class.

Yet some key points stand out. In Asia-Pacific, interacting with market infrastructures is simply too manual – creating risks and latency issues downstream. In North America, manual processes still outweigh system issues as a source of problems for practitioners – as paper-based market practices continue to make manual intervention unavoidable. Only in Europe are practitioners preoccupied more by system limitations than by manual processes.

In an age of such incredible innovation “it feels very 1980s” for us to still be struggling with such core issues. The path to progress is not entirely straight forward, but it begins with collaboration and standardisation – as corporate actions are an ecosystem challenge above all.

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Download the key statistical insights from our industry-wide research here

Download the key statistical insights from our industry-wide research here

Download the key statistical insights from our industry-wide research here

Download the key statistical insights from our industry-wide research here

Download the key statistical insights from our industry-wide research here

Download the key statistical insights from our industry-wide research here

Download the key statistical insights from our industry-wide research here