For many years, supposedly sophisticated financial institutions were in the dark when it came to the implicit costs of trade execution, while the front office paid scant attention to the costs of clearing and settlement.
Recent years have seen a steady move towards building an understanding of and managing the total cost of trading and investment. This movement is expected to build a head of steam in the drive for asset managers, and the sell-side firms that serve them, to remain profitable and competitive while delivering on the intense scrutiny they are under.
This scrutiny comes both from institutional investors, which are becoming ever more vocal in their demands, and from regulators looking to improve investor protection, the disclosure of costs and transparency.
"Margin compression and tighter capital adequacy requirements have led to a huge shift in mindset among asset managers and brokers," says Alex Krunic, Head of Sales & Relationship Management for the Global Broker Deal Services (GBDS) arm of Societe Generale Securities Services. "There's a heavy focus now on improving efficiencies, reducing operational risk and stepping up technical connectivity."
GBDS overlays traditional banking services – credit and financing – with global market coverage via a single entry point and a single legal agreement service into the Societe Generale network. It simplifies business for brokers and broker-dealers alike, enabling them to deliver a broad array of top-level services to their clients at a competitive price, while meeting the challenges of regulatory change, information technology (IT) and operational expenditure.
Just three years old, GBDS has built an impressive book of business, with settlement volumes more than doubling since 2016 and a growth rate of 35% year-on-year. This growth has come from providing brokers and broker-dealers an end-to-end post-trade solution based on a highly efficient, mutualized post-trade industry utility, thanks to GBDS' partner, Accenture Post-Trade Processing, and its market-proven technology, leading robotics, artificial intelligence (AI) innovation and analytic solutions.
"In trading where investors seek growth in an environment of low real returns, the whole focus is to minimize slippage costs at the instant of execution to contribute to investment returns. Trading at mid-price can save half the bid-offer spread and dark pools and periodic lit auctions can help minimize market impact," says Dr Robert Barnes, Chief Executive Officer, Turquoise and Global Head of Primary Markets, London Stock Exchange Group. "Access to new execution channels for potential price improvement is key."
Turquoise offers global investors access to 4,500 securities across 19 countries, with open access to four fully interoperable central counterparties (CCPs). With no member fee, a 0.3 basis point transaction fee and trading at the mid bid-offer price, savings over traditional execution are substantial.
Avoiding the bid-offer spread can save both parties to the transaction some two basis points for major stocks and perhaps more than ten times this amount for smaller stocks.
For large institutional investors, another crucial aspect is the ability to trade in a large block while minimizing its impact on the price achieved in the market.
"As asset managers begin to adopt the practices of other industries in scrutinizing workflows and operating costs to the nth degree, the value of the block trade in reducing the total cost of investment is becoming increasingly important," says Rebecca Healey, Head of EMEA Market Structure & Strategy for Liquidnet.
Liquidnet is a global institutional trading network where close to 1,000 of the world's top asset managers and other like-minded investors come to execute their large trades with maximum anonymity and minimum market impact. Its offerings include a data tracking system, with alerts on buying and selling opportunities. This automates the traditional role of the sell-side sales trader who previously would call round the market to find the other side of the trade. Through automation of this process, Liquidnet's OTAS Technologies arm provides next-generation market analytics using artificial intelligence and big data analysis to alert clients to exceptions, allowing them to make faster, more informed trading decisions real-time. This serves the market well, with broker cutbacks having led to a drop-off in the number of sales traders and with asset managers looking to build out internal dealing desks, to maximise alpha opportunities real-time.
"We are seeing a shift in behaviour from the sell-side to the buy-side, front office through to the back office as firms tackle the need to adopt best execution practices and minimize the total cost of trading and investment," notes Healey.
"In the front office, there's been a fundamental shift from paying little or no attention to custody and clearing costs to this now being very much on the radar and we see this trend continuing," adds Krunic.
It seems clear that the forward focus will be on simplifying workflows, driving up service levels (both in-house and at vendors, with greater collaboration across the front, middle and back offices) and building on capacity to evaluate service delivery and measure the total cost of trading and investment.
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For many years, supposedly sophisticated financial institutions were in the dark when it came to the implicit costs of trade execution, while the front office paid scant attention to the costs of clearing and settlement.
Recent years have seen a steady move towards building an understanding of and managing the total cost of trading and investment. This movement is expected to build a head of steam in the drive for asset managers, and the sell-side firms that serve them, to remain profitable and competitive while delivering on the intense scrutiny they are under.
This scrutiny comes both from institutional investors, which are becoming ever more vocal in their demands, and from regulators looking to improve investor protection, the disclosure of costs and transparency.
"Margin compression and tighter capital adequacy requirements have led to a huge shift in mindset among asset managers and brokers," says Alex Krunic, Head of Sales & Relationship Management for the Global Broker Deal Services (GBDS) arm of Societe Generale Securities Services. "There's a heavy focus now on improving efficiencies, reducing operational risk and stepping up technical connectivity."
GBDS overlays traditional banking services – credit and financing – with global market coverage via a single entry point and a single legal agreement service into the Societe Generale network. It simplifies business for brokers and broker-dealers alike, enabling them to deliver a broad array of top-level services to their clients at a competitive price, while meeting the challenges of regulatory change, information technology (IT) and operational expenditure.
Just three years old, GBDS has built an impressive book of business, with settlement volumes more than doubling since 2016 and a growth rate of 35% year-on-year. This growth has come from providing brokers and broker-dealers an end-to-end post-trade solution based on a highly efficient, mutualized post-trade industry utility, thanks to GBDS' partner, Accenture Post-Trade Processing, and its market-proven technology, leading robotics, artificial intelligence (AI) innovation and analytic solutions.
"In trading where investors seek growth in an environment of low real returns, the whole focus is to minimize slippage costs at the instant of execution to contribute to investment returns. Trading at mid-price can save half the bid-offer spread and dark pools and periodic lit auctions can help minimize market impact," says Dr Robert Barnes, Chief Executive Officer, Turquoise and Global Head of Primary Markets, London Stock Exchange Group. "Access to new execution channels for potential price improvement is key."
Turquoise offers global investors access to 4,500 securities across 19 countries, with open access to four fully interoperable central counterparties (CCPs). With no member fee, a 0.3 basis point transaction fee and trading at the mid bid-offer price, savings over traditional execution are substantial.
Avoiding the bid-offer spread can save both parties to the transaction some two basis points for major stocks and perhaps more than ten times this amount for smaller stocks.
For large institutional investors, another crucial aspect is the ability to trade in a large block while minimizing its impact on the price achieved in the market.
"As asset managers begin to adopt the practices of other industries in scrutinizing workflows and operating costs to the nth degree, the value of the block trade in reducing the total cost of investment is becoming increasingly important," says Rebecca Healey, Head of EMEA Market Structure & Strategy for Liquidnet.
Liquidnet is a global institutional trading network where close to 1,000 of the world's top asset managers and other like-minded investors come to execute their large trades with maximum anonymity and minimum market impact. Its offerings include a data tracking system, with alerts on buying and selling opportunities. This automates the traditional role of the sell-side sales trader who previously would call round the market to find the other side of the trade. Through automation of this process, Liquidnet's OTAS Technologies arm provides next-generation market analytics using artificial intelligence and big data analysis to alert clients to exceptions, allowing them to make faster, more informed trading decisions real-time. This serves the market well, with broker cutbacks having led to a drop-off in the number of sales traders and with asset managers looking to build out internal dealing desks, to maximise alpha opportunities real-time.
"We are seeing a shift in behaviour from the sell-side to the buy-side, front office through to the back office as firms tackle the need to adopt best execution practices and minimize the total cost of trading and investment," notes Healey.
"In the front office, there's been a fundamental shift from paying little or no attention to custody and clearing costs to this now being very much on the radar and we see this trend continuing," adds Krunic.
It seems clear that the forward focus will be on simplifying workflows, driving up service levels (both in-house and at vendors, with greater collaboration across the front, middle and back offices) and building on capacity to evaluate service delivery and measure the total cost of trading and investment.
