A recent industry survey showed that 81 percent of brokers and banks think it is important to calculate cost per trade, with over half of these respondents believing its “critical” to do so (Grey Costs Per Trade report, 2020).
However, a lot less are measuring it – only 68 percent of respondents are actively tracking it. Disjointed global operations, indirect cost attribution and legacy technology makes it easier said than done to track cross-business costs.
But from this subset of the market, we can gain a valuable insight into the elements making up the cost per trade. The survey indicates that 36 percent of direct costs come from staffing and 18%percent from IT. Good news – the elements making up over half of the cost per trade can be controlled.
One of the available levers to control these costs is post-trade technology. Replacing legacy systems with modern middle and back office systems can drive huge efficiencies in operational costs.
For banks and brokers wanting to reduce operational costs, we suggest three key areas of focus.
Automating as much as possible
Fewer than one percent of trades should need intervention with a well-configured and optimised post-trade system. Consolidating regions and assets classes onto a single platform can also unlock further efficiencies from economies of scale.
APIs are another key enabler in increasing automation. Your back office system may not always have all the information it needs to process a trade so data flows are crucial for straight through processing. A system that can intelligently request information from other systems can prevent the need for a human to get involved.
Moving to the cloud
When firms upgrade from on-premise legacy technology, they are typically also moving to the cloud. Aside from the obvious physical infrastructure cost savings, moving to the cloud can drive other significant cost per trade savings.
Scalability is one driver of cost savings. Systems that can take advantage of cloud scalability can save cost in two ways. The first is by no longer over-provisioning infrastructure to cater for peak loads which may only occur once or twice per year. The second is being able to dial down usage in quiet times.
Cloud also creates business continuity savings. Because cloud providers such as AWS and Azure provide three data centres in every region, you can save by implementing a three-site disaster recovery (referred to as Active-Active-Active). This reduces costs by 25 percent over the traditional two-site Active-Standby model and provides a higher level of availability and resilience.
Solving specific challenges
Reducing the cost per trade is a big task but we’ve seen the best results come from a critical look at the root cause of cost drivers. Check for manual touch points or the movement of unstructured data (like PDFs or emails) and investigate why these processes are still occurring and whether they can controlled from your end. Thanks to newer technologies and better connectivity, we can solve problems that were deemed too hard only a few years ago.
For example, middle office operations are often slowed down by the manual effort required to process allocation files received in different file formats. Your clients won’t necessarily want to change their formats, resulting in your staff being mired in spreadsheets. A chatbot solution could automate this and improve client service at the same time. A simple chat exchange with the bot automatically updates the file into the correct format and with machine learning, it can remember for next time.
This type of practical application of modern tech is where operational teams, IT teams and vendors should be collaborating for maximum return on investment.
With IT predicted to be the fastest growing cost over the next five years (Grey Costs Per Trade report, 2020), firms must start focusing on where they can make the biggest savings.
People and systems will always be major organisational costs but there are plenty of opportunities to reduce them with the right post-trade technology.