Regulatory scrutiny of buy-side broker selection and best-execution benchmarking, together with research unbundling rules, have led many asset managers to rationalise their broker lists. With sell-side firms being held to ever higher standards, winning and retaining client mandates has never been more challenging.
Typically, sell-side firms look to differentiate themselves through the quality of their execution or TCA performance, but a poor onboarding experience can lose a customer before they ever place an order. At a minimum, it can undermine hard built reputations and result in short-term opportunity loss.
Fenergo, a Dublin based solutions firm, recently commissioned a study that estimated the true cost of customer onboarding at around $25,000 per client and upwards of 34 weeks before the first trade. The economics aren’t attractive, but even those estimates appear conservative and don’t factor in opportunity cost. Even small issues such as inconsistent use of currency symbols between counterparties can cause delays measured in days. Lack of standardisation in transactional messaging protocol, the need to run full UAT testing and certification, and implementation of bespoke pre-trade risk filters to ensure regulatory compliance are just some of the technical hoops that the sell-side have to jump through.
With up to five versions of FIX and many dialects in use across the industry, along with multiple proprietary protocols from trading venues, various OMS/EMS vendors and in-house solutions, client onboarding teams can struggle with complexity. On top of this, large asset managers, having grown through acquisition, often use multiple tools for sending orders to the same broker, depending on which portfolio manager or internal fund initiates the trade. Simplifying electronic order ingestion through a single, protocol agnostic platform means that clients can send orders in their preferred format, which sell-side brokers can then normalise for easy integration to their trading systems. This helps reduce the cost of client acquisition and slashes time to market.
Point solutions and inefficient design are even more detrimental to the bottom line when providing DMA services to clients. Sell-side brokers offering trading connectivity within exchange co-location facilities are faced with premium pricing for cabinet space and cross-connects. Simplifying design and reducing hardware footprint through scalable platform technology will have a positive impact on margin.
As well as physical onboarding, implementing instrument normalisation (e.g. ISIN to RIC), routing logic and pre-trade risk filters are key components of the client set-up process. Risk parameters and execution preferences are determined by the clients’ trading strategy, investment mandate and multiple other factors, with each client being unique. The broker will also have its own obligations to the exchanges, clearing houses, counterparties and, of course, regulators – even more so under the MiFID II RTS 6 requirements for firms engaged in algorithmic trading.
Risk filters need to be highly performant, implementing the necessary core checks without adding tangible latency to trades, particularly for DMA clients. When dealing on behalf of large asset managers, brokers will also need significant flexibility and configurability when setting risk parameters to account for investment mandates and portfolio structure. This will be required on an intraday basis as client relationships evolve, new regulations are implemented, or market volatility increases.
A combination of hardware acceleration using FPGA for critical path pre-trade risk filters, together with software configurability for advanced risk parameters provides sell-side brokers with a comprehensive solution to meet the broadest range of client types and trading strategies, while catering for the most exacting performance benchmarks.
Increasing regulatory scrutiny of electronic trading, often accompanied by punitive fines, exacerbates the need for transparency of pre-trade risk control. This was highlighted last year when the Hong Kong SFC fined a tier-1 bank for executing orders that breached risk limits. A major headache for sell-side brokers is aggregating risk when trading in multiple markets with international clients. Being able to consolidate a global, real-time view of aggregate orders and ensure pre-trade risk filters holistically manage a client’s trading activity helps protect sell-side firms from regulatory breaches and gives buy-side traders confidence that orders sent in error will be rejected.
As the world of electronic trading becomes increasingly complex and regulatory oversight hardens, firms who can simplify the client onboarding process, improve time to trade, and quickly and effectively implement risk and routing logic will have a better chance of attracting order flow and sustaining the profitability of their trading operations.