Competing for Order Flow—The Differentiation Dilemma

The economics of providing sell-side execution services have become increasingly challenging since the financial crisis of 2008. High costs and commission compression are driving an unhealthy level of industry consolidation. And while the increasing prevalence of white label trading solutions and improved off-the-shelf technology have helped address some aspects of cost and slowed consolidation to a certain extent, this also means that firms effectively offer very similar services, while competing for order flow.

Many broker dealers struggle to differentiate themselves from their peers, leaving price as one of the few options left for creating competitive advantage, further impacting margins.

This ‘differentiation dilemma’ is a key issue facing broker dealers as they compete for client order flow. It’s hard enough for tier-1 banks to demonstrate the relative quality of their execution services, but for smaller firms who white label algos and liquidity access the job is even tougher. With regulation eroding any inherent advantages such as broker research and incentives, and building in-house trading technology either cost prohibitive, slow to market, or both, where do firms turn?

The answer lies in a platform approach to trading infrastructure that marries best-in-class third-party technology with the flexibility to design and implement functionality unique to each organisation. Combing the best of buy and build, firms can achieve the cost and time-to-market benefits offered by vendor solutions together with the ability to tailor services to the needs of individual clients. By injecting their own unique IP into the platform, the sell-side can create compelling and competitively differentiating services.

Smart Routing

The RA Platform combines a high-performance core messaging layer (either software only or fully integrated with FPGA for ultra-low latency) with a flexible application framework that gives customers the ability to adapt the platform to their clients’ needs.

Central to this is intelligent order routing, with the RA Platform framework enabling broker dealers to rapidly deploy advance order routing logic. There are no limits to defining routing rules within the platform, so trading desks can implement order routing logic driven by live market data, client entitlements, historical data, or any other inputs or parameters they think are required to meet a specific client’s needs. This makes it easier to partner with counterparties and design execution strategies to meet their trading objectives.

Pre-Trade Risk

Aligned with this is the ability to tailor pre-trade risk filters to cater for the trading mandates of each client. RA Platform quickly gets customers up and running through a set of pre-defined risk rules, but at the same time makes it easy to customise existing rules or implement new ones.

Defining rules through the platform UI means changes can be made on the fly, for instance increasing limits or excluding trading in specific securities, helping sell-side firms to respond instantly to client requests and creating a positive customer experience.

Client Onboarding

Onboarding is often a key area of frustration for all parties. Sales desks, having done the hard yards of persuading a client to trade through their firm, can see relationships erode due to a slow and laborious onboarding process.

With no hard-coded APIs or rules of engagement, RA Platform gives customers the flexibility to implement what best fits their needs, allowing them to define their own automated certification and onboarding processes, again creating a highly positive experience for their clients.

Single Platform

Designing the right service offering is essential for any broker dealer looking to win and retain order flow.

With such a broad array of potential counterparties, ranging from HFT clients needing low latency DMA services to small funds and family offices placing infrequent care orders, is it feasible to support multiple client types through a single platform, while also tailoring services to meet specific needs?

Summary: The Order Flow ‘Differentiation Dilemma’

RA Platform’s combination of performance and flexibility addresses the speed and throughput requirements of more demanding clients, while reducing the cost and complexity of connecting to execution services for those less active.

Deploying common technology, whether in co-lo, on-prem, or public cloud, enables firms to create the most appropriate services for the broadest spectrum of client segments. This single platform approach ultimately reduces cost and technology support overhead for broker dealers and allows them to focus on serving their clients.

Sell-side firms will have to continually work hard for market share and to create an economically sustainable trading franchise. A big part of meeting this challenge will be their ability to deliver differentiated services and respond quickly to the changing needs and demands of their clients.