Optimising Sell-Side Client Onboarding: Reducing Costs & Time-to-Trade

The Growing Challenges of Sell-Side Client Onboarding

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.

The Impact of Onboarding on Sell-Side Client Relationships

Typically, sell-side firms look to differentiate themselves through the quality of their execution or TCA performance, but a poor sell-side client 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 sell-side client 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.

Challenges in Sell-Side Client Onboarding Technology

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, the industry faces significant complexity. Multiple proprietary protocols from trading venues add further challenges. Various OMS/EMS vendors and in-house solutions make sell-side client onboarding even more difficult. Large asset managers, having grown through acquisition, often use multiple tools for order submission. The choice of tool depends on which portfolio manager or internal fund initiates the trade.

Streamlining Client Connectivity for Faster Onboarding

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 into 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 face 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.

Risk Management in Sell-Side Client Onboarding

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.

Ensuring Compliance and Reducing Risk Exposure

Risk filters must be highly performant and implement core checks without adding noticeable latency to trades. This is especially important for DMA clients. When dealing for large asset managers, brokers need flexibility and configurability in setting risk parameters. These parameters must account for investment mandates and portfolio structure.

Hardware acceleration using FPGA enhances critical path pre-trade risk filters. Software configurability allows for advanced risk parameter adjustments. Together, these provide a comprehensive solution for sell-side brokers. This approach supports a broad range of client types and trading strategies. It also meets the most exacting performance benchmarks.

The Future of Sell-Side Client Onboarding

Increasing regulatory scrutiny of electronic trading, often accompanied by punitive fines, exacerbates the need for transparency of pre-trade risk control. A testament to that was when last year 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 is crucial for sell-side firms. Ensuring pre-trade risk filters holistically manage a client’s trading activity helps prevent regulatory breaches. This also gives buy-side traders confidence that orders sent in error will be rejected.

As electronic trading grows more complex and regulatory oversight tightens, firms must simplify sell-side client onboarding. They need to improve time to trade and efficiently implement risk and routing logic. Firms that achieve this will attract more order flow. This will help sustain the profitability of their trading operations.