The Potential for Rapid Consolidation in the Trading Sector

Over the last decade, financial services institutions have seen an explosion of trading venues as regulatory pressures move trading from traditionally voice executed trades to electronic execution. The result of recent regulations and M&A activity has led to multiple silos of trading and risk systems. In the recent years, some of the major sell-side banks have decided to streamline technology, trading and operations across geographies and asset classes, by reducing the number of front, middle, and back office systems.

In 2013, JPMorgan Chase announced the roll-out of a multi-asset class trading platform that consolidated over 30 platforms into a single solution for pre-trade, trade and post-trade functionality. The CEO of the firm’s investment bank claimed they had reduced trading costs for foreign exchange and other transactions from about 75 cents per trade to around 10 cents by consolidating these trading systems. Their end goal for 2015 is to have a cost per trade of 5 cents for those products. The bank publicly claimed that it was a $500 million project to consolidate its trading platforms but it would save the bank $300 million a year.  Other large financial services institutions have also seen great advantage to consolidating trading and risk systems with multi-year projects in flight to achieve a similar task.

What are the key drivers for these firms to replace their existing infrastructures with a consolidated multi-asset and global platform? Some of the major drivers include:

  • Improving technology and automating many manual processes will allow for quicker trade processing and issue resolution. Better execution quality will give these firms a competitive differentiator to retain and win buy-side business.
  • Streamlining systems will make it easier to identify potential regulatory issues and comply with new regulations. A consolidated risk management view would bring transparency to senior management on regulatory risks, operational risks, liquidity risks and counterparty risks.
  • Reducing “cost per trade” once systems are in place as there will be more STP (straight-through processing) and less of a need for manual processes and intervention. Platform consolidation would reduce the number of systems a firm has and would consolidate the workload that previously been spread out across many applications.

The benefits of consolidation are clear, but the upfront labor and technology costs need to be compared to the cost savings over many years. When firms are looking at their overall business and technology strategy, they need to do the following:

1) Evaluate the current business and perform a deep dive on current systems and processes. Often, firms have multiple systems and processes across product and/or business lines, which leads to duplicated efforts, and a lack of transparency for potential risks. Data also needs to be evaluated as this process will likely require a golden source taxonomy for reference data (both product and counterparty).

2) Review each business line’s plans and future direction for product lines and technology stacks, and determine if there are ways to combine systems and processes for increased efficiency.

3) Perform cost / benefit analysis for the firm and determine if consolidation is the best approach based on short and long term goals

4) If moving ahead, put together a roadmap to achieve the proposed changes, considering the impacts to downstream systems and functions.

A consolidated trading and risk solution would be a major initiative for any firm but many of them are finding that the long-term benefits far outweigh the significant upfront cost associated with the project. This cross-asset and global transparency will give businesses flexibility and will allow them to react more quickly to industry and regulatory changes.

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