Itiviti VP Strategic Research Mikael Persson weighs in on the advantages for investment banks embracing a customer centric approach to unlock business intelligence. Amid rising regulatory costs and mega fines, brokerage firms continue to struggle with how to increase profitability.
While trading in equities has bounced back since the crisis, the revenue per transaction is dropping, and firms don’t have the sure-fire ways to persuade customers to do more business with them. In fact, some execution businesses, especially equities, are viewed as more of a cost center as execution margins shrink and compliance expenses surge. Regulations have forced investment banks to set aside higher capital charges for riskier assets, while staying away from lucrative areas like proprietary trading and leverage-based strategies. While margin lending has been a source of profits for banks, especially among futures commission merchants, this too is less profitable in a low interest rate environment.
At the same time, investment banks are not as customer-focused as they could be. More customer centricity would enable investment banks to anticipate customer needs and get in front of competitors. Sell side firms are aggressive about getting order flow from buy-side customers, but they are unsure how to differentiate their services. Although investment banks are known for innovations such as financial engineering and automated trading, they are not analyzing information to gain a better understanding of the customer.
Wall Street is sitting on a mountain of data that keeps flowing through their FIX order routing networks and FIX gateways. This information could be mined for valuable insights into trading patterns, market trends and transaction costs. Through the use of business intelligence, a set of techniques and tools can be applied for the transformation of raw data into useful information for analytical purposes.
Imagine if firms could create a consolidated view of global order flow across all clients and regions. They would have greater visibility into risk for compliance purposes. This could provide a window into what products they are trading, and what orders are coming through per client. Sell- sides could set up alerts so that when volumes are declining, they can be notified to contact the customer. They could also provide insights to their customers based on the trends they’re identifying.
Today, however, firms are not having that conversation with clients. The reality is that they are missing out on a huge opportunity to gain more value from information moving through their FIX ecosystems and to deliver more value to their clients.
Currently, there are obstacles that are depriving firms of the opportunity to unlock the value behind this order flow data.
For example, sell side firms may be utilizing multiple order management systems, each tied to a separate FIX engine and to a different FIX order routing network. As the number of trading systems has proliferated inside a firm, the number of FIX order routing networks has grown as well, adding to the complexity and cost. This growth in FIX infrastructure has led to a muddled collection of systems including home-grown and vendor-produced FIX engines, rules engines, routing networks, testing software, monitoring systems, customer onboarding tools, risk management and support. The decentralized nature of the FIX infrastructure has made it difficult for the sell side to see all client activity in one consolidated view. These multiple third party vendor connections also result in disintermediation between the sell side firm and its clients.
An optimal solution is to decouple the client connectivity layer from the OMSs and order routing technology and replace this with a single connection for each client into a central FIX gateway. This, in turn, makes it easier for the sell side firm to see all trading exposure and manage it pre-trade. Once all the client connectivity is supported on a common FIX infrastructure, then normalized log files from the flow can be directed to a business information system for further analysis.
Here are some ways that firms can reap the benefits of business intelligence to make more informed business decisions.
Investment banking is at the crossroads. With profits no longer guaranteed from traditional execution businesses, and compliance costs rising, sell-side firms must search for new sources of revenue. While sell-siders have not been customer-centric in the past, organizations that harness customer data can be proactive and leap ahead of competitors.
Here are a few ways that firms can take action to improve customer centricity:
To begin this journey, firms need to gain a consolidated view of their FIX data across regions and products.
Blog The fast pace of derivatives markets makes their participants a demanding group. Derivatives traders must be flexible to succeed, and also need functional capabilities in their technology such as speed, global access and powerful analytics. They confront these needs in an environment affected by new regulation, plus more demands for market access and lower costs. […] April 27, 2017
Blog In the ongoing pursuit of efficiency and cost awareness among market participants, trading technology is often at the center of attention. Still there is at least one key function in trading systems left largely untouched by productivity and streamlining measures, and that is testing. Manual testing of trading infrastructure solutions remains prevalent within today’s financial […] April 20, 2017
Blog The ability to respond rapidly to a new opportunity is a prerequisite for success in derivatives trading. Adding access to a new exchange or electronic execution venue, support for a new security, or compliance to the latest regulatory wrinkle is essential to making sure opportunities are realized and profits are made. As a result, agility […] April 11, 2017
Automation & Testing Whether you are deploying FIX or proprietary protocol components within trading systems, thorough testing is crucial to success. Not only do you need to test your systems for execution venue driven events but also for managing the client flow. Manual testing is a costly and error-prone process that can be significantly improved and accelerated through automated testing. Automated regression […] April 6, 2017